TiE Institute Series TiE Institute Series IInd of VI May 27, 2006 FORMING YOUR ENTERPRISE with contributions from KPMG & Nishith Desai Associates.

TiE Institute SeriesTiE Institute SeriesIInd of VI

May 27, 2006

FORMING YOUR FORMING YOUR ENTERPRISEENTERPRISE

with contributions from with contributions from KPMG & Nishith Desai AssociatesKPMG & Nishith Desai Associates

TiE Institute Knowledge Series2006

Developing informed entrepreneursthrough. . .

Experience

Training

Interaction

Exercise

Characteristic s of an

Entrepreneur

Forming your

enterprise

Sustaining growth

and Enterprise Maturity

Managing Human

Resources

Financing your

Enterprise

Marketing and

Scaling-up!

1

2

5

6

3

4

Walk-throughthe entrepreneurial

lifecycle !!

Concept

Organisation

Maturity

29th April

24th June

29th July

26th Aug

30th Sept

27th May

LAUNCHING YOUR ENTERPRISELAUNCHING YOUR ENTERPRISE- Business Plan Development-- Business Plan Development-

Agenda Enterprise Roadmap Vision and Mission Business Plan

MissionWhy we exist?

MissionWhy we exist?

Core ValuesWhat we believe in?

Core ValuesWhat we believe in?

VisionWhat we want to be?

VisionWhat we want to be?

StrategyThe game plan

StrategyThe game plan

Business PlanValue proposition, financials and the operational model

Business PlanValue proposition, financials and the operational model

Implementation PlanDetailed plan for market entry with timelines

Implementation PlanDetailed plan for market entry with timelines

Satisfied Shareholders

Delighted Customers

Effective Processes

Motivated Human Resources

Enterprise RoadmapEnterprise Roadmap

NASA - 1960sA man on the moon

Nelson MandelaEnd of apartheid

Leander PaesAn Olympic medal for India

MicrosoftA PC on every desk

A vision….. Stimulates progress Provides direction Unifies efforts Motivates Corrects

VisionVision

MissionMission Lasting relevance Never achieved; But always

strived for Not a goal or business

strategy

3 M Merck Cargill

Sony Economist Walt Disney

To solve unsolved problems

innovatively

To preserve and improve human life

To improve the standard of living around the world

To experience the joy of advancing and applying

technology for the benefit of the public

To take part in a severe contest between intelligence which presses

forward, and an unworthy timid ignorance obstructing our progress

To make people happy

Not defined as products or markets

Reaches directly into the psyche/ society

Function, not form

2004 – Total Investment by VCs was $ 1.3 bn across 68 investments, $ 250 mn was in IT, ITeS and BPOs, $ 27 mn was in software

2005 – Total investment by VCs was $ 2.3 bn across 147 investments, $ 375 mn was in IT, ITeS and BPOs, $ 87 mn was in software

01000200030004000

96 97 98 99 '00 '01 '02 '03 '04 '05 10-May-

06

US

D M

n

050100150200

Investment Number of Deals

Source: IVCA/AVCJ, TSJ Media, News Articles

LANDSCAPE OF VENTURE CAPITAL AND PRIVATE EQUITY INVESTMENTS IN INDIA

India – The VC PerspectiveIndia – The VC Perspective

Expansion18%

Late Stage23%

Early Stage44%

Seed15%

Funding by Investment Stages, 2003-04

Funding by Sector, 2003-04

Information Technology

18%

Healthcare7%

Manufacturing17%

Telecom31%

Internet19%

Others8%

Source: Presentation By Saurabh Srivastava, Chairman, Infinity Venture Fund

Seed Stage: Financing is to foster a concept before formal product launch

Early Stage: In the initial time period of operation

Expansion: For companies scaling up operations

Late Stage: Funds are used for plant expansion, marketing, working capital, new product development etc

India – The VC PerspectiveIndia – The VC Perspective

“My advice to Indian entrepreneurs would be to consider these parameters when seeking VC funding:

The size of the market. Does the company have a strong management team? Can this new idea create a standalone company? Is this a unique, breakthrough project with world-class

technology? Is this technology defendable and is there a unique value

proposition to the customer? (ROI - does this solve a customer pain point)?

Is the business capital efficient?”

- Pramod Haque, Managing Partner, Northwest Venture Partners & World’s No. 1 ranked Venture Capitalist

Funding – The VC PerspectiveFunding – The VC Perspective

The business plan document is essential to a start-up

company

It provides the strategic roadmap

It is used by VCs to determine the project feasibility and

thereby decide on the funding

Venture Capitalists see the business plan as a reflection

of your company and the commitment and drive of

management

Need for sound Business PlanNeed for sound Business Plan

Executive Summary Purpose of the business plan Main Highlights Financial Requirements

Background Legal form, ownership and management Business vision and mission

Products and Services Product Description Product Attributes Product Life Cycle Costing and Pricing Production Process Quality Assurance and Control Sourcing Intellectual Property

Business Plan – Table of ContentsBusiness Plan – Table of Contents

Markets, Clients and Competitors Market Characteristics Clients Competitors Positioning Market Strategy Projected Sales

Business Operations and Organization Location Promotion and advertising Selling methodology Manufacturing Distribution, Order processing and inventory control Company structure Project management Management Information Systems

Business Plan – Table of ContentsBusiness Plan – Table of Contents

Human Resources Management Team

Legal, Environmental and Social Considerations Financial Planning

Key Assumptions Income Statement Projections Balance Sheet Projections Cash Flow Projections NPV/IRR projections Key Financial Ratios Feasibility Assessment Sensitivity Analysis

Business Plan – Table of ContentsBusiness Plan – Table of Contents

Risk Mitigation Plan Environmental Risk Strategic Risk Technology Risk Operational Risk Financial Risk

Implementation Plan Exit Strategy

Business Plan – Table of ContentsBusiness Plan – Table of Contents

Business Plan

Executive Summary

Industry Analysis

Value Proposition

Market Size

Business Model

Financial Evaluation

Risk Analysis and Mitigation Plan

Implementation Plan

Exit Strategy

Business Plan – Key ComponentsBusiness Plan – Key Components

Executive summary outlines the key areas of the business plan. It should include a brief description of the following: The business and the business concept. The opportunity and strategy. The target market and conditions in that market. The competitive advantages for the company. The economics, profitability, and exit potential. The management team. The offering.

Executive SummaryExecutive Summary

Demand Analysis Past Trends Key Drivers Future Outlook

Regulations affecting the industry Existing regulations Expected in the future based on national/international

trends Competition Assessment

Key players and their positioning

Industry AnalysisIndustry Analysis

Threat of New Entrants

HIGH– Entry of new players with low cost value

proposition (similar to India)

– Backward and forward integration across value chain

– Low entry barriers

Rivalry among Competitors

HIGH– Overcapacity leading to intense

competition

– Competition for supply of roughs and markets

– Fragmented industry

– Intensive price cutting and cost based competition

Threat of Substitution

LOW– No absolute substitute

– Synthetic diamonds

– All luxury goods claiming consumer surpluses can substitute the end product I.e. diamond jewellery

Bargaining Power of Suppliers

VERY HIGH– Dominate market

as power centers

– Reducing stranglehold with shifting of power centers

– Shortage of roughs

– Processors cannot switch to other rough suppliers easily

Bargaining Power of Customers

HIGH– High competition

between processors

– China alternative is being increasingly opted for

1

4

5

2 3

Diamond Processing

Industry Analysis – Industry Analysis – Porter’s 5 forcesPorter’s 5 forces

Malls Luxury Hotels Independent Retail

Outlets Category

Shopping experience

-- -- -- -- -- -- -- Leisure activities

Gabbana Zegna Hugo Boss

Louis Vuitton

Taj Blues L’vista Pallazio

Brand assortment

Space

Price competitiveness Privilege customer relationship

Interactive knowledge dissemination

Product portfolio

Neo Cross - roads Basis of

comparison

Substitutes Same Product

Category

Shopping experience

-- -- -- -- -- -- -- Leisure activities

C4 C3 C2

C1

S1 C7 C6 C5

Brand assortment

Space

Price competitiveness Privilege customer relationship

Interactive knowledge dissemination

Product portfolio

Start-Up

- d

Basis of comparison S2

Competition Assessment - Competition Assessment - ExampleExample

• Define possible value propositions– Define attributes important to the customer– Classify value propositions based on combination od

these attributes– Identify your value proposition

Value PropositionValue Proposition

Price QualityAvail-ability

SelectionFunction-

alityService

Partner-ship

Brand

Product/ Service Attributes Relationship Image

Customer Satisfaction

• Customer Profitability

• Market Share• Account Share

• Customer Acquisition

• Customer Retention

Customer Perspective

Creating a Wining Value Creating a Wining Value PropositionProposition

Offer products and services that are consistent, timely and low cost

Lowest Cost Supplier

Consistently High Quality

Speedy Purchase

Appropriate Selection

Offer products and services that expand existing performance boundaries

High performance products: speed, size,

weight, accuracyFirst to market

Penetrate new market

segments

Provide the best total solution to the customers

Quality of solutions provided

Customer retention

Customer lifetime

profitability

Number of product/services per

customer

High switching costs to end users Add value to complementors

Offer broad selection,

access

Provide widely used standards

Provide innovation on a stable

platform

Provide large

customer base

Offer easy to use standard

platform

BEST TOTAL COST

PRODUCT LEADER

COMPLETE CUSTOMER SOLUTIONS

SYSTEM LOCK IN

Creating a Wining Value Creating a Wining Value PropositionProposition

Break down customer based on demographics/psychographics like income, location, age bracket, profession, education etc

Select relevant customer segment after analyzing fit with product / service being offered

Network with current players and industry associations to ascertain customer profile

Additionally could break down customer into retail / corporate

Market SizeMarket Size

Use Secondary Data of product / service available either published sources or from existing players to estimate customer size for each segment Professional Databases eg. ORG MARG, Indiastat.com,

Tata Statistical Outline, The Marketing Whitebook Government Data from census, Regulatory Reports Secondary research from news paper articles, magazines Competitor information Sales data from products / services aimed at similar target

customer since a customer consumes more than one product / service

Market SizeMarket Size

Manufacturing and Sourcing Pricing Location Distribution and Inventory Management Marketing Strategy Technology Framework Organization Structure

Business ModelBusiness Model

Make or buy Manufacturing process, if any Vendor management Major Equipment Layout Resources and Services Quality factors

Manufacturing & SourcingManufacturing & Sourcing

• Breakeven Pricing

• Competitive Advantage Pricing

• Discount Pricing

• Full Cost Pricing

• Penetration Pricing

• Loss Leader Pricing

• Price is based on fixed and variable costs as well as profit goals

• Price is above or below that of competition

• Price is below retail price, target higher volumes

• Price is based on total costs, plus a flat percentage as margin

• Introductory price is lower than competition

• Items sold at a lower price to attract people to buy other products

Pricing StrategiesPricing Strategies

Develop Assessment Framework for selection of cities Sources – NCAER, BW Whitebook, R K Swamy-BBDO

report, Internet research Potential Parameters could include:

Market Potential Value Income classification of population Per capita income Credit card spending Extent of urbanisation Percentage of working women Qualitative assessment

Identify key cities

LocationLocation

All India

Selected y cities

Shortlisted x cities

Credit card spending

Qualitative assessment

MPV

Income classification of population

Ownership of high-end consumer durables

Extent of urbanisation

LocationLocation

Distribution & Inventory Distribution & Inventory ManagementManagement

Distribution Management Distribution Channels Intermediaries Costs Packaging

Inventory control and management Inventory carrying costs Replenishment levels and lead times Vendor managed inventory systems Technology systems to track and monitor inventories

Branding Brand attributes Brand positioning

Promotion Strategy Media Planning Public Relations Programme Promotional Content

Marketing Plan Marketing Channels Order processing Incentives Payment Terms Complaint Handling systems

Marketing StrategyMarketing Strategy

CR

M

Privilege Points/ Info

Front End Applications

Core Retail ApplicationsBack End Applications

External Environment

Executive Information System

Finance & Accounts

HR, Admin & Payroll

Knowledge Base

POS

Interactive Audio Visual

AidsCustomer Walks In

Customer transacts online

Online transaction

Supplier(s)

Customer assisted

Internal Business

Architecture

Auth

oris

atio

n

Retail Application

Purchase Mgmt

Inventory Mgmt

Store & Warehouse

Mgmt

Vendor Mgmt

Decision Support

MIS & Report Writer

Store Security Systems

Internal Wired & Wire-free Network and External Connectivity

Hardware Components

Payment Gateway/ Bank

Smart Cards Online Portal

PDAs

Easy to use knowledge sharing and navigation aids

Direct Marketing/ Cust. Programs

POS Polling

Sales & Marketing

CR

M

Privilege Points/ Info

Front End Applications

Core Retail ApplicationsBack End Applications

External Environment

Executive Information System

Finance & Accounts

HR, Admin & Payroll

Knowledge Base

POS

Interactive Audio Visual

AidsCustomer Walks In

Customer transacts online

Online transaction

Supplier(s)

Customer assisted

Internal Business

Architecture

Auth

oris

atio

n

Retail Application

Purchase Mgmt

Inventory Mgmt

Store & Warehouse

Mgmt

Vendor Mgmt

Decision Support

MIS & Report Writer

Store Security Systems

Internal Wired & Wire-free Network and External Connectivity

Hardware Components

Payment Gateway/ Bank

Smart Cards Online Portal

PDAs

Easy to use knowledge sharing and navigation aids

PDAs

Easy to use knowledge sharing and navigation aids

PDAs

Easy to use knowledge sharing and navigation aids

Direct Marketing/ Cust. Programs

POS Polling

Sales & Marketing

Technology Architecture - Technology Architecture - ExampleExample

Organisazation Structure - Organisazation Structure - ExampleExample

Key Assumptions Key Financials

Profit and Loss projections for next 5 years Cash flow projections Projected balance sheet NPV and IRR calculations Key Ratios

Sensitivity Analysis

Final EvaluationFinal Evaluation

Market Share and Growth Rates Capital Structure Assumptions for major cost heads

Real Estate Depreciation Working Capital Operating Expenses Taxes

Key AssumptionsKey Assumptions

Profit and Loss accountS. No. Particulars Y1 Y2 Y3 Y4

A Source of revenueSales Cost of goods soldGross margin on salesIncome from space sellingOther incomeTotal income

B Operating expensesLease rental Employee expensesCompensation to sourcing partnerAdvertisement and PromotionElecticity and maintainanceForeign travel,insurance and other miscellaneous expenses

Total operating expensesC Earnings before depreciation, interest and tax (EBDIT): A-BD Depreciation and Amortisation

Depreciation on Fixed assetsAmortisation of pre-incorporation expenses

Total depreciation and amortisationE Earnings before interest and tax (EBIT): C-DF Interest

Term loanWorking capital loan

Total interestG Earnings before tax (EBT): E-FH Income TaxI Net Profit after Tax (PAT): G-HJ DividendsK Transferred to reserves: I-J

Profit & Loss StatementProfit & Loss Statement

BALANCE SHEETY1 Y2 Y3 Y4

INR (mn.) INR (mn.) INR (mn.) INR (mn.)SOURCE OF FUNDS

A Shareholders fundsShare Capital Retained Earnings

Opening balanceProfil/Loss for the year

Total retained earningsTotal shareholder's funds

B Loan FundsTerm loanWorking capitalTotal loan fundsTotal source of funds: A+BAPPLICATION OF FUNDS

A Fixed AssetsGross blockLess- DepreciationNet Block

B Working Capital Current assets, Loans and advances:

InventoryPre paid expensesLease depositLC margin moneyCash and cash equivalents

Total current assetsLess:Current Liabilities and Provisions

Trade creditorsOutstanding/Accrued expensesSales tax payableTemporary overdraft

Total current liabilitiesNet Current Assets

C Pre-incorporation expense (to the extent not written off)Total application of funds: A+B+C

S. No. Particulars

Balance SheetBalance Sheet

CASH FLOW STATEMENTS. Y1 Y2 Y3 Y4

No.I Operating activities

A Operating Profit before Taxes (EBIT)B (-)Taxes paidC + Non-cash items:Depreciation and amortisationD +(-) Decrease/(Increase) in working capitalE Net cash provided by operations before tax (A+B+C+D)II Investing activitiesA Fixed AssetsB Pre-incorporation expensesC Net cash provided by investing (A+B)III Financing activitiesA Issue of sharesB DEBT

New debtTerm loan Working capital

Principal repayment of debtTerm loan Working capital

Interest on debtTerm loan Working capital

C Dividend on equity sharesD Corporate dividend tax E Net cash provided by financing (A+B+C+D)

Increase (decrease) in cash and cash equivalents (IE+ IIC+IIIE)Opening balance of cash and cash equivalentsClosing balance of cash and cash equivalents*

Particulars

Cash Flow StatementCash Flow Statement

0 1 2 3 4 5 6 7 8 9 10 11Initial capital expenditureInitial investment in working capitalPre-incorporation expenses

Cash flow from operationsSalesLess COGSGROSS MARGINIncome from space sellingAdd Other incomeTotal incomeLess Operating expenses

EBDITLess Depreciation and amortisationEBITLess Current tax

EBIATAdd: Depreciation and amortisationAdd/(Less) Change in net working capital

Less capital investment

Add Recovery of working capital

Add Recovery of capital assets

Net cash flowPresent value factorPV of cash flowCumulative PVNET PRESENT VALUE- INR (mn.) - INTERNAL RATE OF RETURN- (%)

Particulars Year

NPV and IPP CalculationNPV and IPP Calculation

Profitability Ratios Gross margin Return on Capital Employed Return on Equity

Leverage Ratios Debt/equity ratio Interest Coverage ratio Debt Service Coverage Ratio

Liquidity Ratios Current Ratio

Key RatiosKey Ratios

The feasibility assessment evaluates the project on the basis of pre-decided key evaluation criteria, e.g. NPV, IRR, ROCE, ROE.

The sensitivity analysis analyses the impact of a change in each significant assumption individually on the key evaluation criteria.

Feasibility Assessment & Feasibility Assessment & Sensitivity AnalysisSensitivity Analysis

Sensitivity of debt variancesS.

No.Scenario/Variable assumptions

IRR(%)

NPV INR (mn.)

ROCE(%)

ROE(%)

A Cost of debt (average)       

  2% higher 16.64% 177.76 14.30% 16.65%

  1% higher 16.33% 181.27 14.15% 16.77%

  1% lower 15.73% 188.50 13.88% 17.03%

  7% lower (ECB) 13.93% 212.34 13.11% 17.70%

B Debt equity ratio (initial)       

  0.75 16.25% 193.84 16.07% 25.42%

  0.60 16.05% 186.91 14.38% 18.09%

  0.50 15.91% 182.27 13.45% 15.45%

  0.40 15.77% 177.67 12.63% 13.62%

  0.25 15.56% 170.94 11.57% 11.74%

Project Evaluation CriteriaScenario/Variable assumptionsS.

No.

Examples of Sensitivity Examples of Sensitivity AnalysisAnalysis

Every startup faces risks Environmental – regulatory, competitive Strategic – location, promotion, timing of entry, pricing etc Technology – obsolescence of product/process technology Operational – logistics, inventory management,

organization building Financial – financing structure and cost of finance

Has the management team identified the critical risks? Are the critical risks addressed in the proper order with

the least amount of capital?

Risk Mitigation PlanRisk Mitigation Plan

Current status Likelihood of occurance

Criticality Risk mitigation (if any)

Regulatory risks• High cross-border tariffs, leading

to lower margins and difficulty in maintaining international price parity

• Non-availability of cheaper funds, on account of restrictions on foreign equity participation

Competition • Threat from larger players entering

the same segment with a similar business model

High

High

Medium

High

• Thrust on sourcing of goods locally, to reduce import burden

• Introduction of VAT to rationalise indirect tax structure

• Measures to hedge financial risk (refer to financial risk column below)

• Early launch to have lead time for establishing the brand

• Strong privilege loyalty programmes • Innovative strategies to maintain differentiated

position in the market

Customer purchase habits• Risk pertaining to the current trend

of customers purchasing similar products abroad

High High • Exceptional customer service standards• A compelling promotion strategy, highlighting

the convenience pertaining to shopping at Neo vis-à-vis shopping abroad

• Greater variety of brands and products

Risk Mitigation PlanRisk Mitigation Plan

S.No. Workstreams/ Key Activities

1 Financial Closure

2 Sourcing Arrangements

3 Real Estate Finalisation

4 Retail Outlet Development

5 Technology Implementation

6 Regulatory Matters

7 Organisation Building

8 Branding & Promotion

9 Strategic Partner Selection

10 Organisational Policies & Processes

11 Finalisation and Ordering of in-store merchandise

12 Logistics Arrangements

13 Finalisation of Outsourcing Arrangements

Month 12Month 8 Month 9 Month 10 Month 11Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7

Implementation PlanImplementation Plan

Define exit strategy options IPO Strategic sell-off to third party Other options

Propose time horizon for exit and make financial projections accordingly

Exit StrategyExit Strategy

Irrational Financial projections

Not identifying an Exit strategy for the investor

Lack of credentials of management team

Lack of information on competition

Overly aggressive market estimate

Poor and Inaccurate research

Errors to avoid while developing a Errors to avoid while developing a business planbusiness plan

Q&AQ&A

LAUNCHING YOUR ENTERPRISELAUNCHING YOUR ENTERPRISE- Company Formation -- Company Formation -

Some Q to ask yourself: Structuring the startup? Entity? How do I register my company? Time frame & Costs? Company Name? Pvt. Ltd. or Ltd. Company? Capitalisation requirements? Taxes? EOU, SEZ, STP? Regulatory framework in case of foreign investment?

Directors & Subscribers? Paid-up share capital & Authorised share capital? Equity & Preference shares? Investors - VC, Pvt. Equity, FII, FVCI Stock options? Non-disclosure agreement Employment agreements Policy Handbook Leveraging IP Exit Strategy?

Q&AQ&A

Networking Lunch

How to approach your IP• IPR – “Intellectual property

rights” is a broad, generic term to describe different kinds of monopoly rights granted by the State to an inventor / author for the protection of certain intangible creations (ideas, works of art, etc.)

• Common characteristic – essentially negative rights to prevent others from doing something

• Provides territorial protection

Trademark IPRsIPRs

Copyright Trade Secret

Designs

Patent Knowhow

• The Patent Act, 1970 (Amendments 1999, 2002 and 2005)• Trade Marks Act, 1999 (Replaced The Trade and Merchandise

Marks Act, 1958)• The Geographical Indications of Goods (Registration and

protection) Act, 1999;• The Designs Act of 2000 (Replaced The Designs Act, 1911)• Information Technology Act,2000• The Semiconductor Integrated Circuits Layout-Design Act, 2000; • The Protection of Plants & Varieties and Farmers Rights Act,

2001;• The Biological Diversity Act, 2002• The Copyright Act, 1957 (1994 - computer programs as “literary

work”)

IP Laws : 1999-2000IP Laws : 1999-2000

IP - IPR Territorial Rights Prior use – harmful ? Nature of protection ? – limited, perpetual Protection under more than one head

Some BasicsSome Basics

An exampleAn example

Copyright

GVCTrademark

Patent

Design

Controller General of Trade Mark, Patents and Designs Registrar of Copyright Main Offices

Trademark – Mumbai (branch Delhi, Kolkata, Chennai, Ahmedabad)

Copyright – Delhi Patents – Kolkata (branch Delhi, Mumbai, Chennai) Designs – Kolkata

Harmonization proposed Appellate Board Infringement matters - Courts

AuthoritiesAuthorities

Convention Date

Berne Convention April 1, 1928 (Party to convention)

Universal Copyright Convention January 7,1988 (Ratification)

Paris Convention December 7,1998 (Entry into force)

Convention on Biological Diversity June 5,1992 (Signature and ratification)

Patent Cooperation Treaty December 7,1998 (Entry into force)

Budapest Treaty on the International Recognition of Microorganisms for the Purposes of Patent Procedure 1977

December 17, 2001(Party to treaty)

TreatiesTreaties

Intangible property – can be used simultaneously Right is limited by a term (if not renewed – lapses) It is a territorial right (PCT, EPO, Paris Con.) Patentability tests vary in each jurisdiction Obtained only by registration (not mere application) It can be assigned, licensed, mortgaged, surrendered Patents are granted for working not for hoarding. Non-

working could be fatal Right relates to commercial exploitation, does not preclude

experimental work Joint ownership (Section 50)

Salient FeaturesSalient Features

Total licensing revenues estimated at $100b (Economist) Texas Instruments licensing net revenues – $800m / year IBM licensing net revenues – $ 1 billion / year Digital Equipment got $1.5b from Intel for dropping its patent

infringement suit Bankruptcy to $400m 5 people – two computers – one patent – 400 licences - $50m

income Gillette’s Mach3 blade technology is protected by 35 patents

Value – Some examplesValue – Some examples

Kodak’s loss for infringing Polaroid patent

$925m as damages

$100m litigation fees

Shutting $1.5b manufacturing plant

Loss of R&D and other efforts

Minolta paid $127m to Honeywell for infringement of its

‘autofocus’ patent

GE paid $128.7m to Fonar (a small medical firm with

annual revenues less than $12m) for infringing its MRI

patent.

IP wasting – shareholder’s suit for failing to exercise its

duty of care to protect its IP assets

Xerox – failing to patent its GUI technology – estimated

loss $500m

Swiss Watchmakers Association dismissing new

electronic quartz watch as mere curiosity

Features Protection Limitations

Trade Secret

Kept secretCan be acquired only by improper means

Contractual obligationTerm : forever

Once comes into public domain – difficult to protect

Copyright Exclusive right to do certain acts (permissible acts)

Registration not compulsoryThrough Berne convn/ UCC Term – + 60 Y

Only expression protected , not underlying ideas, concepts

Patent Exclusive Right(permissible acts)

Registration in each countryTerm – 20 years

Only if technical contributionGrant slower than © Regn.No criminal penalties

Protection – A ComparisonProtection – A Comparison

Protect IP where your market is.

Use different kinds of IPRs for protecting your IP.

IP StrategyIP Strategy

PatentPatent

What is a patent? Is my invention patentable? What is patentable and what is not? Is a software or a business method patentable

in India and in US? How do I file a patent? How much information do I provide in my

patent application? What is a patent strategy and what must be

my patent strategy?

Innovations Inventions

2(1) (j)

S. 3 exclusionsNot Invention

S. 4 exclusionsNo Patent

S. 5 exclusionsNo Patent

Patentable InventionsPatentable Inventions

S. 2(1)(j)

Invention

Art. 27 (1) of TRIPS

a new product or process involving an inventive step and capable of industrial application

(Novelty, non-obviousness, Utility)

S. 2(1) (ja)

inventive step

means a feature of an invention that involves technical advance as compared to the existing knowledge or having economic significance or both and that makes the invention not obvious to a person skilled in the art

S. 2(1)(ac) capable of industrial application

in relation to an invention means that the invention is capable of being made or used in an industry.

Definitions - 2002Definitions - 2002

an invention which is frivolous or which claims anything obvious contrary to well established natural laws

an invention the primary or intended use or commercial exploitation of which could be contrary to public order or morality or which causes serious prejudice to human, animal or plant life or health or to the environment

the mere discovery of a scientific principle or the formulation of an abstract theory or discovery of any living thing or non-living substance occurring in nature

What is not patentable? S.3What is not patentable? S.3

The mere discovery of a new form of a known substance

which does not result in the enhancement of the known

efficacy of that substance or

the mere discovery of any new property or new use for a

known substance or

the mere discovery of the mere use of a known process,

machine or apparatus unless such known process

results in a new product or employs at least one new

reactant.

What is not patentable? S.3What is not patentable? S.3

Explanation- for the purposes of this clause, salts, esters, ethers,

polymorphs, metabolites, pure form, particle size, isomers,

mixtures of isomers, complexes, combinations and other

derivatives  of known substance shall be considered to be the

same substance, unless they differ significantly in properties with

regard to efficacy

SWISS CLAIMS allowed in certain countries.

“use of product X for the manufacture of a medicament for the

treatment of disease Y”

a substance obtained by a mere admixture resulting only in the aggregation of the properties of the components thereof or a process for producing such substance

the mere arrangement or re-arrangement or duplication of known devices each functioning independently of one another in a known way

plants and animals in whole or any part thereof other than micro-organisms but including seeds, varieties and species and essentially biological processes for production or propagation of plants and animals

a method of agriculture or horticulture any process for the medicinal, surgical, curative, prophylactic,

diagonistic, therapeutic or other treatment of human beings or any process for a similar treatment of animals or or to render them free of disease or to increase their economic value or that of their products

a mathematical or business method or a computer program per se or algorithms

a literary, dramatic, musical or artistic work or any other aesthetic creation whatsoever including cinematographic works and television productions;

a mere scheme or rule or method of performing mental act or method of playing game;

a presentation of information; a topography of integrated circuits; an invention which, in effect, is traditional knowledge or which is an

aggregation or duplication of known properties of traditionally known component or components.

India E.U. U.S.A.

First to file file invent

Prior publication

harmful harmfulArt. 54 EPC

1 year grace period (35 US Code s. 102)

Specification Fully & particularly describe I, operation, use, method Best method of performingS.10

At least one way of practicing inventionArt. 83 EPC

best way to practice invention (35 US Code s. 112)

Publication After 18 months After 18 monthsSpecification & novelty search

After 18 months

Opposition Prior to grant During first 9 months after grant – at EPO

Re-examination

USPTO 5,356,330: Apparatus for simulating

a ‘high-five’

… shared between fans to express the joy and

excitement …

Unfortunately requires mutual hand slapping of

two participants ……

a solitary fan is unable to…express excitement…

US Patent 5,197,216

Combined camouflage and decoy device

In order to fool the birds, the inventor suggests the hunter move his head from side to side and flap his cape a little to simulate a happy goose.

Section 39

prohibits any person resident in India from filing patent application for any

invention outside India unless :

• Written permission of Controller

(Permission is granted if there is no direction passed under Section 35 for

prohibiting/restricting publication/ communication of information relating

to invention. The Controller must obtain consent of the Central

Government before granting such permission for invention relevant for

defense purpose / atomic energy. The application is to be disposed of

within 3 months.) OR 

• Patent application for the same invention has been first filed in India at

least six weeks before the application outside India.

Security ProvisionsSecurity Provisions

Considering definition of “person” under the General Clauses

Act, 1897 person resident in India would include company or

association or body of individuals, whether incorporated or

not. Expression “resident in India” is not defined.

Exception u/ Section 39(3)

This section shall not apply in relation to an invention for

which an application for protection has first been filed in a

country outside India by a person resident outside India

Security ProvisionsSecurity Provisions

CopyrightCopyright

What is a copyright? What can be copyrighted? What is the term of the copyright? What do you mean by registration of a copyright? What is an infringement of a copyright?

Registration not compulsory, only acts as prima facie proof of ownership, with registration no special benefits

Computer databases and software protected as literary works (Amendment in 1994)

No “Work for Hire” concept in the Act, but under Section 17 an employer is a copyright owner of an employee’s work unless a contrary agreement is in place

Copyright Act, 1957Copyright Act, 1957

Work Literary, musical, dramatic, artistic, sound recording, C film

Copyright

1st Owner

Exclusive right to……

Creator

Term 60 years

Infringement Violation of exclusive right

Defenses Fair dealing, S, 52(1) (j)

Registration not compulsory

Expression & not idea protected

Bundle of Rights – assign, license separately

Allied Rights – Performers, Broadcasters

Copyright Act, 1957Copyright Act, 1957

Registration not compulsory but acts as a prima facie proof of ownership

Registration in Berne Convention and UCC countries would be acceptable

Unlike US, no special privileges upon registration No specific provision for the deposit of the source code on any

specified media To prevent piracy – first 25 and last 25 pages of the source code

submitted for registration To prove ownership other methods – maintenance of log books,

deposit in locker, posting to oneself / attorney, insertion of error in the code

Copyright Notice not compulsory

RegistrationRegistration

Trade MarkTrade Mark

What is a trade mark? What can be trade marked? What is the term of a trade mark? What do you mean by trade mark registration? What is an infringement of a trade mark?

Registration of three dimensional marks, combination of

colours Service marks, collective marks

Prior use not a must for application or registration

Term : 10 years Recognition of “well-known” marks

Trade Marks Act, 1999Trade Marks Act, 1999

Trade Secrets & Confidential Trade Secrets & Confidential InformationInformation

What are trade secrets? What is confidential information? What should be my internal practice to protect confidential

information? What must I do when I find out that my employee has

compromised confidential information of my company? What do I do if my company receives confidential

information of a 3rd party, without the 3rd party knowing about it?

No statute Common law, contract Strong Non- disclosure agreements,

processes and policies

Trade Secrets & Confidential Trade Secrets & Confidential InformationInformation

No specific legislation governing technology transfer Governed by contractual obligations IP laws governing IP transfer

Written instrument – specify rights, term, territory Instrument is to be stamped as per state law In case of registered IP, transfer to be recorded with the

authorities in India Tax on royalties payable Withholding of taxes

Technology TransferTechnology Transfer

Copyright law Except in the case of employer – employee relationship – no

work for hire concept Assignment in writing must, stating

The work Rights Tenure (else 5 years presumption) Territory (else Indian territory presumption)

Assignment of future work permissible

Patent law No work for hire concept Assignment in writing must

Work for HireWork for Hire

Non-compete, non-solicitation – Section 27 Contract Act

Privacy and Data protection Control over employees / sub-contractors Governing law Jurisdiction Enforcement of foreign judgments and

awards Exchange Control

Issues arising in TransactionsIssues arising in Transactions

Intellectual Property – Allocation of Intellectual Property – Allocation of RightsRights

Preferred Approach Examine Nature of IP

Nature of technology or information (software code, business methods, manufacturing processes, etc.)

Nature of intellectual property rights (patents, copyrights, trade secrets, etc.)

Examine Each Party’s Situation Business model Core competencies Competitive threats

Allocation Principles Joint ownership is usually a bad idea A license is sufficient in order to have freedom of use Ownership is important to control use by others (e.g.,

competitors) Exclusive licenses – pros and cons Embedded or essential third-party IP creates

complications

Intellectual Property – Allocation of Intellectual Property – Allocation of RightsRights

Rights Transfer Principles Present assignment or license grant Specify rights granted Further assurances clause Chain of title from employees and contractors to supplier

to customer Recordation

Rights Transfer Requirements in India Written instrument – specify rights, term, territory Instrument is to be stamped as per state law In case of registered IP, transfer to be recorded with the

authorities in India Tax on royalties payable Withholding of taxes

Intellectual Property – Rights TransferIntellectual Property – Rights Transfer

Industrial Age Information Age

Patents are protected; licensing opportunities are considered

Goal IP Portfolio is strategically linked with Business strategy

Reactive Mindset Proactive

Patent “scorecard” is maintained

Focus Revenue and Competition

Periodic attempts to know what the company owns

Approach IP inventory updated and leveraged

IP generates costs without measurable returns

Results IP drives revenue against measurable business goals

IP Strategy

Investment Strategy

Deployment Strategy

Legal Strategy

IP Strategy

IP Strategy

IP Legal StrategyIP Legal Strategy

Offensive StrategyOffensive Strategy Defensive StrategyDefensive Strategy

IPR STRATEGYIPR STRATEGY

Identify your core Tech. &

Protect it

Identify Compt's

core Tech. & Block it

IP Search and IP Audit

Protect Core &

Ancillary tech

Q&AQ&A

Next: Session - 4

A Case Studyby

Ajit Nagral

Founder, NuGenesis Technologies(acquired by Waters Corp. NYSE:WAT)

PATENTING & PROTECTING YOUR INNOVATION

Please Note

This case study provides an Entrepreneurial Perspective on NuGenesis’ innovation and protection of its innovation, via a series of events.

Confidential Information reating to the patent or patent protection activities shall not be disclosed

NuGenesis was a U.S. based company with presence across the globe

My Current StatusPresident, Megaware, Inc, Westborough, MADirector, Megaware Technologies, Mumbai, Indiawww.megawareinc.comIndia Cell: +91 98203 27200Email: [email protected]

The Patent

United States Patent 6,260,044Nagral, et al. July 10, 2001

“Information storage and retrieval system for storing and retrieving the visual form of information from an application in a database”

www.uspto.gov

At NuGenesis we called it“Print to Database Technology”

Events as they unfolded

Company Formed in 1996 with a focus on the Life Science Industry

Why “Print to Database”? – solving an industry wide problem

Is the Innovation Patentable?

Filed Provisional Patent Application – costs considerations, flexibility, under the radar, time limits

Reducing the innovation to practice – NuGenesis SDMS

First offer of sale – why is it important?

Should we patent? – cost vs. benefits, disclose vs. keeping it close to the vest, time commitments

Prior Art analysis

Filed Patent Application – finding the right firm

Picking the countries to file in – first (U.S.A), next (Germany, France, Switzerland, U.K., Netherlands), later (Japan, Korea and others)

Wolf in a Sheep’s clothing – competitors, not partners

Patent as an offensive strategy

Patent granted in the United States first and later in E.U. countries

Filed patent infringement lawsuit against competitor the day after patent was issued

Events as they unfolded

Lawsuit considerations – preliminary injunction, PR, damages, message to prospective competitors, expert witness’ cost

Defense arguments – suit is without merit, product does not infringe, patent is invalid (prior art, first offer of sale bar, etc.)

Deposition – not fun

Settlement (confidential)

What it did – patent remains valid and has more value today, competitive deterrence, helped our M&A prospects, helped sales

Follow on patents

Events as they unfolded

Q&AQ&A

Networking Tea / Coffee

PROTECTING YOUR BUSINESS PROTECTING YOUR BUSINESS THROUGH INVESTIGATIONTHROUGH INVESTIGATION

Enforcement issues arise when: Piracy, counterfeiting

Outright infringement of IP Genuine disputes

between competitors Contractual disputes

licensor – licensee employer - employee

Some BasicsSome Basics

Various types of IP TM, ©, patent, CI / Trade Secret, GI, IC, plant variety

Rights – by creation or registration Territorial right International treaties

Copyright – recognition of © created in member countries TM, Patent, Designs - Priority

International Framework for International Framework for enforcementenforcement

No international law or enforcement mechanism Treaties lay down minimum requirements which member

countries have to incorporate in their laws International IP court not contemplated under any treaty Domestic law, procedures & remedies Order of one country – enforceable in the other only

under limited circumstances WTO dispute settlement mechanism Agencies

TRIPS and its Main FeaturesTRIPS and its Main Features

Establishes minimum standards for all types of IPRs (but utility models and breeders’ rights)

It is based on and supplements, with additional obligations, the Paris, Berne, Rome and Washington Conventions

It extends to IPRs the principles governing international trade: MFN, NT

It contains provisions relating to enforcement of IPRs, amendment and reservation

TRIPS – Article 41TRIPS – Article 41

Effective action against infringement Expeditious remedies to prevent infringements Remedies constituting a deterrent to further

infringements Procedures:

Fair and equitable, Not unnecessarily complicated or costly, or entail unreasonable time-limits or unwarranted delays.

Written decisions on evidence led after opportunity to be heard

No obligation to create distinct system for enforcement of IPR

Essential aspects of enforcementEssential aspects of enforcement

Speed – at least interim reliefs Effective, efficient Cost – Effective

Problems faced Slow pace of enforcement proceedings, Low level of costs and damages awarded by courts, difficulties in obtaining rapid ex parte injunctions.

Benefits of strong system Boost to domestic industry (depending upon level of

development) Technology transfer Foreign Investments

IndiaIndia

Trademark, Copyright – Civil + criminal Patents, Designs – Civil (in case of cheating - criminal) Civil remedies

Interim reliefs – injunction, court receiver, Mareva Injunctions, Anton Piller orders, John Doe (Ashok Kumar) orders

Delivery up Quia Timet Action Damages – recent trend – punitive and exemplary damages

Timeline Foreign judgements – persuasive value Customs

Penalties and DamagesPenalties and Damages

Copyright & TM infringement - punishment 6 months – 3 years 50,000 – 2,00,000

Traditionally nominal damages Recent trend (Delhi High Court cases)

Exemplary and compensatory damages

Protect your own rights!Protect your own rights!

Secure your rights: Though transborder reputation recognised and well-known marks have statutory protection – Register your mark

Alert and well-informed brand protection cell Invest in investigations:

Reliable and timely information Identify production and storage sites

Stringent and watertight agreements: with the local distributors, manufacturers, joint venture partners and the IP holders

Timely actions: even against small time manufacturers

Some instancesSome instances

Criminal action followed by civil Theft by employee – evidence collection /

preservation Assistance of police even in civil matters Goods lying with customs for export Infringing products only exported from India, not

sold in India Parallel imports

Q&AQ&A

THANK THANK YOUYOU

KPMG

Nishith Desai Associates