The Merchant Banker of Intellectual Capital
Intellectual Property (IP) has always been important. However, as I have written here, in the last 30 years, it has replaced hard assets as the most important part of corporate valuations. In the Shift Age IP will be the most important asset that any individual or company can own. The ability to create value, transactions, liquidity and ultimately an open marketplace of Intellectual Capital (IC) is therefore one of the most important historical developments that lies ahead for the emerging global economy.In a couple of recent columns, I have written about the efforts of one company, Ocean Tomo, to lead the way into this new future of IC. Today we publish an interview with James Malackowski, Founder and CEO of Ocean Tomo.
James E. Malackowski is the President and Chief Executive Officer of Ocean Tomo, LLC, an integrated Intellectual Capital Merchant Banc® firm providing valuation, investment and risk management, corporate finance and expert services. Ocean Tomo assists clients â€” corporations, law firms, governments and institutional investors â€” in realizing Intellectual Capital Equity® value broadly defined. Subsidiaries of Ocean Tomo include: Ocean Tomo Auctions, LLC; Ocean Tomo Asset Management, LLC; and Ocean Tomo Capital, LLC — publisher of the Ocean Tomo 300® Patent Index (Amex: OTPAT), the Ocean Tomo 300® Patent Growth Index (Amex: OTPATG) and the Ocean Tomo 300® Patent Value Index (Amex: OTPATV).
Mr. Malackowski is an internationally recognized leader in the field of Intellectual Property (â€œIPâ€) management as well as a noted expert in business valuation and intellectual property strategy. He is a member of the IP Hall of Fame Academy and was recognized in 2007 as one of the fifty most influential people in intellectual property.
Evolutionshift.com: Jim, how did you first get interested in intellectual property? Was it some event or personal experience?
Malackowski: My career in IP was a classic example of being in the right place at the right time. After graduating from Notre Dame in the mid 1980s, I chose to work with a small dispute and contract accounting firm as preparation for what I thought would be a career in business law. Given my familyâ€™s background as small business owners, I requested to work on smaller rather than larger matters for the firm. In practice, this meant working on the firmâ€™s first patent accounting involving the swirl flame of a blowtorch rather than a nuclear power plant. After the first patent accounting, I was staffed on the second. After the third, I was an expert. Fortunately, I could sense that IP was becoming relatively more important to each of my clients and at that point made a decision to focus my attention on this emerging asset class.
Evolutionshift.com: When did you decide to make intellectual property and the IP marketplace your career and lifeâ€™s work?
Malackowski: Three years after my first assignment valuing IP for disputes I experienced two concurrent events that set my career path. First, I was asked by a client to value IP for a transaction rather than a dispute, and my then-employer required that I reject the assignment as â€œimpossibleâ€ and not be covered by their professional insurance. Second, the firm I was working for was sold to an international advertising agency wanting to branch into consulting. Although I had progressed rapidly to the level just below partner, I would not share in the sale proceeds. At that point, age 25, I decided I would start my own practice to focus exclusively on IP valuation, both for disputes and transactions. That turned out to be a good decision.
Evolutionshift.com: When was it that you truly saw that intellectual property would become the dominant asset in the Information Age. I know you call it the Knowledge Age and, I call our current times the Shift Age, but regardless of the name, in the post-Industrial Age the value of IP has surpassed the value of hard corporate assets. When did this become trend become clear to you?
Malackowski: From the mid 1980s to the late 1990s I was buried deep in the forest of IP-based client work. After we sold the business in 1999, I had a three-year remaining non-compete to extinguish. This gave me plenty of time to think. I was fortunate enough to spend this time first with the private equity firm that funded our sale and then with a boutique investment bank. This change of venue, combined with a lot of reading about the development of merchant banking as an industry 200 years prior, led to my recognizing that IP was an emerging asset class and my thoughts for developing a strategy to monetize the asset across traditional models.
Evolutionshift.com: When you founded Ocean Tomo, what was your vision for the company? You call Ocean Tomo â€œthe Intellectual Capital Merchant Banc.â€ Please explain.
Malackowski: Ocean Tomoâ€™s mission is based clearly on my interpretation of the merchant banking model developed by Morgan Grenfell in the mid 1800s. I desired to be â€œall things financeâ€ related to the asset I knew bestâ€”intellectual property. The notion of combining valuation, investment, dispute accounting, risk management, and corporate finance advisory services around a single asset class under a unified name was not mine. I simply applied lessons I read to IP.
Evolutionshift.com: Please explain what the Ocean Tomo 300 indexes are, how they are compiled, and where and how they are traded.
Malackowski: There are countless articles that describe the construction and purpose of the Ocean Tomo family of indexes. Briefly, we wanted to create a broad market measure of innovation by allowing investors to buy a collection of stocks with strong patents. It is very similar to the S&P 500, though, rather than the 500 largest companies, it is the 300 companies with the best patents for their size and investment style (i.e., relative value). The Ocean Tomo 300® Patent Index and its growth and value derivative are all priced on the American Stock Exchange with exchange traded funds offered by Claymore Securities (e.g., AMEX: OTP). As of this writing, year-to-date performance has been more than 700 bps [basis points] above the S&P. Starting later this year, we will be offering a new index, the IPX Composite, which will include not only the Ocean Tomo 300 firms but others with qualified patent portfolios. Further detail can be found at http://www.oceantomoindexes.com
Evolutionshift.com: It strikes me that the Ocean Tomo 300 Patent Index is the only equities index that truly and purely values corporate intellectual capital. Since IC is the valuation in ascendancy, it would make sense that the Ocean Tomo 300 should and will become one of if not the most influential stock indexes of this new century. Do you agree, and, if so, when do you think that might happen?
Malackowski: Clearly, we agree. In fact, the American Stock Exchange has already proclaimed the Ocean Tomo 300® Patent Index to be the first new major market index in 35 years following the DOW, S&P, and NASDAQ. In less than one year since inception, the index is routinely cited alongside the DOW and NASDAQ on daily market reports. It is included in the most respected news media listings of major indexes, and it became investible though ETFs [exchange-traded funds] almost immediately upon inception. I think we are well on our way of achieving the goal of educating the market about the indexes which we believe will result in the influential position your question suggests.
Evolutionshift.com: Please explain to my readers the current state of the IP marketplace: how does IP get valued, and how do transaction get done?
Malackowski: The IP market is clearly emerging. Most transactions are still valued and executed in a private, one-off, highly inefficient way. Our ratings software, public auctions, and pending IP trade exchange are changing the way business is done. IP is spreading from a topic of the general counsel to a focus of the CFO. In our view, this remains a long-term transition but the next five years will see tremendous progress. As an example, less than 18 months ago, the idea of a routine large-scale public auction for IP was viewed as silly. Today it is already an accepted part of the IP solution set.
Evolutionshift.com: The IP auctions that Ocean Tomo initiated in 2006 seem to be a step to create a more liquid and transparent IP marketplace. I gather the auctions have really been a success given the large sums being paid. I know the spring 2007 one I attended in Chicago broke some records. How are they going, and what do you think the future of IP auctions will look like?
Malackowski: Prior to the first press release announcing a live multi-lot auction of IP, we made a three-year commitment to the process of building an auction marketplace. This commitment was also made public to both instill confidence in new market participants as much as to lock ourselves into a position that could not be easily altered. To date, each auction has exceeded our plans and expectations. We believe that the live auctioning of IP will be a permanent marketplace. That said, we have also proclaimed our desire from the beginning to obsolete the auction floor for most transactions by creating a traded exchange for IP (see http://www.ipxchicago.com). This transition will begin in 2010 and should be fully complete within three years.
Evolutionshift.com: As you know, I have written about the steps you are taking to change this. Please explain what they are and the timeline for bringing them online. What is the IP Exchange?
Malackowski: IPX Chicago is a traded exchange for intellectual property that seeks to bring the efficiency of existing equity and commodity indexes to IP as an asset class. We expect to launch IPX as a separate exchange on January 1, 2010, with four products: equity listings, IP-based indexes and related futures and options. Tradable Technology Basketsâ„¢, and Unit License Rightsâ„¢. Ocean Tomo, as founder of IPX, is working today to immediately post industry-based indexes of patent value (e.g., the notional value of all patents comprising hybrid electric vehicles) in major financial publications and complete a number of beta trades within the next six months.
Evolutionshift.com: What has been the reaction of corporations both in the United States and around the world to these initiatives? Are any taking the first steps toward full participation? Anything you can share?
Malackowski: As a career entrepreneur, the toughest part of my day is understanding the prevailingâ€”and no doubt prudentâ€”attitudes of large corporations. As we have introduced each initiative, the results have been similar: an early and broad recognition that the IP market needs such a solution, a grave resistance to be the first to participate, and gradual adoption and participation. Given that, we are happy with the actual results thus far; we are very excited about what we see as the growth for these new markets as more and more firms adopt.
Evolutionshift.com: Jim, as a futurist, I look at the waves of history to better see what lies ahead. You will recall that when we first met I was thrilled because I believed that the transition from the Industrial Age to the Information/Knowledge Age and on to the Shift Age dictated the need for a change in the evaluation of wealth and assets, but I had yet to meet people who were doing the heavy lifting to manifest this change. It seems to me that you, your company, and its vision are part of something historically inevitable and timely. Do you see it that way? Please, no false modesty.
Malackowski: We clearly see ourselves as a partâ€”a catalystâ€”of an extraordinary transition. The movement to an intangible-based economy is every bit as significant as was the Industrial Revolution a century ago.
Evolutionshift.com: It could be said therefore that Ocean Tomo, and perhaps other companies like it, are representative of an idea whose time has come. That is the most powerful force there is? Do you agree?
Malackowski: We hope a rising tide will raise all boats and are happy to be on our own little ship out at sea.
Evolutionshift.com: Thank you so much for taking the time for this interview.