Banking on busted IT projects and dormant IP

Resourceful VCs can help you unearth treasure buried in your IT asset sheet

The news of the day is that Silicon Valley is awash once more in VC money. The dollars are rolling in. So why shouldn’t your company get a piece of the pie?

According to Henry Chesbrough of the University of California at Berkeley Haas School of Business, 90 percent of corporate IT assets sit dormant inside the balance sheets. Where, you ask? In the form of untapped IP (intellectual property).

Managing Director George Hoyem’s VC firm Blueprint Ventures specializes in what he calls “early stage” corporate spinouts — ventures undertaken to capitalize on hidden IP.

“Early stage” refers to the fact that these spinouts are smaller than what typical buyout companies invest in. They are not full companies, and from their perspective, they don’t have the upside potential they want. Blueprint findings note that early-stage spinouts “were less likely than traditional startups to generate 10X or higher multiples.”

Nevertheless, Blueprint manages about $100 million to $200 million from investors who believe they are getting solid returns.

LANDesk, a company spun out from Intel, sold to Avocent for $416 million. Here’s a company that Intel was likely to shut down, and instead Blueprint wrote Intel a check for $50-plus million — about an 11X return on Intel’s original investment, according to Hoyem.

Monetizing dormant IP has not yet registered with VCs looking for revenue-generating businesses.

“These kinds of early-stage IT spinouts don’t meet their [corporate] hurdle rate or strategic core direction,” Hoyem tells me.

So Blueprint comes along and says we can liberate assets and turn them into startups, which the company has done for Intel, Fujitsu, and NEC, among others.

For example, American Electronic Power (AEP), a utility in Ohio, was working with Cisco to put up networks on medium-voltage power lines in order to become an ISP for rural parts of the country.

Along the way, however, AEP discovered being an ISP was not its core competency. So AEP took its technology and Cisco’s and bundled it into a separate company called Amperion in 2001. Amperion is now the leading medium-voltage power-line communications company for broadband over utility lines, according to the company. That’s a nice win-win example for everybody.

But sometimes Hoyem sounds a bit like a predator on the prowl.

“One day, the music will stop at Google,” he tells me — I’m on the phone, so I can’t see if he’s twirling his mustache — “and Google will be a great hunting ground for us.”

Wow, this guy is good.

“They will have all these patents,” Hoyem adds. “And some exec will come in and say, ‘What are we doing here? We need to focus.'”

Of course, no definitive numbers are available on these deals, but typically about 19.9 percent goes to the parent company. That percentage represents the barrier at which a company doesn’t have to consolidate earnings, profit, and loss, up through its income statement.

After that, 15 to 30 percent typically goes to the new founders and the new management team, and it’s used to lure talent to the startup. The remainder goes to the investors.

Dormant IP aside, think of the hundreds of projects in which companies spend millions, if not hundreds of millions, only to never complete them. Blueprint figures out how to value these assets and structure spinouts — certainly worth looking into while the VC money is still flowing.