Presentation At Ip Conf. 02 12 10

For private use only -- CASPA Copyright Protected

Intellectual Property as the
Crown Jewel of a Highly Valued
Semiconductor Start-up –
a Real-life Case Study
Intellectual Property Symposium 2002 in Guangzhou
December 10, 2002

Presented by: Al Kwok
President, CASPA Pearl River Delta Chapter
Member, VSI Alliance IPP DWG


Outline
 General background
 Intellectual Capital, Human Capital, Intellectual
Assets & Intellectual Property
 IP as the strategic leverage
 A case study – for high-tech start-ups to follow
 Semiconductor IP business model
 Best practices in IP management
 China’s situation
 Suggestions to investors
 Suggestions to entrepreneurs
 Acknowledgements and appreciation
2


Intellectual Capital (IC)
 According to Brooking Institute study of thousands of non-financial
companies, the percentage of company value attributable to intangible
assets (Intellectual Capital) has increased dramatically:
 1978: 83% in tangible assets; 17% in Intellectual Capital
 1998: 31% in tangible assets; 69% in Intellectual Capital
 In Information Age, Intellectual Capital represents the value of a company
 IC is defined as KNOWLEDGE that can be converted into VALUE
 Knowledge companies make profits by converting knowledge into revenue.
 Product/market knowledge for differentiation -- a key competitive advantage
 IC consist of 2 elements: Human Capital and Intellectual Assets
 Human Capital (tacit knowledge, know-how and relationship)
 Person (employee) specific and not interchangeable – e.g., a chef’s know-how
 The employer does not own it: It leaves the company at the end of each workday
 Intellectual Assets (codified knowledge, know-how and relationship)
 Independent of the operator and interchangeable
 Belong to the company and not to its creators
 Intellectual Property is legally protected Intellectual Assets

Source: VSI Alliance (IPPWP2 1.0) 3


Intellectual Capital
Intellectual Capital

Human Intellectual
Capital Assets
(Tacit Knowledge  Codified Knowledge)

2
1
IP
How to expand one’s Intellectual Property (IP):
 By converting Human Capital into Intellectual Assets through the
Employment Agreement and systematic and thorough
documentation of the process of engineering and improvement
 By converting Intellectual Assets into Intellectual Property through
legal claims (by confidential notices) and protection (by NDA and
proper access controls – on a “need-to-know” basis)


What is Intellectual Property?
 Innovation => Creation of marketable values
 The core competencies & primary differentiators
 Intellectual property
 Crown jewels of innovation - lasting values!
 Sole ownership (without contaminations)!?
 Exclusive rights to use for commercial purposes
 Patents, trademarks, copyrights, trade
secrets, etc.
 Mark your market territories by patent, copyright
and trademark claims (No Trespassing signs!):
 Let people know you are the owner!
 Keep some know-how to yourself as trade secret
5


Competitive Intelligence
 An organized process for gathering and analyzing
publicly available information about trends and
competitor activities to further company objectives
 Companies about which information is desired
 In the same technology and business space
 Competitors, customers and enablers (service providers
& partners)
 Key competitors’ IP portfolios
 # of patents, segments by technology area, pace of
patenting (in quantity over time & by technology area)
 Strength and weakness of the technology, strength of
patent claims (their breadth & depth)
 How to navigate through the “patent minefield”
 Internal IP audit to understand one’s own SWOT
(Strength, Weakness, Opportunities and Threats)



Intellectual Property (IP)
as
the Strategic Leverage


IP for Commanding Mkt. Position
 IP defines the ownership of any market territory and
one’s position along a product/service food chain:
 Dell and Compaq/HP dominate PC market
 Protected by their IP portfolio (brand, patents, know-how, etc.)
 Controlling the Market/Customer Channels
 Sitting on the top of the PC food chain
 Striding to outsource their manufacturing & design work
 Taiwan manufacturers as manufacturing partners
 Providing low-cost manufacturing supports (open book for audit!)
 Managing the logistics for 48-hour global ship-to-order end-
customer delivery
 Financing the WIP and buffer inventories at multiple
manufacturing sites world-wide
 Responsible for all RMAs and replacements to consumers
 Funding the BRAND (IP) OWNERS’ businesses, with much
lower profit margins (actually <10% gross margin) in return!!
 At an inferior position along the PC food chain
8


The Value Hierarchy
Brand Innovation
Values/Profit Margins

Intellectual Property

50% Applications (Mkt. & Standards)
System Integration (Archit., …)

Outsourcin
40%

Trend
Engineering (Design, ODM,..)

g
30%

Manufacturing (Process, OEM)

Consumer recognition Core competency
9


The Value Hierarchy – cont.
 A corporation defines its profit-making potential by
the activities upon which it focuses its key resources.
 <30% PM (profit margin) for contract manufacturing
 <50% PM for ODM with little IP leadership
 >50% PM for an IP leader setting a de facto standard
 The two curves along Core Competency axis (based
on Innovation) and Customer Recognition axis
(based on Brand) form the wall of the bowl holding
the potential profit
 Lowering of either curve will let the potential profit escape
 In order to achieve high profit (like “Wintel”), a corporation
must focus its resources mainly on strengthening its core
competence with differentiating IP generation and promoting
customer recognition as the leading brand.
10


Evaluating of a High-tech Corp.
 Value Proposition
 Market: What are the product(s) and service(s)?
 Applications: De facto standards (e.g., “Wintel”)?!
 Competition: Who are in the same market space?
 Profitability: Profit margins attainable, ROI
 Core Competency
 Differentiating values – by how much? Uniqueness?
 Barriers to competition – by means of intellectual property
 Protecting the lead – outsourcing non-core functions
 Brand Recognition (as a de facto standard)
 Building reputation and customer base (market share)
 Securing long-term customer loyalty

11


Hierarchy of IP Management
Increasing capabilities
Long-term Growth
to affect the future
(Market dominance)

Short-term Growth
(Market share)

Profitability
(Within the domain)

Cost-effectiveness
(Within the domain)

Level 1

Each level of IP Management builds on the foundation of the lower levels

Source: VSI Alliance (IPPWP2 1.0)
12


A Case Study –
for high-tech start-ups to follow


IP for High Investor Valuation
Case Study #1 (in Silicon Valley):
 A 5-year-old hot start-up in Network Search Engine
(NSE: a co-processor & a core component for routers)
 Building an impressive patent portfolio since 1998
 In-house patent attorney to manage IP creation/development
 25 patents granted & much more being reviewed @ USPTO
 Enabling cutting-edge product developments
 Closed 2 recent rounds of financing – investors
approached
 US$22M+ (“UP”) round in September 2001
 US$32M+ (“UP”) round in June 2002
 While the NASDAQ index dropped from >4000 to <1600 and
many start-ups were abandoned by investors
 Seasoned investors value IP for its lasting values!!
14


Market Demand for NSEs
 New paradigm - network (parallel) search engines
have become mainstream (in the last 3 years)
 Higher data rate (in # packets/sec.)
 More packets (data traffic) to process: ~10X
 Deeper processing (in # searches per packet)
 More searches per packet for QoS & security: ~4X
 More items (stored in the table) to check
 Table size increase from 12.8K to 2M entries: ~100X
 4000X increase in search rate requirement by now
 New applications with ~2Mx128 bit table for >150Msps
 Traditional software (hash-based) search approach
is out of date!

15


An Application Example

16 15


Valuable Patent Portfolio
Patent # Title matter Type Date Elapsed # Claims Yearly
Filing Issued Days Total
1 6,199,140 Multiport CAM and timing signal S, A 30-Oct-97 16-Mar-01 1,233 21
2 6,148,364 Method for cascading CAMs S, A 30-De c-97 14-Nov-00 1,050 31 2
3 6,240,485 Learn operation in depth-cascaded CAMs F, BA 11-Ma y-98 29-May-01 1,114 30
4 6,219,748 Implementing Learn instruction BA, C 11-Ma y-98 17-Apr-01 1,072 39
5 6,381,673 Next HPM in CAM F, BA 6-Jul-98 30-Apr-02 1,394 37
6 6,418,042 Tenary (3-state with "don't care") CAM A 9-Se p-98 9-Jul-02 1,399 75 4
7 6,237,061 Method for LPM F, BA 5-Ja n-99 22-May-01 868 7
8 6,125,049 ML control circuit for CAM BA, C 5-Ja n-99 26-Sep-00 630 8
9 6,137,707 Compare operation for CAM F, BA 26-Ma r-99 24-Oct-00 578 40
10 6,460,112 Determining LPM F, BA 22-Jun-99 1-Oct-02 1,197 51
11 6,393,514 Full flag and almost full flag F, BA 12-Jul-99 21-May-02 1,044 38
12 6,175,513 Detecting multiple matches in a CAM F, BA 12-Jul-99 16-Jan-01 554 35
13 6,243,280 Selective match-line pre-charge in IRC BA, C 9-Se p-99 5-Jun-01 635 40
14 6,275,426 Row redundancy BA, C 18-Oct-99 14-Aug-01 666 53
15 6,154,384 TCAM cell A 12-Nov-99 28-Nov-00 382 19
16 6,147,891 ML control circuit for CAM BA, C 21-De c-99 14-Nov-00 329 15 10
17 6,191,970 Select ML discharge in a part. CAM array BA, C 13-Ma y-00 20-Feb-01 283 11
18 6,324,087 Partitioning a CAM A 8-Jun-00 27-Nov-01 537 33
19 6,249,467 Row redundancy BA, C 8-Jun-00 19-Jun-01 376 20
20 6,229,742 Spare address decoder BA, C 8-Jun-00 8-May-01 334 5
21 6,252,789 Inter-row configurability (IRC) A 14-Jun-00 26-Jun-01 377 49
22 6,246,601 Inter-row configurability A 14-Jun-00 12-Jun-01 363 10
23 6,243,281 Segment access in IRC BA, C 14-Jun-00 5-Jun-01 356 29
24 6,317,350 Hierarchical depth cascading S, A 16-Jun-00 13-Nov-01 515 53 8+
25 6,445,628 Row redundancy BA, C 18-Jun-01 3-Sep-02 442 20

Ave. / S.D. 709 / 367
Total 769

17


Build a Valuable Patent Portfolio
 Application & market potential
 Assess commercial values – in term of
cost/performance improvements
 Differentiation – for competitive advantages
 Types of innovation in order of value hierarchy
 System application level (S): e.g., the Sandisk
“338” patent for flash-memory card
 Including new functionality (F) & system architecture
 Chip architecture level (A) – building blocks
 Chip array architecture level (A) – for memory array
 Block architecture level (BA) – enhanced
functionality/performance
 Circuit level (C) – circuitry (more difficult to monitor)
18


Values to Investors
 Fast-growing market demand – tied to IT traffic growth
 Compelling solutions
 Solving the IT bottleneck (>1000X improvement)
 Great revenue potential
 High revenue per board (>50% of the total cost of BOM)
 Attractive gross margin (>55%)
 Well-positioned in the market
 Cutting-edge system solution products (S/W+H/W)
 Key customer design-wins (at the top 20 customers!)
 Well-protected lead
 Comprehensive and key (system & architecture) patent portfolio
 Patent portfolio at ~2% of total investors’ money (~US$50M)
 ~US$12K/patent => 75 patents for ~US$1M
19


Semiconductor
IP Business Model


Future Trend for SOC
 The success of SOC depends on IP Reuse
 SIP trading will be a fact of life for 90nm node and beyond
 IP Reuse means standardization of IP library
 Organizations driving SOC IP reuse:
 VSI Alliance (US), VCX (EU), SOC Consortium (Taiwan)
 Key factors about IP Reuse/SOC effort
 Technical aspect:
 Design for re-usability
 IP interface specification
 IP verification, characterization & promotion
 Legal aspect:
 IP novelty – ownership & non-infringement
 IP authentication – certification of originality
 IP protection – by law
 Business aspect:
 IP licensing (from owners to users)
 IP library consolidation (by foundries)
 IP trading (3rd parties as escrow agents)
21


Semiconductor IP Business Model
Key success factors based on H&Q’s SIP Flywheel
Model:
 Differentiated SIP -- performance
 IP portfolio – clean (uncontaminated) & comprehensive
 User-valued features – mission-critical, >10X improvement?
 Silicon verification – full validation of the innovation
 Market “Pull” -- market acceptance
 End users pull -- lead user (market leader) endorsements
 Market presence, applications, references & recommendations
 Industry (standard) “Push” -- becoming the de facto standard
 Partners and supporters push
 JEDEC promotions, strategic alliance (e.g., Intel ecosystem), …
 Foundry & EDA supports, service partners, etc.

22


SIP Flywheel Model
Differentiating SIP

Industry “Push”
Creating an ecosystem (a self- Market
sustaining and enriching “Pull”
Creating a huge demand
system): to be the de facto
standard
Strategic partners and enablers

Standardization based on
volume & cost advantages

23


Areas for Innovation
Key Design Considerations
Performance

Fab Technology Factors
(Low)
System Interface Factors

(High Speed Power
& Features)

Reducing (High)
Noise
(Low) Overall Density
(/area)
Cost
Form factor Reliability
(Small & Robust) (High)
Package Technology
24


Focus for Innovation
 Proper SIP focus for design-house start-ups:
 System architecture and interface
 New system architecture/function(s)
 New interface scheme for higher I/O data rates
 Performance (chip level): =/>100X improvement
 New functions
 New architecture: chip and block level
 Power/Voltage reduction
 New power management scheme
 New architecture: chip or block level
 Density (feature size reduction)
 New array architecture
 New storage element
25


Best Practices
in
IP Management


Best Practices
To convert Intellectual Capital to Intellectual Property:
 Patent Program
 To define the general practices to protect inventions
 To educate employees issues about patents and patent law,
especially those related to the preparation of patent applns.
 To encourage the proper documentation of inventions
 Patent Award Program
 To encourage inventors to develop patent-able ideas
 To recognize and reward inventors’ creative efforts and extra
time and energy required to successfully pursue a patent
application to conclusion
 Documentation
 Laboratory Notebooks (bound & serialized) – legal document
providing corroborative evidence (sequentially dated and
signed)
27


Best Practices – cont.
 Patent Committee (top management focus)
 Maximize ROI of IP dollars by identifying
 Which inventions should be protected by patents,
 Which should be kept as trade secrets and
 Which should be published (put into the public domain)
 Provide a well-organized and consistent evaluation of
inventions and their disposition
 Set patent budget (as a % of investors’ investment dollars!!)
 Consist of 3 to 5 key persons: In-house patent attorney, CTO,
VP of Business Development, VP of Product Definition, …
 Meet on regularly basis (weekly or bi-weekly) for inventor
presentations and invention review
 Review all patent proposals for filing decision and strategy
 Make suggestions to inventors for improvements and
refinements
 Make foreign filing decisions
28


 The patent process
 Inventor/Idea
 Reduction to practice (a key step!)
 Corroboration of the engineering notebook (legal document)
 Invention Disclosure Form (legal document)
 Patent Committee review
 Preparation of patent application
 Should be drafted by the patent attorney
 Foreign filing of application
 Thorough evaluation of the costs vs. benefits
 Procedure in the USPTO (office actions, etc.)
 Monitor the status at USPTO closely
 Issuance of a patent
 Assignment to the Assignee (Company)
 Product/Literature marking
29


 Invention Disclosure Form (legal document)
 Inventor(s): name, employee ID #, address, contact #s,
citizenship, etc.
 Conception of invention (dates, where, to whom, etc.):
 1st drawing, 1st written description, 1st oval disclosure
 Construction of device (when, by whom, witness, data):
 Design, construct and test
 Sale (record)
 Use and publication
 Industry standards
 Related printed publications, patents and/or patent applications
 Government contract
 Detailed description
 Any disclosure to a third party on the matter: NDA? Record
 To ensure “clean room” uncontaminated creation process 30


Detailed Description of Invention
 General purpose or goals of your invention.
 Describe the general area of technology to which your invention
applies and prior ways, if any, of performing similar function or
goals.
 Indicate the disadvantage(s) of prior technologies.
 Describe generally your invention.
 Describe in detail your invention referring to block diagrams,
schematics, flow charts, graphs, or other illustrations.
 Identify how your invention overcomes the disadvantages of the
prior technologies.
 Summarize the advantages of yours over the prior technology.
 Indicate the features which are believed to be new.
 Indicate alternative embodiments or methods of your invention.
 Suggested claim ideas.
 If this is a joint invention, indicate the contributions of each
inventor.
31


China Situation
and
Suggestions


China’s Situation
 Domestic market with huge potential
 Envy of the world – the ONLY leverage for China’s
High-Tech Economic Development
 Open to global competitions – by the rules of WTO
 State of the high-tech industries
 Still in early stage of development
 Few domestic corporations have achieved world-
class stature (like TSMC)
 IP infringements and violations are commonplace
 Short changing the future (will remain at the bottom of the
food chain in economic development)
 Lack of IP protection infrastructure to earn customers’ trust
for high-tech service industry (like software subcontracting)
 Too many resources wasted on low-value IPs!
33


Missing Links!
 IP Protection is the base for Software Industry
 Software industry in developing countries (like India and
Ireland) builds on subcontracting (services).
 Overseas customers have to be made comfortable to disclose
their proprietary information for the outsourced software work.
 Lack of an adequate IP protection infrastructure & culture
means NO CUSTOMERS’ TRUST and NO BUSINESS!
 IP Reuse & Licensing is the future for IC Industry
 System-on-chip (SOC) is the product trend for semiconductor.
 No company has the resources to develop all the IPs for SOC.
 IP trading and cross-licensing will be the way of life for product
development at 0.13um node and beyond.
 Lack of an adequate IP protection infrastructure & culture
hinders the advancement of semiconductor industry.
 Trading contaminated IPs can poison the whole IP blood
supply – “AIDS VIRUS” to the whole industry!
34


Cost of IP Infringement
 A highly probable scenario:
 Dr. X joins a hot Chinese start-up (Company C) as its CTO
developing a flag-ship IC chip (Product A) competing with his
former US employer (Company I).
 Dr. X uses some key circuits that he developed at Co. I.
 Product A is a big hit; Co. C goes IPO with a big bang!
 Co. I files a lawsuit against Co. C in US/Europe claiming IP
infringement and requests for injunction.
 All US and Europe bound shipments of Co. C’s customers are
stopped, causing enormous financial losses (>1 million folds!).
 The US jury finds the key circuit is essentially the same and Co. C
infringes Co. I’s IP.
 Headline news in US: “Chinese company steals US technology”.
Talk shows exacerbates the bad press, hurting the image of China
and its entrepreneurs as well as Chinese American entrepreneurs!
 The foundry cuts off its support. The stock crashes; investors flee.
 Co. C goes bankrupt and shuts down.
35


Suggestions
 To China investors (incl. Gov’t science parks)
 Protect your long-term interests by funding only projects with legally
licensed IPs or GENUINE IP development (REAL value creation)
 Take a proactive role to discourage IP infringement and encourage
IP licensing
 To China entrepreneurs
 Define your market position with competitive intelligence
 Join the international standardization body to get first-hand information
 Do your homework first and map out the “patent minefield”
 Ignorance is not an excuse! Be responsible to your investors
 Focus on genuine value creation and build a lasting foundation to
compete globally
 Money is not everything!! Don’t short change the future!
 Play by the international business rules of the game (set by WTO)
 You have the pride and capability to flourish without IP infringements
 Be the PRIDE of China and a WORLD-CLASS GLOBAL
corporate citizen!!
36


Acknowledgements

Many thanks to
Hong Kong IP Department
for inviting me

Thanks to VSIA IPP DWG
for its fellowship & inspiration
37


Thank You Very Much
for
Your Attention!

I am looking forward to
future cooperation with you!

38

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