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How you measure success is crucial.
StarAnchor uses only one financial measure to assess success for client opportunities. That measure is Return on Capital, which is the ratio of earnings to capital. Discussions surrounding ways to increase this measure typically focus on the numerator, or earnings, component. We believe that the market will dictate the earnings for the innovation, and that there is little that can be done to effect changes in this value. Therefore, we manage the measure by minimizing the denominator, or capital committed to the initiative. This approach results in our strategic principles for minimizing capital, which contributes to speed to market as well as to minimizing dilution. |
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During our initial engagement discussions, prospective clients often express concern that this strategy "leaves money on the table," or that we are abandoning potential earnings by virtue of licensing or otherwise outsourcing production, distribution, and the higher capital investment aspects of commercialization. They argue that, even though it might result in a lower Return on Capital, earnings would be higher if more of the effort was in-house. Research indicates the opposite is true. Evaluations of earnings rates for major corporations over the last 50 years indicate that earnings rates typically fall in the range of 3% to 7% before tax. Although recent major improvements in productivity have meant that the earnings rates since 2002 have exceeded this range slightly, we expect that as the productivity improvement mature and become more widespread, and global competition becomes more thoroughly entrenched, earnings will return to their traditional range. In addition, the capital required to accomplish all aspects of production, distribution, etc. result in much higher capital requirements, contributing to delay and much stronger opposition from the established industry participants. When we investigate the typical rates for licenses with a sample of attorneys practicing in the Intellectual Property area, we find that license fees typically range from 3% to 7%. Therefore, the commercialization decision becomes whether we would prefer to do all the "heavy lifting," with its associated substantial increase in capital requirements, delay, market opposition, and administrative headaches; or whether we would prefer simply to collect a license fee and go back to the drawing board to begin working on the next important innovation. The earnings will be approximately the same regardless. |
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© 2006-2008 StarAnchor |
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