Patent valuation, as a subject, is still “hot”. When in LinkedIn a question was posted on how to value IP[1] a large number of comments, suggestions and ideas appeared. The overall conclusion – it is fair to say – is that valuation is all about context. This might not be very helpful for those that seek a clear and universally applied method, but unfortunately in the absence of a functioning IP market, this is proven to be right many times over. We blogged earlier about accounting initiatives to come to some sort of “standardization” of valuation methods [2]. Antti Saari, a student at Aalto university at Helsinki, Finland (sponsored by Antti Kosunen, IPR business advisor at Lexford Enterprises, is doing his MSc. theses on patent valuations in M&A context. In order to assist him to make a representative research effort, readers are encouraged to fill in his questionnaire at http://bit.ly/patentvaluation
Some highlights of the LinkedIn discussion:
- Start with a reasonably objective, market based, approach. Apply discounts where objective signs of patent strength such as licenses, litigation, Marksman hearing are given the most weight. Two critical questions are to factored in: who is buying a patent and for what reason? A patent may be worth a great deal more to an enforcement entity who sees its value as a percentage of a market then to a company with an infringing product to whom the value is a percentage of the product’s sales, i.e. what they would pay if they had to license the patent (Robert Blumberg, Soquel Group)
- A basic approach is to create a standard financial model for the opportunity (size of market, market share of the target licensee, projected growth over time, etc.) then discount for the contribution of the IP to the product (typically using the 25% rule) and additionally discount based on the risk assessment of the portfolio (is the patent issued or just an application, how easy it is to invent around, etc.) (Kate Shore, IP Capital Group)
- The bottom line is that you should use a few different methods to obtain a guideline (cost method, market method, expected commercial value method, real options method, etc.). Then, as with most business transactions, it will come down to what you can negotiate. While many will attempt to convince you otherwise, IP is not a magical concept, requiring esoteric methods of analysis to determine its nature. It is a property just like any other property. However, it is more difficult to value because of the lack of a publicly visible market/archive of historical valuations. This will change, but it is not unlike valuing any other item for which there is a limited market. (Robert Solomon, Volpe and Koenig)
- It might make sense to categorize each particular IP as being either strategic or tactical, in terms of how it would be implemented in the marketplace. An example of strategic implementation would be where a product’s function is increased (improved), which could provide a means to de-commoditize the product with respect to alternative products otherwise having functional equivalence. An example of tactical implementation would be where the cost of manufacturing a commodity product can be reduced. (Ray Maroon, Volt Amp Consulting)
- Unless you are identifying the value of IP toward a specific target (i.e. a potentially infringing competitor), trying to come up with a value for IP is (in my opinion) impossible and not worthwhile. If you come up with a number in the abstract, you’re really just guessing. (Brent Ray, Jones Day)
- Last summer this article highlighted the valuation method often follows what drives the valuation effort, see “Still A Long Way To Value-Based Patent Valuation“.(John Figueroa, EFIG.com)
- One complaint I have with the article (last bullet, IPEG) is that I may conclude the ‘valuation’ according to the cost method of a lottery prize, of say $1M nominally, would be the cost of the lottery ticket, say $1 nominally. Since utilization of this method by industry is considered by the author to be a substantial influence, on par with each of the two other methods, and since this method lacks credibility based upon my observation here, the conclusions of the article as suggested by its title are questionable. I wonder if this paper might demonstrate how the design of a survey form can influence the interpretation of its results, and thereby bring subjective bias into the conclusions? (Ray Maroon, Volt Amp Consulting)
We can’t get enough of theorising about patent valuation. It would be interesting to see a “post-evaluation” analysis to see how much of those analysis did in fact influence the decision for which the valuation was meant for.
[1] “How Do I Value the IP?”, started by Shuo-Kai TsaifromBlackswan
[2] “IP Valuation – A Pandora’s Box“, IPEG blog