Dr. Caldwell is the founder and managing partner of Caldwell IP.
The most exciting topic in the legal field of intellectual property is, of course, intellectual property (IP). But more specifically, it is the impact intellectual property is having on the valuation of companies.
The corporate world has seen a shift in what it considers an asset. In years past, tangible assets—physical products, such as computers, machinery or real estate—outweighed the intangible. Tribal Credit shared that “In 1975, companies with intangible assets accounted for only 17% of the top S&P 500 companies, compared to 83% with tangible assets.”
Present day, things have flipped. According to Ocean Tomo data (via Visual Capitalist), in 2020, intangible assets accounted for 90% of the index’s total assets.
Intangible assets include patents, copyrights, trademarks, trade secrets and proficiency and expertise. Looking at previous data, the explosion of these assets in the past several decades is very telling about advancements in digital technologies and where businesses are investing their resources.
This also shows that there is value to companies’ intellectual property. In my decades of experience advising companies on patent portfolios, I’ve found that companies that go public with patents can often do so at five times the rate.
How To Assign Value To A Patent
Patents can be far more valuable than physical assets when it comes to the different types of IP, and owning a patent can give your business a competitive advantage over others, which is why patents are highly guarded and protected by those with ownership. That said, because of their abstract nature, putting an actual price on a patent is challenging. Many sellers and investors disagree about the monetary value of patents.
To efficiently assign a patent its value, I recommend following three steps.
1. Determine the importance of the patent.
Look at what it protects. Would a competitor be willing to pay just to have it? Is the patent for an original product or the building blocks for a new product? Or is it a way to improve upon something that already exists? For example, the Cohen-Boyer biotech patent is valuable because it is groundbreaking and unique. If the patent isn’t for an original concept or innovation, it is considered incremental—only improving an existing invention. The value of the patent depends on how important the original creation is and how much value it can bring to the marketplace.
2. Evaluate how well the patent is constructed.
A patent offers the owner the right to use and protect the invention and helps prevent replication. But patents can be complex, and some may have loopholes or weaknesses that enable patent infringement, enabling others to replicate or use the protected intellectual property. The process to ensure a patent is comprehensive and protects the owner calls for substantial legal expertise.
3. Determine how to extract value from the patent.
The specific price a patent carries depends on the factors mentioned above as well as the market and industry conditions. Profits incurred directly from a patented technology increase the value of the intellectual property, and a larger market often means more potential profits and, as a result, a more valuable patent.
Monetizing your patents is important for managing your IP portfolio. Usually, a patent portfolio protects businesses’ investments in developing a new product or service and establishing a competitive advantage in the market. However, patent portfolios can prove to be a valuable asset in more ways than one.
The Business Benefits Of Having A Patent Portfolio
The biggest advantage to having a patent protect your product or service is the exclusivity it brings. A granted patent gives you the right to prevent others from commercializing your product or process for up to 20 years. This exclusivity can lead to a larger market share and the ability to charge a premium. It can also help protect you against potential copycats and give you a leg up if you decide to pursue legal action.
Licensing your patent can generate income from practical applications or unexplored territories, further expanding the reach of their value and, in turn, your company’s value. This is an especially important consideration if you are looking for investors or partnerships to expand your business. Patents help create the framework through which ownership and allowances are determined, helping create parameters around how joint ventures are handled.
Patents have their place behind thousands of successful companies. Patented technology can increase your brand’s value and the valuation of your company—when patents are prepared thoughtfully and comprehensively.
To ensure you’re making the most informed decision about patents for your business, consider the originality of your IP, how to derive value from your IP based on market conditions and the parameters you’d like to put around your IP and its use. When done correctly, you can use your intangible assets to grow your company’s valuation and success.
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