As an inventor and IP consultant with over a decade of experience in patent valuation, I’ve seen how intellectual property (IP) can significantly impact a company’s valuation. With the average cost of obtaining a patent around $50K and the average patent sale price at approximately $320K, according to a 2020 GreyB report, it’s clear that IP can be a valuable asset. However, it’s essential to understand how to leverage patents effectively to increase company valuations.
In this blog post, I’ll discuss the importance of patent valuation, how to monetize IP, and how CEOs, founders, and CTOs can use IP to tell a compelling story to investors.
Patent Valuation and Its Impact on Company Valuations
Obtaining a patent is just the first step. To truly unlock the value of IP, you need to know how to use it to gain leverage. Patents can not only be sold for profit but can also increase company valuations by providing a competitive advantage and attracting investment.
Six Ways to Monetize IP:
- Licensing: Grant other businesses the right to use your IP in exchange for royalties.
- Assigning (selling): Transfer your IP rights to another party for a lump sum payment.
- Joint ventures (partnerships): Partner with another company to jointly develop and commercialize IP.
- Raising money (investment): Use IP to secure funding from investors.
- Asset-Based Loans: Use IP as collateral for loans.
- Litigation: Enforce your IP rights against infringers to collect damages or royalties.
Many people are only familiar with litigation as a means of monetizing IP, but diplomacy through licensing and partnerships can often be more effective.
How to Determine IP Value/Patent Valuation
There are several approaches to determining the value of your IP:
- Cost approach (not good): This method is based on the cost of developing the IP but may not reflect its actual market value.
- Market approach (better): Compares your IP to similar IP in the market to estimate its value.
- Licensing Income approach (best): Calculates the potential income from licensing your IP.
- Industry comparisons (as a backstop): Uses industry averages as a basis for determining IP value.
Knowing the value of your IP helps you understand what to aim for when leveraging it for business growth.
Why IP is Valuable to Investors
IP provides several benefits to investors:
- Reduced risk: IP protects your unique ideas and innovations, making it less likely that competitors will replicate them.
- Competitive advantage: A strong IP portfolio can set your company apart from competitors.
- Higher valuation: Investors are more likely to invest in a company with a valuable IP portfolio.
A well-protected IP portfolio can be a self-fulfilling prophecy, convincing current investors of its value and making it easier for them to attract others if they seek an exit.
Why Invest in Patents as a CEO?
- Protect innovation: Secure your unique ideas and innovations from competition.
- Secure market position: Maintain a competitive edge in your industry.
- Attract investment: Investors are more likely to invest in a company with a strong IP portfolio.
- Retain Talent: Investing in patents also empowers your most critical talent, as inventors and engineers appreciate having their names on patents.
How to Assess Your Current IP Position
To evaluate your current IP position, you need to:
- Evaluate existing IP: Assess the value and relevance of your current IP assets.
- Identify gaps: Determine areas where your IP protection may be lacking.
- Create an IP strategy: Develop a plan to address the gaps and protect your innovations.
Having a structured IP strategy sets you apart from companies that approach IP management haphazardly. Being proactive and sticking to a well-defined plan can make a significant difference in the success of your IP endeavors. If you need help with this process, consider hiring IP consultants like ipCapital Group to develop a bespoke strategy tailored to your company’s needs.
Expanding IP Positions to Attract Investors
To make your IP portfolio more appealing to investors, consider the following steps:
- File new patents: Continuously innovate and protect your new ideas with patents.
- Keep an inventory of invention ideas for future filings: Maintain a pipeline of ideas that can be developed into patents.
- Implement a world-class trade secret protection plan: Ensure your confidential information stays protected.
How Many Patents Do You Need?
The number of patents needed varies depending on your industry and company. While quality should always be prioritized over quantity, it’s essential not to rely solely on one patent. Building a diverse portfolio minimizes the risk of having a critical patent invalidated, ensuring your business remains protected.
Telling Investors an IP Story
To leverage IP for fundraising success, tell a compelling story to investors by:
- Showcasing innovation: Highlight your company’s unique ideas and how they set you apart from the competition.
- Explaining the competitive edge: Detail how your IP portfolio gives you a market advantage.
- Demonstrating growth potential: Show how your IP assets can be monetized to fuel future growth.
Patent valuation is a critical aspect of a technology-driven company’s overall business valuation. By understanding the importance of IP, knowing how to monetize it, and effectively communicating its value to investors, CEOs, founders, and CTOs can significantly increase their company’s valuation and secure better funding deals. Take the time to assess your current IP position, develop a robust IP strategy, and build a strong IP story to maximize the value of your intellectual property.