Why Start-Ups and Scale-Ups Need to Come to Grips with Intellectual Property Valuation

ip valuation intellectual property

By Roya Ghafele, OxFirst Ltd. www.oxfirst.com

The continent of Europe is not short of creative and innovative entrepreneurs eager to make a difference. Yet, their attitude and mindset towards IP sets them apart from their counterparts in the United States. While a study undertaken by UC Berkeley shows the many different ways which the young and mighty of Silicon valley put their IP to work, a study undertaken by the UK Intellectual Property Office suggests that only 13% of British companies consider IP to be important to their business and only 7% state that they own patents. Such statistics are alarming.

For sure, not every patent is a capital catch and a lot of patents may not even be worth the paper they are written on, but to ignore patents all together seems irresponsible. For sure, at the gist of such misconceptions lies a lack of awareness about the many opportunities and potential pitfalls associated with intellectual property. To equip start-ups and scale-ups with a minimal understanding on the value of IP is the purpose of this brief note.

Why Patents matter

Patents are the legal dress of an invention. As such, they equip you with a temporary monopoly right over your invention. For usually a period of twenty years you own the invention. In exchange you disclose your invention to the world. Because a patent allows you to stack your rights in a given technology space, you have an entry ticket to the market based economy. This is a very powerful tool.

Like any other form of ownership, the ownership of a patent gives you the opportunity to use it for your own purposes, but it also allows you to trade. Through a patent your tacit knowledge, your inherent insights, bear the potential to create surplus value. The property notion inherent to IP gives you the ability to license or sell your IP, but also to use it for your own internal purposes, such as protecting your products or services.

How you can put patents to work

Using patents as a fence around a product or technology or taking advantage of it to keep competitors at bay is a fairly established tactic. What I find more exciting, is how to make use of patents to attract investors, renegotiate an interest rate or identify opportunities to enhance a company’s capital base.

Access to adequate financial means can often be a stumbling block for various forward looking and promising technology fields. In my practice, I have been repeatedly able to help firms overcome this problem by undertaking an IP valuation. Through an IP valuation it is possible to associate rights to an invention with a potential financial revenue stream. It can help understand how risks relate to potential revenues and what strategy a firm needs to make use of to live up to its full potential. As such, an IP valuation is more than just a simple report that offers insights into the economic worth of intellectual property. It is an instrument of business strategy.

I understand strategy as the most effective way to get you where you want to be. A strategy is a means that allows you to achieve your goals. You can only achieve these goals when you have adequate insights on all your assets, be they tangible or intangible in nature. While your firm’s balance sheet will tell you a lot about your tangible assets, it will stay silent about the economic worth of your IP. The old tale that you cannot manage what you cannot measure reflects well this dilemma.

However, an IP valuation can changes this. As an off-book assessment of the economic accounts of your patents, it sheds light on the possibilities and potential pitfalls IP can have. As such, it is a key instrument of your firm’s IP strategy.

Case study

If all of this sounds a bit too hypothetical, I will explain myself with the help of an example. X is a company we undertook an IP valuation for in Mach 2020. X was a spin out from a North American University that obtained its IP by means of a license from the University itself. The firm consisted of four entrepreneurs who had an environmentally friendly technology that allowed to resolve a substantial problem in the area of urban waste. Experiments in the lab did prove that the technology was functioning. The firm had about 10 million in investments already. They approached me asking how much the patents could be worth. During the course of the valuation, we guided them through a process of potential opportunities for an IP strategy. The team was rather skeptical. After all, their experience with the license from the university was not particularly positive. Their thinking went more in the direction of exiting the company in a fast manner, or alternatively brining the technology solution to market on their own, with the support of a few investors. Once they saw the results of the IP valuation they opted for an IP business model. The advantage was that it allowed them to scale the technology fast without losing ownership over it. The IP approach we recommended allowed them to take advantage of the best of both worlds. Growing without having to ‘go solo’, while at the same time having the ability to benefit from a continuous growth opportunity provided by the IP strategy. We heard that in the last four months this firm was already able to obtain a further 20 million Dollars against their IP alone. Further deals are in the pipeline.

Successfully Maneuvering the patent space

IP can be a source of wealth, if approached under an economic paradigm. To untap such potential, it is important to critically assess IP from a business perspective. This can be achieved through an IP valuation.