INNPERSPECTIVE

A Series of Industry Focused Articles
Read about the latest trends and updates in the intellectual property industry from the Innography perspective.

How Much Is My Intellectual Property Worth? Setting a Value on Your IP

Sunday 28, February 2010 by Tyron Stading

The second article in a series of two.

Having acknowledged in the previous article that no standardized way exists to fully and accurately assess the monetary worth of your IP, it is also true that you should have a sense of its real value. Several valuation models exist (some of which are more scientific than others) that are widely accepted. Here are just a few:

  • Fair value measurements – Here you are basically asking, “What would a third party be willing to pay?”  This analysis uses objective measurements such as price per engineer who created the technology, price per patent, licensing fee per brand recognition rate and price per unit generated from IP assets. This method is relatively simple and easy to use, but it might not produce enough data points to accurately reflect how much your IP is actually worth.
  • Present value of expected future cash flows – This approach is based on discounted cash flows.  Essentially, you examine past revenue that can be tied to your IP such as licensing fees, royalties and product sales revenue. You then use that data as a basis for forecasting future revenues. The resulting forecast is discounted by the costs associated with the IP, which can include things like maintenance fees, defense costs and any potential future investments in the existing IP. This method is more accurate than the fair value measurement, but it can produce considerable uncertainty regarding the revenue forecast.
  • Option pricing models – Option pricing models are so called because they were originally developed to assess the value of stock options. In this case a patent is treated as an option on future technology. The most popular model is the Black-Scholes model, which—when adapted for patents—considers things such as remaining development costs, the market value of the underlying products and variance of product value return. This method is much more scientific than either of the previous methods, which is desirable. There are a number of examples, however, in which the initial analysis has been contradicted by reality because some of the assumptions were simplified so as to make the method easier to wield.
  • Conjoint and relative utility analysis – This approach also brings science to bear in the assessment of your IP. Using a standard questionnaire and a mathematical equation, products and technologies can be evaluated to determine a monetary value. The biggest drawback of this type of assessment is that it can be complicated and assessing an entire patent pool can take considerably longer than other methods.
  • Cost of development – If a company has recently completed a new technology investment, analyzing its cost can suggest its value. This is a valuable tool in the disciplines of competitive intelligence and M&A because you can use the economic principle of substitution to understand the value of your competitor’s IP. The use of this model alone, however, does not necessarily reveal what someone would be willing to pay for the IP because it doesn’t account for the potential return on the investment.
  • Cost of replacement – This approach is useful primarily when a company is considering the sale of a brand or trademark. During the assessment the analyst considers infrastructure costs (the cost to change any physical assets that contain the brand name), marketing costs (such as collateral) and revenue decline.
  • Price minus book value – This is a very common approach. It is very simple to use but is the least accurate method of any listed here. Using this method, you simply subtract the book value of a company from its market value, and the presumption is that the difference is the value of all intangible assets. The problem with this approach is that it is predicated on several assumptions that don’t stand up to the realities of the market and how companies actually conduct business. The resulting analysis should be thought of as a rough estimate.

So how does Innography fit into this notion of IP valuation? Quite simply, no matter what method you use, the resulting assessment is no better than the data you feed it — and that’s what drives a lot of what we do at Innography.

We share the vision of a standardized valuation model for IP because we believe that IP is an integral part of your business. Until recently, that hasn’t been widely recognized. It’s an extension of the concept of business intelligence, a concept that’s been around for a while and which is playing an ever-increasingly critical role in business strategy.

Data as a Service (DaaS as it’s come to be known) has become an entire industry just as Software as a Service (SaaS) has. Merely accessing the data, though, is not sufficient to drive real business intelligence; that’s accomplished by analyzing the data, something else that’s becoming widely recognized as a necessary component of business strategy.

To analyze the data it has to all be correlated to give it context — and all the data has to be considered to gain a full understanding. Without those data driven analytics it’s impossible to implement a true business intelligence system. More than that, though, Innography is going to be the business intelligence platform for delivering those analytics when a standard model emerges.
At Innography we believe a standard valuation model is necessary and we are in the process bringing that idea to the industry.

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