Increase revenue and enhance strategy by learning the value of patent valuations
For most businesses today, 75% of their value, sources of revenue and long term sustainability is directly related to IP and intangible assets. Companies traditionally file multiple patents as part of a defensive strategy to beat their competitors and achieve or retain a monopoly. However, filing patents without a strategic plan can lead to a mixed bag of patents in your portfolio— some valuable, and some much less so.
Research has suggested that the way patents are used has evolved over time. Previously they were mostly used for defensive purposes, but now, rather than simply serving as an insurance policy, they are also being leveraged as part of board level competitive strategy and exploited as a financial asset.
Furthermore, research suggests that patents are important for strategic reasons, including being used in negotiations, to enhance reputation, in the generation of licensing revenue and to measure R&D performance.
I will discuss how you can leverage the value of your patent portfolio to enhance strategy and revenue by:
- Negotiating a good deal in a joint venture or collaboration
- Securing funding and investors
- Informing due diligence with M&A
- Increasing revenue through licensing
- Benchmarking R&D
Valuing your patents puts you in a stronger negotiating position
As companies strive to accelerate their innovation rate, open innovation has become a growing trend. But collaborations can become complicated because some organisations may not be so keen to bring their most valuable assets to the table. Even when they do bring their valuable intellectual property assets to the negotiating table, it can be difficult to accurately gauge the value of each party’s contribution. Looking at a company’s patent valuation, as well as assessing the value of comparable patents gives each company a clearer picture about the position of collaborators and provides a starting point for negotiations.
Research suggests that if partnering is needed to access third party technology, a patent portfolio may assist in demonstrating credibility, technology leadership and ownership and therefore provide strategic value, a better negotiation position and more favourable terms of contracts for collaborative activities and licensing-in or cross-licensing.
Higher patent value helps attract investors and secure financing
For smaller companies and start-ups, a high patent valuation may help secure financing. As well as demonstrating that your company’s assets are well protected, having a more valuable portfolio than your competitors can help differentiate your company as an investment opportunity.
According to Better Business Finance, IP constitutes a business’s single most valuable asset and could be used as a leverage to secure finance for company growth. Furthermore, research by Rivette and Kline 2000 suggests that high value patents are among the most important factors that venture capitalists consider in their investment decisions and is a crucial factor in competing against larger firms.
As 80% of a business’s assets are intangible assets, businesses must ensure that they look at the value of their patent portfolio and do the best they can to maximise the value of their portfolio to build a protective moat around their technologies. This can help your business stand out from the crowd when looking for investment and also give your company a better chance of success in the due diligence stages of investment.
Patent value helps you with due diligence in M&A
According to Forbes, IP acquisitions are a good way to rapidly increase the strength and financial value of your company. If you are looking to acquire technologies, you can assess another company’s portfolio to understand its value and to give an idea of how much value could be added to your portfolio. Furthermore, Forbes explains that more patents are being sold at much lower prices and with more favourable terms for acquirers which may explain why half of all high-value unicorn start-ups have bought IP to complement their own IP.
Looking at patent valuation data is equally important for mergers because companies can make better strategic decisions by understanding the combined value of the potential merging companies’ patent portfolios. Simulating merger situations can help shareholders on both sides of a deal to understand the potential economies of scale, technology strengths and weaknesses of the proposed new company.
For example, the image below shows what a merger between L’Oreal and P&G could look like. You can identify the value of each company’s portfolio and find out how much their portfolio would be worth if they merged.
(Click image to enlarge)
High patent value + royalties = more revenue
David Bennet explains in Business North Carolina law journal, that strong patents may be used as bargaining chips to gain access to patented technology through cross-licensing agreements. Furthermore, licensing of patents requires little overhead and can contribute to a company’s bottom line to increase revenue.
By ensuring you have a strong patent valuation and reviewing royalty rates for comparable patents, you can license your technologies for a more favourable royalty rate which can help to secure additional revenue for the company. This can also be beneficial because another company may be more well equipped in terms of having a large market presence and resources. Licensing your technology to another company in this way can reduce the barriers to entry and help increase your revenue by opening doors to a wider market and also to adjacent markets.
Benchmark R&D against competitors
It’s not just a company’s own patents which should be considered. Analysing the value of competitors’ portfolios is equally important because it enables benchmarking activities, helping decision makers to understand their comparative productivity and position within the marketplace.
If a competitor has recently begun filing patents in an emerging technology area and those patents have a higher than average valuation, it suggests that this technology area or market could warrant further investigation as a potentially lucrative opportunity. It may make sense to focus some R&D effort into innovations in related spaces to avoid being blocked out of that technology area in future by a competitor.
Comparing patent valuations over time can also help companies to benchmark their R&D productivity, often as part of a balanced scorecard which may incorporate filing velocity, global coverage, patent density in key or emerging technology areas, and number of patent families or claims.
According to IP Watchdog, different valuations methods could be used for benchmarking and cross calibration of each other and for portfolios of future value. Furthermore, portfolios covering different competing technologies could be used to benchmark each other.
For example, the image below shows the most valuable patents in the graphene space. Businesses can identify the most valuable patents in their technology space to understand who their biggest competitors are and benchmark against them to help with their own strategy.
(Click image to enlarge)
(Most valuable patents in the graphene space- PatSnap platform)
How can patent valuations enhance strategy and increase revenue?
As we have seen, patent valuations are a strategic tool that are useful far beyond the company balance sheet.
By understanding the value of competitor patent portfolios, companies can benchmark their R&D productivity and identify potentially lucrative new technology areas, as well as finding new opportunities to build strategically upon their portfolio.
By knowing the value of your own portfolio, you can put yourself in a stronger negotiation position for collaboration, investment, and M&A activities. Highly valued patents may also enable your company to unlock additional licensing revenue and gain access to new markets.