(This week, David Wanetick, Managing Director of IncreMental Advantage provides readers if the IP Asset Maximizer Blog with an excellent overview of the various factors that he believes affect patent valuation. Please let me know if you would like to be a Guest Blogger.)
How Patent Vulnerability Impacts Valuation by David Wanetick of IncreMental Advantage
As I often tell business leaders who attend my course on Valuing Early-Stage Technologies, valuing patents isn’t rocket science. It is much more difficult. Or to paraphrase Winston Churchill, valuing patents is a riddle, wrapped in a mystery, inside an enigma.
Measuring even a well-delineated permanent entity is much more difficult than may be imagined. As Neil deGrasse Tyson (a renowned astrophysicist) and Benoit Mandelbrot (the father of fractal geometry) have discussed, no one really knows what the circumference of the coastline of the United Kingdom is. The tides will cause varying degrees of erosion on the coastline depending on the hour of measurement while the cumulative affect of choosing which rock formations to measure around will have a dramatic impact on the final assessment of circumference. Patent valuation is infinitely more difficult to determine than the measurements of a given land mass due to the interminable variation of underlying technologies, legal issues, business issues, and context in which patent valuations are conducted.
Companies that have patents often attempt to achieve a more attractive valuation by boasting about their patent portfolio. This is often a successful gambit as many investors, customers and media figures are impressed when a company reports a relatively large number of patents or pending patents in its portfolio. Thus, it is no surprise that many entrepreneurs and venture capitalists have admitted to me that they view patent preparation and filing costs akin to marketing expenditures.
However, valuation analysts should not reflexively assign a higher valuation to companies that own patents or are applying for patent protection. Companies can have a patent on a technology for which there is no possibility of commercializing or selling. Patents pending are particularly specious. Pendency (the length of time it takes the US Patent and Trademark Office to make a decision on a patent application) is now an average of 32 months. In some industries—such as semiconductors and electronics—pendency is more on the order of four to five years. Thus, the market targeted by a patent could become obsolete before the USPTO makes a decision. In fact, only between 2% and 5% of patents generate any royalties and another 45% to 50% don’t even have any strategic value. Further, two out of every three patents lapse because of failure to pay fees, most often because their owners believe that the thousands of dollars in maintenance fees exceeds the value of the patents. Continue reading