At the intersection between innovation and business lies the crucial concept of the valuation of intellectual property (IP). Whether you're an inventor or an investor, understanding the nuances of valuing technology and patents is paramount. In episode 33 of our podcast, Sylvain Roy explains the differences between valuing technology, patent applications and granted patents.
Technology valuation vs. patent valuation
When embarking on the journey of IP valuation, the distinction between valuing technology and valuing patents is pivotal. Typically, technology valuation involves a thorough assessment of whether the technology meets a need in the marketplace; a bit like a business case. On the other hand, in a patent valuation, we're looking to establish the link between revenue and what the patent protects. The protection the patent offers is also assessed and as a matter of fact, the true value of a patent is often realized when someone infringes that patent. This is proof that others need it.
Importantly, Sylvain emphasizes the difference between valuing a patent application vs. valuing a granted patent. A patent application is akin to a lottery ticket; it's only when a patent is granted that you solidify your rights and can valuate the exclusive protection you will have in all or parts of your invention. In the meantime, the value of the patent application is probably limited to the costs of filing the patent application. This is why it is important to file for patent protection and ensure that the application is examined.
Helpful questions for inventors
Sylvain outlines essential questions that inventors should ask themselves:
1. Understanding utility and context: The value of your invention is directly tied to its value proposition.
Start by figuring out how if your technology fits into a larger picture and its usefulness in relation to products and components, and ask yourself:
- What does the technology do? What problem does it solve?
- Is the solution incremental, competitive, better priced or entirely new?
- Who will be my client? What is their perspective of the value proposition?
- How is the IP securing a unique position in the marketplace?
2. Identify the broader market you are addressing: Assess whether the opportunity is worth pursuing.
Valuation can, of course, also include incremental improvements or niche focuses. The key is to ensure the entry market is sizable enough to justify development expenses. Take a critical look at the market and ask yourself:
- Why is the technology useful in relation to the product, component or service?
- How will you reach this market?
- What is the larger market? What is the underlying business model?
3. Risk and benefit assessment: This doesn't always come naturally to inventors, but it's important to also assess the risks, benefits and hurdles to overcome to become a player in the market.
Be aware that transforming technology into a market-ready product incurs costs that are significantly higher than those related to the technology development itself. Be sure to understand industry dynamics, including revenue streams, client relationships and the significance of related services. It is important to identify risks and hurdles early. So, ask yourself:
- What are the hurdles that I could face down the line?
- How well can I transition from a small research organization to a product company and sales-driven organization?
- Is this an industry with substantial dealership opportunities?
- How do I enter this market?
- Is the relationship with clients important?
- Is there an opportunity to offer services connected to the product?
Sylvain's tips for valuation
Sylvain also points out that it's important to recognize that every technology has a window of opportunity. Timing is crucial, so be aware of market advancements and be ready to engage with clients at the right moment. In general, a valuation is only as good as its methodology. Consequently, you may want to avoid generic approaches that lack substance, like black-box formulas. If you are investing in a valuation, ensure you can provide investors or anyone interested in how the valuation was made, detailed documentation that explains your value proposition and how you have assessed the risks and the remaining cost of development.
The valuation process: art and science
When it comes to unraveling the layers of intellectual property valuation, Sylvain emphasizes the blend of art and science in the process. Essential skills and information include:
- Industry experience—A valuator should possess operational experience and extensive knowledge in law, IP and finance.
- Negotiation expertise—The art of negotiation is a delicate endeavour. Developing negotiation skills is important as pricing results from this process.
- Contextual understanding—Recognizing the subjective nature of value, the IP value is tied to how a given party plans to exploit the IP. To assess IP value, a valuator must seek to determine the best context for IP/technology use.
As you develop experience in your understanding of business elements such as value proposition, risks, client base, pricing and business models, you will be able to derive a valuation that is realistic, sensible and respected by potential investors and clients.
The reality check: is valuation necessary?
Sylvain highlights that only a fraction of his clients need to have a valuation done, because valuation isn't always the silver bullet. In fact, it's a tool used when critical discussions about the project's future are imminent. Therefore, when diving into a valuation exercise, inventors should ask themselves important questions like: Are there any steps missing? Have the clients been properly identified? Are there adequate resources (i.e., people and capital) to develop this business opportunity?
To know if valuation is necessary, assess if valuation is the remedy or if other aspects like client track record, documented use case, better documentation or team expansion are needed. A valuation opinion can't replace business basics, such as a strong value proposition, strong IP or a team of professionals.
Consider valuation as a strategic compass to help you find your way through building an innovative business: Equipped with a thorough understanding of your technology's market, risks and benefits, the valuation becomes not just a number, but a powerful tool for negotiation and decision-making.
Liked this post?
- Learn about assessing the monetary value of your IP assets.