Building a Comprehensive Multivariate Valuation Model for Intellectual Property, With particular Focus on Patents, Which Allows for Full Securitisation and Tradability of IP as a Commercial Asset
The author has researched the somewhat sparse territory of IP valuation and developed a methodology for valuing IP assets with particular emphasis on patents.
Starting by defining IP rights as conventional assets and then imposing the requirements of traditional asset valuation, a systematic process emerges in terms of which their intrinsic value for their holder or acquirer becomes a useful tool in strategically managing them.
The asset value of the modern organization is predominantly made up of intangible assets (including IP assets) and yet financial reports are still unable to effectively reflect these values for the investor or manager. Yet all value must possess the three factors of scarcity, utility and title in order to hold any value.
Similarly, although IP assets have a skewed orientation to their context and possessor in title, they may be analyzed like any financial instrument by assessing a given set of value dimensions and each dimension may thus be reduced to value or risk indicators. In this research four fundamental dimensions of value have been identified next to an exhaustive set of value factors, listed within each dimension. Typical of the "legal dimension of value" would be for example the scope of the patent. Obviously the wider the scope the more "power" the holder may exercise but the less chance she might have in defending against infringement if deemed too wide. Equally, the history of litigation over this patent would seriously affect the risk of its surviving further legal attack.
These factors apply to all patents, and a comparison between two or more patents would imply a comparative value advantage. By weighting these various factors across specific compatible industries (as in any asset class) a realistic and effective evaluation may be achieved. The analyst may also imply a comparable risk weighting from the comparative scoring achieved within a given dimension. The higher the risk of abandonment, the lower the value of the asset. Over time this assessment would acquire a "track record" of risk scores for a particular sub-industry and a more accurate assessment would emerge.
Current valuation methods offer little in the way of reliability or usefulness. The traditional cost, market and income approaches are archaic and serve only to guide the IP manager to some value, and even the existing purely financial valuation method based on internal rate of return or net present value of discounted cash-flows may offer only the base of valuation relying on estimates and purely financial data. A contextual indicator including a reasonable understanding of IP law and the technology of the asset together with specific industry knowledge is demanded.
With the recent dramatic increase in focus on IP assets just one side effect has been the macroeconomic impact of patent policies worldwide. A liberal national policy of allowing patent protection will ultimately increase liquidity of asset trades and thereby automatically influence the risk/reward value within the asset class whilst a restrictive policy of qualifying patent protection would have the opposite effect. With improved valuation methodologies this would have the effect of governing the national competitive advantage through IP asset securitization.