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Valuation of Intellectual Property for Open Innovation

Assessing the value of intellectual property (IP) is one of the most complex and dynamic aspects of open innovation and technology scouting. In today’s value-crazy world, IP may be worth very little -- or worth more than entire companies! 

Take Kodak, for example: “Despite its $576 million market value, the company’s digital imaging patents are worth $3 billion on their own,” according to an expert interviewed in a NY Times article (before Kodak declared bankruptcy).The same article discussed Google’s $12.5 billion offer for Motorola Mobility. “Patents are now driving mergers and acquisitions and that’s driving up valuations.”

On the other hand, just a couple of years ago, Amy Achter (Kimberly-Clark’s Director of Corporate Intellectual Asset Management at the time) said:“While intangible assets (including patents) comprise an increasingly high percentage of corporate value, only 30% (at best) of patents actually provide profitable returns.”

So how do you value your IP or the patent(s) of potential partners? Should you even consider co-innovation if you’re potentially sacrificing company value? 

According to valuation expert Mike Pellegrino, key factors in assessing patent value are:

invention status, status of current art, patent utility/value proposition, patent quality, and patent age.  

Current art can indicate patent importance, e.g. pharmaceutical patents are generally most valuable. Current art also affects risk profile-- little current art indicates potential design freedom, but may indicate little value in patenting. Patents must ultimately bring utility to the market that people are willing to pay for. 

You should consider the amount of technical uncertainty. Has the inventor reduced invention to practice? Inventions that have working embodiments are worth more than those that do not. Prototypes are worth less than production ready inventions. Can it scale up for commercial use? These are the kinds of questions to ask about patents, both internal and external. 

For innovation partnerships, further questions must then be asked about how value will be shared.

Example:

Praxair* asks these questions in analyzing IP opportunities:

  1. Where will IP result in competitive advantage?
  2. How can value be extracted?
  3. How will value be divided?
  4. How are development efforts divided?
    1. Costs
    2. Risks
  5. How will IP rights be allocated?
  6. What are the terms for early termination?

Technology Landscaping and Other Tools

One of the more common tools used by firms to analyze the value of IP is technology landscaping.

Dr. Paul Germeraad of Intellectual Assets, Inc., recommends using “the Intellectual Property (IP) Landscape” to assess the business value of technology– both internal and external

This is a simple matrix to evaluate technology and IP as a function of benefit and cost. The x-axis on the matrix represents the relative cost to create and deliver a product. The y-axis measures the “relative performance of the product as perceived by customers.” Patents (and perhaps other types of assets as well) are placed on the matrix one-by-one according to their perceived cost and benefit.  The matrix may then be divided into four quadrants. High-value assets will appear in the upper left quadrant. Items in the lower right are low value and it may be best to abandon them. Items in the upper right and lower left may be “licensed per a company’s brand image.”

Example PepsiCo uses the following matrix to assess its IP landscape

Overall, the valuation of IP is challenging and can be subjective – tools and matrices can help. Ultimately technology scouts and R&D managers will be working closely with legal, financial, technical and business experts and will use collective judgment in this important, albeit imperfect, aspect of innovation.

Footnotes:

1.Stewart Mehlman, Director - Licensing, Alliances and Emerging Technologies, Praxair, Inc. at recent MRT workshop

2. Margaret H. Dohnalek, PhD, Global Head of Technology Scouting, PepsiCo

3. Books and articles about valuation of early stage technologies by Mike Pellegrino

Related Workshop:

Valuation of Early Stage Technologies