Why intellectual property is a key asset and a valuation that truly matters

4 October, 2021

European Patent Attorney, Sofia Willquist, has during her career closely followed companies of different sizes and phases and with different paths to success. As a patent professional, her learning and conviction is that intellectual property rights should always be integrated in the business plan.
– At Ström & Gulliksson we have numerous times helped clients to get a head start by creating a solid patent strategy. There is a strong correlation between IP strategy and success. Start ups are no exception, rather they can truly benefit from it in the long run if they invest in it from day one, says Sofia Willquist. 
 

In a survey performed by Ocean Tomo in 2015, over 80% of the total worth of companies in the S&P 500 index was made up by so-called intangible assets. In 2020 this survey was updated and showed that this had grown to about 90 %.

Other studies, such as “IP in early-stage commercial and investment success” by Joseph Hadzima et al, shows a very strong correlation between having a strong Intellectual Property (IP) portfolio and obtaining venture capital attention.

What would you say is characteristic for start-up companies in particular?
– It depends on the field but most start-up companies, especially within the “tech field”, do not have any substantial tangible assets and what more – most of them don’t even have a market or a product to sell. This means that the intangible assets, such as IP, key people, a product or service idea or concept, might be the sole value of the company, says Sofia Willquist, and continues: 

– For an investor it is therefore crucial to use consistent and transparent methods for assessing the value of intellectual property during an investment process.

What are the immediate benefits of understanding the value of IP? 

– It is equally important for companies to understand the value of their IP and how to use it in the same manner as tangible assets since they can also be sold, licensed, bought and used as security for loans or for securing financing, says Sofia Willquist.

She also emphasizes that the value of a company’s IP assets may also be of guidance when deciding on enforcement actions in relation to third parties, such as deciding on claiming infringement, settling disputes or entering into license agreements. Further, it is important that both an investor and an entrepreneur is aware of the fact that a product or service of today, most likely will not be the same neither in the near or far future, and that creating IP protection that continues to generate value thus closely must follow both the business strategy and innovative process of the company. 

Different types of IP requires different types of measures

For patents it is important to consider, already when drafting an application, some key aspects such as how the patent will be used, and being as broad as possible in order to allow for future technological adaptations, while still keeping to the legal principles of sufficient disclosure. For trademarks and branding, it is important to consider possible brand extensions, partnering and franchise as well as goodwill associated with the trademark.   

What are the crucial questions that need to be answered when looking into different methods for assessing the value of IP? 

– There are a number of basic ones and in addition a number that require a deep dive. Does the company own intellectual property rights? What is the position of these IP rights in comparison to competitors or field of use (technology and/or geography)? Is there a clear strategy for handling the IP?

Sofia Willquist also recalls the importance of considering these aspects in a due diligence process.

– To fully understand and create a valuable IP-strategy you remember to consider not only patents, trademarks and designs, but also includes copyright and trade secrets as well as different types of agreements.

Ström & Gulliksson often cooperate with Advokatbyrån Gulliksson who has specialized expertise and can assist clients with the entire legal Due Diligence and acquisition process including agreements governing consideration, guarantees and terms and conditions for the acquisition.

What are the different ways for investors to determine the position and strength of IP rights and portfolios?
– One way is simply looking at the number of filed and granted/registered IP rights, and the technology they cover as well as the territorial coverage. An IP portfolio having a high strength should support the business and key technology, and this is also something that should be taken into account by an investor, as well as a company when building that portfolio. 

How to attract investors? Create a well-positioned IP portfolio
Showcasing an IP portfolio which is well-positioned (territory and technology wise), and having a high strength or quality, is a foundation for building investor confidence in a company, and also confidence in relation to third parties when it comes to enforcement of the IP rights. But of course, start ups can also have an uphill climb just when it comes to credibility.

– For some very early start-up companies, there might not be any granted or registered rights available to assess, or even any filed patent or trademark applications. In those cases it is even more important to be able to show that there is a solid IP strategy and management, and a sound understanding of the market – who is the buyer, and how the revenue is expected to develop depending on commercial competitiveness brought on by creation of IP rights. 

Methods of assessing the value of IP
There are a number of different valuation methods for assessing the value of IP. Often these include the cost involved in R&D, the market price for the intellectual property and the economic income generated by the IP.

The World Intellectual Property Organisation (WIPO) offers some further guidance on three principal methods for valuing IP assets: income method – valuing IP assets based on the economic income they are expected to generate; marked method – which is based on a comparison with the actual price paid for the transfer of rights to a similar IP asset under comparable circumstances; and cost method – in which the value of an IP asset is established by calculating the cost of a similar IP asset.

The questions of why a valuation of the IP assets is needed, who is the purchaser, and what is being evaluated will determine which is a method used, but the income method, i.e. forecasting the future sales revenue generated by the IP, is the most fundamental and widely used. 

– This requires that an entrepreneur seeking financing must be able to provide answers the questions as set out above, in particular – how will the asset generate future income and a positive cash flow in relation to the business model – and an absolute criteria is that the IP rights will be commercialized in some way, says Sofia Willquist and recommends start ups to consider a business model around licensing:

– Licensing technology or trademark, or both, requires less investments and may lead to very high revenues, provided that the IP portfolio is of high strength and quality, which is also beneficial for any potential investors. One should also keep in mind that when it comes to the actual financial value of IP – there are really no limits, says Willqvist and highlights the Swedish company Xcerion reportedly sold their IP relating to the domain and trademark “iCloud” to Apple for about EUR 4,5 million in 2011, a trademark that was registered in 2007, i.e. many years in advance of this sale.

Considering the importance of intellectual property for the valuation of a company, whether it is an early start-up or a more mature company, developing a comprehensive IP strategy fully taking into account all uncertainties of product and service development, the market and competitors, will of no doubt be beneficial for attracting investors, and will also serve as guide for the development of the business model and concrete business plans.

For entrepreneurs
Perform a business intelligence analysis: Including market, product marketing fit, competitors, technology 
Develop an IP strategy: Including present and future IP assets 
Adapted to the business model
Forecast sales revenue generated by IP!
Consider IP assets the same way as tangible assets

For investors 
Perform a thorough due diligence: Does the company have IP assets/rights, assess the strength and coverage of the IP assets/rights, and look at IP strategy/management
Don’t be afraid of business models based on licensing!
Carefully select the method for valuation for each specific case

Are you a start up aiming for success?  Ström & Gulliksson’s patent consultants Ida Moen Larsson, Maria Weineisen and William Helin share valuable insights (in Swedish).

Sources:
Ocean Tomo, The Intellectual Capital Merchant Banc™ Firm
Intellectual Asset Management
WIPO
NyTeknik
Breakit