zaterdag 7 februari 2015

Patent valuation

Clients ask me often what the value of their idea is and if it is sensible to file a patent application for their invention. Well, here are some considerations.

The value of an idea is very difficult to assess, but still I would like to share two basic tools: First of all a generalized graph showing the dollar value of an idea, at its typical various stages of development.

This graph is showing the various stages of an idea, through prototype and patent protected innovation. Further in the development of an idea, building a company around it is indispensable. The values are estimates, based on some company estimations. Some insights from this image are:

If you are an inventor and you are not aiming to build a company around your invention, it will not be worth more than a couple of thousand dollars, about the price for getting proper patent protection.

Crowd funding campaigns can virtually kickstart your innovation and boost it about 3-4 orders of magnitude in value.

Estimations based on this graph are by nature rough estimates, spanning about two orders of magnitude.

For an indication of the order of magnitude, various patent portfolio's sold in the last decade have been inserted as well. Patent portfolio's nowadays represent a true estimated value of the company, which can be concluded from the following image, produced by Ocean Tomo [1]. This image indicates that the intangible assets (for tech companies it is predominantly IP) will determine about 80% of the company value.

For various innovations, after the first introduction, the time to reach global coverage is different, very different indeed. And, in the path from idea, prototype, first clients to regional coverage, 97% of all inventions have died off. From the market introduction of any innovation, an S-curve type of growth is expected, which is represented by the following graph:

As an example the number of Facebook users is depicted, together with an S-curve fit. The time from the market introduction to half the saturation is about 7.6 years, an astoundingly short period of time. The steps from market introduction to global coverage was attained within a year after market introduction! Nowadays, Facebook has a market capitalization of around 200 billion, off chart in the first graph.

In estimation of innovations and patent portfolios I generally use this second tool, the mathematical S-curve formula. I use it per invention or per patent family, by calculating a cumulative turn over, based on an S-curve fit. Evidently the S-curve fit is more precise if more data is available. In the cumulation there is incorporated a discount cash flow correction. If an innovation has not yet hit the market, estimations begin to be shaky, and best guesses for market saturation, market introduction and speed of penetration have to be based on similar products or best guesses.

Actually, the value of an idea, any idea starts to be relevant only when first clients are found. That is why it is for physical products -that need expensive production investments- very difficult to decide, weather to invest, patent and start production or not. Here crowd funding may prove very valuable.

Any questions? Please leave a message below, I will respond!

Hendrik de Lange