IP valuation for Investment Purposes
– Part 1
By Roya Ghafele, OxFirst Ltd.
www.oxfirst.com
With
the European Central Bank’s interest rate decision continuing to be at 0%,
investors are forced to put their funds to work in different ways. Can patents, the underlying rights to an
invention, offer such an alternative?
Any
type of investment decision is hinged on an adequate appraisal of risk and
return rates of an investment. Ideally, an investment yields high returns,
while risk rates are kept as low as possible. The investment in intellectual
property forms no exception to that.
The
adequate valuation of intellectual property can hence play an important role in
the promotion of technology markets. It is through this instrument that
investors can make an educated placement of their funds. In spite of the
instrumental role that IP valuation could assume, it is often ignored in the
financial community.
The
problem does not seem to be that it is not possible to value IP for investment
purposes or that IP has any intrinsic features that would prevent its
valuation. The problem is a lack of awareness of the many opportunities
provided by IP valuation. If investors have IP on their radar screen at all,
then they tend to contend themselves with counting patents (apparently, the
more, the better seems to be the premise) or to check if the company is
involved in any legal proceedings. As to early stage technology companies,
investors will at best consult a patent attorney who can undertake a freedom to
operate analysis of the underlying patents of a technology. While such an assessment
can provide helpful legal insights, it does not allow to understand how IP
relates to potential business performance.
IP
managers in technology companies on the other hand side do often also not know
how to best communicate the value of patents to financial analysts, angel, VC
or Private Equity Investors. Current accounting standards that allow to only
partially reflect the value of patents do not make things easier.[1] This leads to market inefficiencies, where
valuable technology sits gathering dust, while investors are not able to scope potentially
attractive financial opportunities. Already in 2014, the European Commission
called for an enhanced usage of IP valuation as a means to better link those in
search for funding with those eager to put their money to work.[2]
Equally, the UK Intellectual Property Office launched an initiative inviting
the City of London to ‘Bank on Intellectual Property.’ [3]
Those initiatives have so far shown little results and the best practice for
leveraging IP in financial transactions still seems to stem out of Silicon
Valley, where some financial institutions have been reported to use IP
valuation for investment purposes. [4]
Yet, institutions like these are the
worthy exception, rather than the norm.
So,
with a lot to gain from overcoming the little understanding that prevails on IP
valuation, the question arises what technology entrepreneurs can do to attract
investors to their business.
I
turn to this question in the part 2 of this comment, where I will seek to offer
some practical tips that may help to better link IP to cash flows.
[1] GHAFELE, R. ‘Accounting for Intellectual
Property?’ Oxford Journal on Intellectual Property Law & Practice, Nr. 5/7
2010, at 37
[2] EUROPEAN COMMISSION,
Report of the Export Group on Intellectual Property Valuation.
http://ec.europa.eu/research/innovation-union/pdf/Expert_Group_Report_on_Intellectual_Property_Valuation_IP_web_2.pdf (2014) at 7, 22-23, 57, 91,
[3] UKIPO ‘Banking on
Intellectual Property? The role of intellectual property and intangible assets
in facilitating business finance’ available at: http://www.ipo.gov.uk/ipresearch-bankingip.pdf
(2014) at 221
[4] See About Silicon Valley Bank,
http://www.svb.com/about-silicon-valley-bank/ (disclosing that Silicon Valley
Bank’s clients include 50% “of all venture capital-backed tech and life science
companies in the US” and that Silicon Valley Bank was established in 1983).
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