How Valuable is a Patent?
Intellectual property is valuable beyond a patent. Strong branding, trademarks, copyrights and trade secrets can all be valuable if protected from reverse-engineering. Patents are generally the most important IP for startup companies because branding and building a business identity in the market takes time and money, something new startups rarely have. So, what is the relative and absolute value of a patent—and how is this value different for entrepreneurs, investors, competitors and acquirers?
In the May-June 1997 issue of Research-Technology Management Journal, former Dow executive Greg Stevens and Professor James Burley published research that evaluates the value of ideas and ultimately, intellectual property. Researchers analyzed information from institutions, industrial product developers, venture capitalists, inventor groups, and other sources, to show that for every 3000 raw ideas, only 1 cements the basis for a company generating $20M in annual revenue. Those are not good odds.
3000 ideas become 150 (5%) patent disclosures that result in 112 issued patents (3.7%). Nine (0.3%) of those receive Angel Investment of $100k or more. Four (0.1%) become significant efforts with research and development, product definition, customer trials, and test marketing. Only 1.7 (0.056%) reached commercial launch at full scale with production, marketing, and sales.
Only 1 in 3000 (0.033%) resulting companies based on the issued Intellectual property is considered a commercial success.
In the early stages of developing a patent portfolio, it’s impossible to know what claims might be granted or the timeframe for issuance (years, and possibly tens of thousands of dollars). Most investors and competitors must rely on their own knowledge and experience, as well as that of others close to them, to project the value of a patent to the long-term success of the company. This is especially important in valuing a company for a proposed early-stage investment. Potential acquirers have the luxury of waiting to see the IP mature in the market.
The fundamental question is: does a patent(s) create sufficient value in the context of a company’s business model to justify the effort, time, and cash? Is a patent application worth it?
There are many companies and platforms that evaluate and provide estimations of value for IP portfolios. The existence of these companies indicates that there is a market for services, and that patents must have value—but not all patents are created equally. Investors prefer companies with IP over those without. Patent applications are expensive to file, maintain, and defend, and value drops as they near the expiration date. Entrepreneurs and companies can expend significant resources, when they are often operating on already streamlined budgets, creating intellectual property only to discover that investors don’t see the value in these sunk costs. A domestic patent can cost a company between $10k and $25k to file and maintain over a 12-year timeframe. Filing internationally can increase that number by a factor of two to four.
Does IP provide a sustainable competitive advantage for the company?
A well-conceived and written patent provides some protection for the holding company, giving them time to get started and launch. Such a patent provides a barrier-to-entry to fast followers and provides one of the key elements (IP, technology, customer base, and revenue) for future acquisition. The patent has tangible value because it is a key driver in market formation, investment, and eventual exit.
Liscensed IP can also impact tangible value. Universities and research laboratories, both private and public sector, generate IP that can become a wind in the sails of a company—or the albatross around its neck. A startup company can leverage the reputation of the inventor/organization to demonstrate credibility in the market and access technology and resources well beyond its financial means. When the terms of the license haven’t been properly negotiated, however—they can have the opposite effect on investment. Prohibitively high costs, steep royalties or onerous terms can prevent investors from engaging and damage the viability and profitability of companies. The other consideration is the patent holder’s ability to sublicense the IP to create economic value. In this sense, a license of IP from a reputable, knowledgeable entity has intangible value as a validation of the licensing company’s ability to negotiate and to build corporate value in addition to creating the basis for technology development and market formation.
To put a finer point on the issue, the economic value of a patent is based on the size of the patent’s projectable market and its ability to block others from entry. Seventeen years of protection and a dominant segment of a $100M market might seem attractive, but only if that patent’s claims are sufficiently strong and broad to provide the owner with meaningful ability to block others from competing, even if for a relatively brief period of time. A well-crafted seminal patent creates significant, tangible economic value.
Do patents impact the exit and exit valuation of your company?
According to The Angel Capital Association (ACA), the probability of exit increases with the number of patents. Pitchbook, ACA, and Harbison analyzed 281 outcomes from 1997 – 2024 and found that companies with 30 patents or more increased the chances of a successful exit by 80%. Further, the study found that the exit multiple increased by a factor of 300% - 80% for companies with 30 – 50 patents and 51 or more respectively. So, we can conclude that patent portfolio increase the likelihood of exit and the size of the exit.
Are patents a panacea?
The ultimate value of a patent is related to a company’s financial ability to defend its IP. IP ligation can cost both parties an aggregate $1M+ in legal fees and court costs, and most startups don’t have $500k available to fight a legal battle. It’s also harder to raise capital while in a prolonged legal battle. Strong, broad patents are hard to fight and it is often cheaper to acquire such companies. Only meaningful, defensible patents that create proprietary technology forming a defensible, sustainable competitive advantage have value and are worth the expended resources. The size and scope of that value correlates to the monetary value of the market it protects.
Takeaways for Entrepreneurs:
Postives
A robust patent portfolio can increase the likelihood of exit and the exit multiple.
Intellectual property is valued by the investor community
A robust patent portfolio can provide the basis for a sustainable competitive advantage in the marketplace.
Negatives
Don’t bother filing weak patents just to say you have IP.
Don’t sign a license agreement that does not create the basis for a viable, scalable company.
Don’t pretend your IP has undeserved value—savvy investors, potential acquirers and competitors will see right through it!
If your IP is not valuable, don’t waste your time or capital. Focus on branding, marketing, sales and customer support. Nothing is more valuable than customer traction, an engaged and fulfilled client base, and revenue!
References:
Harbison, John, Angel Capital Association, Angel Insights Blog, “Do Patents Affect Outcomes in Early Stage Investing?,” April 3, 2024.