(Updated 22 July 2023.)
TL;DR: Realistic patent valuations are based on *context*. I can tell your patent value by how much revenue it produces. If your patent is infringed, I can calculate possible damages and likelihood of recovery. If it is not infringed, it has *potential* value, but not *realized* value. In other words, it does not have value – yet.
Patents are worthless until they are put to use.
Once a patent is being used, a realistic patent valuation can be determined using many of the same techniques used to value businesses. Until a patent is being put to use, a patent is a liability – it costs more than it is worth.
Quite simply, they are put to use when you sell your patented product or when someone copies it.
If we can figure out the sales associated with the patented product (or the infringement), we can calculate the patent value.
Everything else is pure fantasy.
BlueIron’s core business is patent-related financing and insurance. Our IP-collateralized loans require Investment-Grade Patents, and we are constantly looking at patent portfolios to find the valuable ones.
We are constantly on the lookout for high quality patent portfolios and we evaluate at least 20 portfolios a week.
Potential value is not realized value.
Many entrepreneurs call us looking for a loan based on their patents, and often, the entrepreneurs start out saying how valuable their patents are. But when they say they have little to no revenue, they are confusing potential value with real value.
A patent in a big market might have *potential* value – if someone puts the patented idea to work. But *potential* value is purely fantasy. It is wishful thinking that the invention would magically command 10% of a 10 billion dollar market.
Real patent value is when someone actually sells a billion dollars of infringing product. The sales could come from the patent owner, or from a competitor that intentionally or accidentally stumbled on the same idea.
Most ‘patent valuation’ analyses are merely Total Addressable Market (TAM) analyses. When you pay someone to give you a patent valuation analyses and there is no existing infringement, you are buying an over-priced TAM analysis. These analyses are often pure speculation, and there is a huge incentive for the analyst to inflate the valuation number. I have seen so-called ‘valuation reports’ that show patents with no infringement having a ‘value’ of multiple billions of dollars. This is pure fantasy.
As an aside, the only reliable patent valuation is one where the other party is paying you for your patents, not when you are paying them. If they are writing a check, they believe in the patent value. If you are writing the check, don’t believe a word of it.
Patent value depends on context.
The biggest factor of patent value is context. Patents that need to be sold quickly in a ‘fire sale’ will not fetch much money.
Even infringed patents with solid Evidence of Use might not bring more than $100-200K, even if there is $5M or even $50M of infringement. This reflects the cost (and risk) associated with an enforcement lawsuit.
Think about it: even if there is blatant infringement, someone needs to be willing to spend $2-5M to enforce the patents to recover anything. It is not a bet that most people will take, so the price reflects that risk.
Patents that have no known infringement are worthless. Period. You cannot give away these patents.
The best way to increase the value of your patents: sell the patented product.
The ‘easiest’ way to increase the value of your patents is to sell the patented product. ‘Easiest’ is in quotes because I recognize that it is not easy.
Building a business takes endless, frustrating hours to find that elusive product-market fit, to build inventory, to reach the right customer, and to deliver the end product.
The most important component of patent valuation: revenue.
I often say that if you show me revenue on a patented product, I can show you patent value.
Without revenue, there is no (real) patent value.
When we evaluate early stage companies for IP-backed loans, we look at the business first. If it is generating revenue, it is delivering value to customers.
The second step in our analysis is whether the customers are buying the product or service because of the patented feature or not. In this step, we map the customer value back to the patents to see how they overlap.
A patent has value if and only if it captures the real reason why a customer bought the product/service.
Valuable patents are ones that product a business’s competitive advantage.
It is not enough that there is a patent on the product, but the patent must capture the real reason why someone bought the product. Getting a patent on a feature that nobody uses is worthless.
Every product goes through a lengthy battle of finding out what the customer really wants and how to deliver a solution for that need. Customers often do not realize what their needs are, and your business helps them put that need into context. Your marketing and sales help your customers vocalize their needs, and you provide the solution.
For every new product idea, whether done by an entrepreneur in a garage or a large corporation in a huge research and development facility, there is some amount of thrashing back and forth to figure out what the customer wants and how best to deliver it.
It is pure arrogance to assume that you know what the customer wants before they actually buy.
The customer discovery process always uncovers things that were not known beforehand. You learn a lot from what the customer says and how they behave.
How does this relate back to the patent?
Often, an entrepreneur will have a ‘great’ idea, then run to their patent attorney to get a patent. Their next step is to start the customer discovery process. After a lot of back-and-forth and some product redesign, they start getting market traction. This is a bad strategy.
It is only then that we really find out why the customer bought the product. In many cases, there is a patented feature on a product that might never be used by the customer. They bought the product/service because they saw something else in the product that was valuable to them.
Here’s the conundrum: you need to file a patent *before* you know why someone bought your product, but you need the voice of the customer to know what needs to be in the patent. This is not a simple thing.
Large companies solve for this problem by file a patent *as late as possible* in the process.
Large companies typically file patents as close to product launch/disclosure as possible. This gives them the most data to support the investment on a patent, plus it makes the patent much better, since we know (to the best of our knowledge) the customer’s value of the product.