Patents that are Bad Stand-Alone Investments
How BlueIron Evaluates Patent Investments.
We do not invest in technologies where we don’t think there is a market for the patents alone.
BlueIron treats client’s patents like collateral for loans. Our investment is protected only by the value that the patents would have on the open market, if the client walks away from the inventions – either intentionally or unintentionally through bankruptcy.
How do we assess the potential value of an invention on the open market?
Our first analysis looks at the raw economic value of the invention. We want to determine the economics of the invention: is it a $3 improvement to a $10 product? In many cases, the dollar figures can be very difficult to estimate, especially at the invention phase, but we do our best to accurately estimate it.
Part of the analysis is to evaluate design-arounds or alternatives to the invention. We might estimate the price of a product/service with the invention and without the invention, and try to figure out what alternatives might be used instead of the invention.
In some cases, this analysis may identify additional inventions or improvements to the original invention because the design-arounds may be more economically favorable than the original invention.
The second analysis looks at the market for the patent and how much direct economic impact that invention would have if it were licensed or sold. The market needs to be large enough to support the costs and recovery of litigating the patent.
We recently evaluated some inventions for high end bicycles. These inventions would only be appropriate for bicycles that might cost $5000 or more. These inventions were very innovative, very well designed, and were the result of a lot of passion and ingenuity.
Our analysis struggled to find a large economic advantage of the inventions. Yes, the invention of a new suspension system for a mountain bike was new, novel, and probably non-obvious, but what was the economic advantage over existing alternatives? Maybe the new suspension system had a better feel or handled certain situations better than others, but was that a quantifiable advantage that would cause a consumer to pick the invention over the prior art?
We concluded that any potential differences in consumer choices were more likely due to differences in brand name and advertising than because of the advantage due to the invention. The fact that there were many other suspension systems with similar number of moving parts, similar performance specifications, similar looks, etc., that we could not attribute a significant economic advantage to the invention.
The second part of the analysis also weighed against investing in the patents. The market for bicycles costing many thousands of dollars can be extremely lucrative, no doubt. However, the market can be fickle and driven by needing the Next New Thing. A $5000 bicycle is a luxury item, and decisions about luxury items are often driven by emotion, the need to one-up my friend, and other factors – factors that have nothing to do with the economic contribution of an invention.
The market also has the problem that it was quite small. The sad fact is that patents are bought and sold only in industries where the economic value of the invention is in the millions if not tens of millions of dollars per year. We could not come up with a plausible way to show that the invention would have a $10M impact in the industry.
This is not to say that the company should avoid patents, because these patents may add substantial cachet to a young startup making its way into the high end bicycle market. Having one, two, or even ten patents in this field may give the company a competitive edge in their advertising, make the company more attractive for takeover, grab the attention of potential customers, or otherwise make the company more valuable.
There may be a business justification for the company to still get patents.
In the BlueIron business model, we evaluate patents as a *stand-alone* assets, and in this case we could not find enough value. However, the business may still be able to use patents on their innovations to increase their company’s value. BlueIron, sadly, could not finance those patents.