KUHN CAPITAL Monday, March 19, 2018
Dispatches from the front

What’s Intellectual Property Worth?

Premium IP
While watching the stock market administer its object lesson in what-goes-up-must-come-down, we stumbled across an interesting effort to quantify and track the value of intellectual property (IP). Since we’re in the business of helping people buy and sell IP-intense businesses, we consume data on this subject with relish (and a pinch of salt).

We’ll call this IP valuation technique the Premium approach because it measures IP value simply as the difference between a company’s net worth and its market cap. Said another way, this approach presumes that however much more the market values a company than its net worth, that premium over net worth is generated by IP.

Pure Plays
This Premium metric obviously can’t be used to track IP value in established companies with dependable profit and sales histories like, say, IBM. The market takes into consideration these traditional indicators of reliable financial performance when assigning value in excess of net worth. In fact, with large companies, such a premium might better be called an “Enterprise Value”.

But in the case of small, young IP-intense companies, too immature to have generated profits or even material sales, their value must be based almost entirely on the promise of their IP. What else do they have to offer besides that, and net worth?

Now an organization called The Patent & License Exchange, which operates a market for IP buyers and sellers, maintains records on 6,500 IP patent filings made by 1,500 microcap public companies, the sort of companies that may represent the "purest" possible expression of IP value. PL&E then groups the IP assets for these companies into about 380 niche IP technologies like Fuel Cell, Video Component, even our favorite, Action Figure. They further aggregate these niches under a handful of broad IP tech sectors like Information, Life Sciences, Transport & Logistics, etc. For more detail on P&LE’s methodology, see PL&E’s site.

Well, the resultant rankings of IP value by niche and sector seem to make intuitive sense to us. Nonetheless, they also raise questions about why certain kinds of IP are more valuable than others. Here’s some recent samples of the most and least valuable IP tech niches and their respective sectors:

Most Valuable IP (ave. value/property = $435M)
Tech Niche
Video Component
Non-Gene Chip Genomics
Fuel Cell
Storage Area Network
Cardiovascular Therapeutics
Cancer Therapeutics
Tech Sector
Life Sciences
Auto & Transport
Life Sciences
Life Sciences

Least Valuable IP (ave. value/property = $50K)
Tech Niche
Incontinence Therapy Device
Fuel Additive
Educational Product
Order & Fulfillment Mgt.
Process Monitor/Control System
Ferrous Metal
Tech Sector
Life Sciences
Basic Materials/Energy Procurement
Consumer Products/Apparel
Express Package Transport/Logistics
Basic Materials/Energy Procurement

Why does one IP tech niche attract market enthusiasm while another languishes? To our eye, the limited data presented here seem to argue first that newer applications — those presumably in which innovation is brisk or whose commercial limits are largely unknown — attract investor support. But the newness of a solution couldn’t alone guarantee value: there are plenty of new kids on the block who don’t get respect. And note the presence above of some valuable niches dominated by IP components that look a bit long in the tooth, like that in the Fuel Cell and Storage Area Network (SAN) tech niches. So a new solution can be comprised of old tech components.

In summary, maybe you can explain a lot of IP value as the product of two variables:

  • The novelty of the solution, and;
  • The market’s readiness for it.

    If this hypothesis holds water, then we’d expect the strongest IP values to be reserved for new solutions that investors believe will soon see strong market demand. (Sometimes we’ll take a circuitous route to arrive at the obvious.)

    So What?
    We’re not sure whether this premium metric can help you predict which IP niche lightning will strike next, but it might give you some ideas about the characteristics of future winners. It would certainly refine estimates of an IP asset’s value, and it may also guide efforts to bottom-fish undervalued IP. But it wouldn’t necessarily steer you away from the next dotcom-style bust, since at the end of the day, the metric is entirely dependent on the notoriously fickle public markets.

    Certain promising visitors to the Patent & License Exchange may qualify for full access to the company’s data. But if you don’t pass their stringent criteria, you may glimpse portions of their vast store by checking out The Daily Deal.

    Ryan Kuhn

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