Use intellectual property to secure debt and equity-based funding
Cars, phones, watches.
It’s easy to put a value on physical objects when we can see their differences and compare their quality. But what about intangible assets that make up the designs of each car, the trademarks behind those watches, or the patents fueling the smartphone wars?
The abstract nature of intellectual property (IP) presents a dual challenge: It can be demanding to safeguard and can be equally intricate to articulate its worth. This affair can pose a significant hurdle for companies looking to leverage patents in their fundraising efforts, primarily as more companies rely on forward-thinking conceptualizations aided by technology.
Recent years have seen increased financial support for companies seeking debt funding and equity fueled mainly by the innovative ideas of startups and tech companies that have established precedence. From 2011 to 2020, 58% of venture capital went to startups with patents or patent applications. Deal sizes for patent startups during this same period were up 40% to 60% than those for nonpatent startups. When considering valuations during patent raises, patent companies raise capital at higher valuations than non-patent-seeking companies. Looking solely at angel round deals, the average annual median is 93% larger.
From human resources to car wash companies, technology is now so prevalent that placing a value on intangible assets no longer seems out of reach. However, AI and other emerging technologies have added gray areas to the world of patent funding, asking investors to open their minds and wallets once again.
Determining patent value
When a company seeks to use patents as collateral for debt, it is common practice to reference the yearly reports published by Richardson Oliver Law Group. Richardson Oliver helps companies make IP decisions and provides average values for a patent or patent family on the brokered market.
The abstract nature of intellectual property presents a dual challenge: It can be demanding to safeguard and can be difficult to articulate its worth.
Alternatively, if the goal is to sell a company to private equity, companies can use the fair market value approach, also called a relief from royalty. The relief-from-royalty number is based on a company’s patent portfolio and details the amount of money a company will not have to pay in patent royalties.
Another option is for companies to collaborate with reputable patent valuation firms when assessing the data integrity of their patents. This option holds particularly true for companies in emerging fields needing more substantial information or historical benchmarks.
When selecting a patent valuation firm, the quality of data the firm can provide should be emphasized. Ideally, companies should seek out firms that rely on publicly accessible data from legal proceedings or publicly available patent transactions. This data should be used to establish a dependable valuation of the patent portfolio tailored to the specific purpose at hand. Companies should exercise caution when encountering patent valuation teams that present excessively optimistic valuations lacking a clear foundation in data.
