Venture capital (VC) valuation of a company’s patent is typically based on the potential value that the patent can bring to the company’s overall business.
A patent is one of the most advantageous investments a startup can make. Not only does it give them access to their target market, but also shields their technology from larger company competitors.
Patents can help startups form partnerships with larger firms and accelerate their business operations.
key factors that VCs may consider when valuing a company’s patent
Venture capitalists (VCs) embrace patents as they represent tangible property with significant value to a startup. VCs consider a range of factors when seeking patent valuation, here are some of the factors:
1. Technical Quality
A company’s patent is the intellectual property that represents their invention. It serves as collateral for investment and, during early rounds of funding, may be the only real property worth valuing to venture capitalists.
As your startup expands, the value of a patent increases along with it. Each additional patent can add $1 million to the valuation in a subsequent round of funding, making them an invaluable asset.
VCs often look upon patents as a signal of the success of a startup’s technology and potential in the market. This is especially true during early funding rounds, where patents provide extra assurance that your startup can hold its own space and defend itself against competitors.
2. Technology Stage
A startup’s patent is a tangible asset that can be licensed or sold to other companies for an agreed-upon fee. This enables the business to generate revenue from their technology and boost their valuation in the eyes of investors.
The value of a startup’s patent can vary depending on several factors. For instance, it protects an organization’s intellectual property from being exploited by competitors or other businesses.
A company’s patent can also help a startup secure funding. Venture capitalists (VCs) tend to invest more in startups that possess an impressive IP portfolio.
3. Weighted Backward Citation Count
The weighted backward citation count is an indicator of the technological impact of a patent. Scholars often use this metric to measure and value companies’ patent portfolios.
Scholars are still debating how best to utilize this metric. One potential solution is using the PageRank score of a patent.
Another method is to measure how often an invention is cited by prior patents within its field known as Prior art. This approach relies on the idea that earlier citations tend to refer more frequently to inventions within their area than later ones do.
Innovation in systemic technologies typically occurs continuously and is distributed. This can be explained by the fact that inventions often revolve around well-established technical designs.
4. “Generality” Measure
The “Generality” Measure is a new metric that allows for the analysis of results across humans, non-human, and artificial intelligence systems. It decouples generality from capability – an essential factor in cognitive performance – and reframes intelligence as holistic rather than narrowly focused.
The starting point is a difficulty metric, which can be determined either extrinsically or intrinsically. Difficulties are typically ordered by difficulty to make them easier to interpret but may still lead to inaccurate outcomes.
5. Scientific Citation Percentage
The scientific citation percentage is a quantitative evaluation of a scientist’s research impact. It’s calculated using the number of times a publication has been cited and adjusted for field, publication year, and document type (e.g., regular article or review).
Researchers often use citations as a measure of the quality of a work. It is essential to remember that even though something may lack high quality, its impact can still be considerable.
The citation process is an intricate, cumulative one. At its core, knowledge diffuses over time and leads to exponential increases in citations; however, this increase is counterbalanced by a depreciating exponential depreciation in likelihood as outdated knowledge becomes outdated – this phenomenon known as knowledge spillover which can be quantified using a structured model of diffusion.
6. Technology Market
The technology market is a highly profitable segment of the capital markets. Tech companies create and sell electronics, software, computers as well as services essential for businesses to run efficiently.
Venture capital funds are also an abundant source in this industry, supporting startups and small enterprises alike. These capital sources come from institutional investors such as pension funds or endowments who then provide companies with small amounts of cash in exchange for equity shares.
However, the venture capital (VC) market has been adversely impacted by a decrease in valuations for high-growth areas of tech. This has had an impact on both publicly-listed tech stocks and private valuations of venture-backed startups.
7. Technology Appropriability
Technology appropriability is a critical factor in the venture capital valuation of a company’s patent. This factor plays an integral role in the valuation process since it directly correlates to the worth of an invention and its associated knowledge base.
Innovation appropriation mechanisms tend to differ across industries and innovations, which can have either positive or negative consequences on a firm’s performance.
Companies with a strong patent portfolio tend to experience higher sales of new products; however, this effect diminishes over time and could be affected by the quality of search reports.
Unfortunately, most studies on appropriability only address the potential for appropriation rather than its actual realization. This is a grave error since actual appropriation depends on several conditions like the strength of the patent appropriation regime, availability of complementary assets and how well an innovator can design technology that is applicable across domains.
8. Industry Complimentary Asset Distribution and Specialization
When rapid technological innovation disrupts an industry, established firms often experience dramatic failure and are quickly replaced by newcomers. On rare occasions, however, they can survive and prosper.
To explore the relationship between patent commercialization performance and complementary assets, we analyzed data from a large sample of firms in the typesetter industry from 1886 to 1990. Our findings indicated that appropriability and complementary assets positively correlated with firm success.
Complementary assets are defined as the total economic value added by combining certain complementary factors in a production system, exceeding what would have been generated if these elements had not been combined. Two assets are said to be complements when their investment increases the marginal return on innovation; otherwise they act as substitutes.
9. Technology Pull
The term “technology pull” is used to describe a phenomenon whereby technological advances are driven by consumer or user demands. This is in contrast to the “technology push” where new technologies are developed, then marketed towards potential users.
In a scenario of technology pull, the demand for new and better ways to solve problems or accomplish tasks is what drives technological innovation. This can lead the development of products or services tailored to specific user groups or consumers.
The development of smartphones that have larger screens and better cameras is an example of the technology pull. Users began to use their smartphones more for internet browsing, taking pictures, and streaming videos. This led to the demand for larger, higher-quality screens. In response, manufacturers started to create phones with larger displays and better camera technology.
Overall, technology can be an important driver of innovation. It can also lead to products and services which truly meet the demands of consumers and users.
10. Presence of Disruptive Factors
Disruptive factors are an essential element when assessing the potential impact of a company’s innovation. These can include unestablished technologies, business models that differ from current ones, and new technological breakthroughs that render older products or services obsolete.
Disruptive factors must be factored into a venture capital valuation because they can significantly influence the likelihood that companies will reach multibillion-dollar valuations. Traditional valuation metrics, such as earnings, do not typically take into account these elements and may lead to higher valuations for firms with significant disruptive potential.
One type of disruption occurs when a company creates a product that appeals to low-end customer segments that an incumbent does not reach due to lower profitability. This type of innovation can be transformative for an industry and force incumbents to lose market share or even go out of business entirely.
Valuation for patent portfolio
The valuation of a patent portfolio is a complex task that involves many factors, including the number and type of patents in the portfolio, the technologies they cover, the quality and age of the patents, as well as their geographical coverage and potential for licensing and commercialization.
You can use several methods to determine the value of a patent portfolio.
1. Cost-based approach
This is based on estimating the cost of developing each patent and adding the costs together to arrive at the total value.
The cost-based approach considers the cost incurred in developing the patented technology, including research and development expenses, legal fees, and other associated costs. The approach then subtracts the depreciation of the patent over time to arrive at the current value.
The cost-based approach is useful when valuing patents that are not yet commercialized, as the approach considers the costs incurred in developing the technology. However, this approach does not take into account the potential revenue or profits that the patent could generate in the future, which can be a significant limitation.
2. Market-based Approach
This compares the patent portfolio with similar portfolios which have been licensed or sold in the market, while adjusting for technology, quality and other factors.
Identify patents that are similar to the patent being valued
To use this approach, identify patents that are similar to the patent being valued. This can be done by analyzing the patent’s technology, application, and market. Once similar patents are identified, their sale prices can be used as a basis for estimating the value of the patent being valued.
Use recent sales of similar patents
In order to obtain accurate market data, it is important to use recent sales of similar patents. Sales data from the same industry and geographic region can also be more relevant. Additionally, any factors that may have affected the sale price of comparable patents, such as licensing agreements or litigation, should be taken into account.
3. Income-based Approach
This is based on estimating potential revenue from licensing or commercializing patents and discounting the amount to arrive at the present value.
This approach involves estimating the potential income from licensing or commercializing the patents in the portfolio and discounting it to arrive at a present patent value.
4. Combination method
This involves using a combination of the above methods to arrive at a final value.
This method involves using a combination of cost-based, market-based, and income-based approaches to arrive at a final value.
The specific circumstances and goals of the owner will play a significant role in determining which method is most appropriate. Consulting with a patent attorney or a patent valuation expert can provide more insight into the specific factors to consider for your patent portfolio.