Making Smart IP Investments

Corporate research organizations, universities and government labs have recently turned more and more to the monetization of technology-based intellectual property portfolios as an important revenue source. Carefully targeting development efforts to increase asset value can significantly improve industry competitiveness, market revenues and licensing returns.

Expanding fields of use, reducing technology risk, advancing the stage of development and speeding time-to-market are all means for increasing the perceived value of your IP and associated licensing revenues. Investments in each of these areas are worth close evaluation as you consider strategies for maximizing the return on your IP portfolio.

Expand the Fields of Use

Each potential field of use for a particular piece of IP represents a licensing opportunity and potential revenue stream. Investments targeted at expanding or identifying new IP uses can dramatically leverage the returns generated from a new technology.

Internal development teams and licensing groups tend to be narrowly-focused within their firm’s line of business. When trying to expand field of use, consideration should be given to engaging outside organizations that can provide a broader view of the potential application landscape for a new technology. These organizations can expand your thinking and point you to licensing opportunities you may not have considered. Moreover, as new applications are identified the original invention may be extended with new ideas resulting in additional IP filings that increase the overall portfolio’s value.

Reduce Technology Risk

From a licensee’s perspective, IP value is substantially increased and downstream risk is reduced as the technology is proved feasible and actual performance estimates are solidified. The challenge for the licensor is to positively balance the investment in projects proving feasibility and generating performance data with the financial returns that can be expected over the duration of the license agreement.

In most cases bringing a technology invention to a point where it can be optimally licensed requires a solid “proof-of-principle” demonstration followed by a technical “characterization” effort. The proof-of-principle demonstration shows that an invention will actually work when reduced to practice. Many times this demonstration takes the form of an experimental lab setup using “crude” custom components and simple instrumentation.

The characterization effort provides estimates of expected operating ranges for specific key performance parameters. The estimates are important as they provide guidance to potential product developers who are keenly interested in understanding how the technology may allow them to gain competitive advantage in the marketplace. The estimates are usually derived from one or more “prototype build-and-test” iterations. The prototypes are typically built using engineered custom components and tested using repeatable, commercial measurement instrumentation.

When generating characterization information, care should be taken to address the needs represented by the key fields of use. The potential licensees in these fields may have very different technical data requirements. Taking all these requirements into account when first scoping a prototype effort may save you the time and cost of an additional iteration.

Finally, consider using an outside resource to prototype and gather characterization data. This approach allows your internal R&D resources to focus on your firm’s primary product development efforts and creates an independent reference to support a potential licensee’s due diligence process.

Advance the Stage of Development

Closely tied to reducing technology risks is the concept of “stage of development.” IP valuation exercises will typically try to slot the technology into one of four stages:

• Basic Research/Concept (new idea/lab experiment)
• Prototype Development (one or more engineered build-test iterations)
• Pilot Production (first runs/R&D complete)
• Advanced (volume manufacturing)

The discount rates (typically 60%-15%) used in the IP valuation calculations will be reduced as the technology proceeds towards the “Advanced” stage of development. Performing sensitivity analysis using the appropriate discount rate(s) and proposed investment costs will help ensure commercially-relevant development decisions are made.

Speed Time-to-Market

As you invest in projects to reduce risk and advance the stage of development of your IP, you are reducing time-to-market as well. From a valuation perspective, positive cash flows will occur sooner, which will drive present value calculations up and make your IP more valuable. This is a powerful effect and should be included in the sensitivity analysis you perform when considering proposed investments.

References

Razgaitis R 2007. Pricing the Intellectual Property of Early Stage Technologies: A Primer of Basic Valuation Tools and Considerations. In Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best Practices. MIHR Oxford, UK and PIPRA: Davis USA

G. Smith and R. Parr, Valuation of Intellectual Property and Intangible Assets, John Wiley & Sons, Inc. 2000