What are the most common mistakes made when valuing IP?

80% of the market cap of the S&P 500 consists of intangible assets according to Ocean Tomo. A big part of reaching that number is that the IP has to be systematically captured, identified and marketed. Most companies do this poorly.

Neglecting market dynamics while valuing IP is a prevalent blunder. Focusing solely on costs and potential revenue overlooks crucial factors like competition, legal nuances, and customer preferences. True IP value emerges from a comprehensive market analysis, benchmarking against similar assets. Don't let shortsighted valuation blindside your IP's true worth.

To my opinion, you can only value P in light of - a prospective business - an established market - a business model to exploit, - a competing set of IP playing in the same filed, Or - any tangible purpose Value the IP for a purpose (subjective valuation), not in isolation.

You raise an excellent point that valuations not grounded in reality often set IP assets up for frustrated underperformance, if not outright failure. Over-indexing on engineering input costs or idealistic revenue models devoid of demand signals risks distorted perceptions blind to market realities. A prudent valuation methodology requires meticulous market mapping on top of assessing technical merits or legal protections alone. Studying threat environments, adoption barriers beyond innovation romance and frictionless techno-optimism brings objectivity. Holistic diligence analyzing adjacent solutions, environmental shifts, and value chain gaps can size possibilities from various lenses.

It's not just about looking at what is in the market now and building something to compete. The true value comes from looking at where the market will be in the next 3 years and building towards that. By doing this the market then chases the product you have built because it fills a growing need rather than you competing on existing features and price.

There is no one size fits all in valuing IP. And one single method may not give the right perspective. It's best to do 3-4 methods and get a range for the valuation. Ideal would be to use three methods and triangulate the results.

Using inappropriate valuation methods for Intellectual Property (IP) can jeopardize accuracy. Methods like the income approach may struggle with early-stage IP, while the market approach might lack comparables for unique IP. The cost approach, relying on historical cost, may not reflect current value. The option approach, though complex, offers flexibility. Innovators must align valuation methods with IP characteristics, opting for a mix to ensure accuracy and reliability.

This post highlights a crucial issue that innovators and IP professionals grapple with - using appropriate valuation methods. As the global economy grows more knowledge-based, the value of intangible assets like IP continues to accelerate, underpinning the market value of companies across industries. However, inaccurately assessing this value can have dire financial consequences and undermine critical business decisions. Choosing unsuitable models jeopardizes deal-making, investment rounds, credit decisions, tax planning, litigation outcomes, and more. It may result in leaving money on the table during licensing negotiations or acquisitions, overpaying for IP-rich companies, underestimating infringement damages, or even accounting fraud.

You also need to be checking the price elasticity of your IP against different clients in the initial stages of development to be able to understand what the overall value proposition is. Part of this is being very clear on what value you are bringing to a specific market problem. As with creative you need to be testing the products price point and different models against different audience types to be able to understand the value you are providing.

If it goes about innovative IP, not an incremental one, conventional cash-flow based and benchmark models make no sense cause they don't cover the unforeseen number of uncertainties and known unknowns and incapable to factor in related assumptions. Whatever you build using the Time Value of Money paradigm crashes after pivoting the technological or business model assumptions. Moreover, such valuation becomes too expensive to perform. Meanwhile, the complexity of more relevant modeling like Real Options or Systemic Dynamic require a lot of efforts and are pretty expensive to do, even if you are lucky enough in finding quants capable to do that.

Imagine a tech company with a groundbreaking environmental sustainability patent. While the direct financial gains might be quantifiable, the intangible benefits are equally, if not more, impactful. This IP positions the company as an industry leader in eco-friendly innovation, enhancing its brand reputation and attracting socially conscious consumers. It is clear that the environmental impact becomes a unique selling point, creating a competitive edge that extends beyond traditional financial metrics.

IP by it's very nature is intangible. But we think of the usual suspects-patents, trademarks etc. Try not to exclude clients lists, in house processes, pricing strategy, trade secrets etc to get a robust valuation

This post illuminates a profound truth - the immense, often overlooked value hidden in the intangibles of intellectual property. Financial statements and valuation models are blind to the strategic essence of competitive advantage that IP confers. Metrics cannot capture how pathbreaking technologies shape human progress or company legacies, earn loyalty, and create meaning for stakeholders. Even the shrewdest investors underappreciate these soft powers that determine hard market outcomes. However, exclusivity over intangibles enables businesses to corner markets, disrupt industries, and amass influence that impacts society. The symbiosis between IP and intangibles manifests in iconic brands that dominate consumer imagination and culture.

Valuing intellectual property without considering the intangibles is like rating a movie solely based on its ticket sales. Sure, the box office numbers tell a part of the story, but what about the critical acclaim, the cultural impact, or the behind-the-scenes drama? Similarly, your IP isn't just a financial asset; it's a blockbuster with strategic twists, a reputation saga, and an ethical subplot. Neglecting these intangibles is like giving an Oscar to the highest-grossing film without considering its cultural resonance. Don't make your IP the equivalent of a forgettable blockbuster; acknowledge its intangible nuances for a truly award-winning valuation.

When developing products and IP I always start with 1. Technically can it be done? 2. Is it solving a clear and genuine problem in the market? 3. Commercially does it make sense? 4. Legally can I do it and own it? 5. Ethically should I do it? If the answer is no to any of them then stop. But if you can justify the product at each gate then you have a very clear plan as to what you are building and the value it will bring.

This post strikes at the heart of the existential tension underpinning intellectual property - the inevitable trade-off between risk and control. The very exclusivity that makes IP valuable also invites constant challenges to that control. Competitors relentlessly probe weaknesses to contest or usurp such prized knowledge assets. Mitigating risks across the IP lifecycle is thus an unending battle. Technical risks menace the research journey from ideas to working prototypes, threatening viability before IP even materializes. Legal risks then haunt IP protection processes, allowing imitators to erode control if enforceability fails.

In my experience many companies overestimate how valuable their IP is. Its only valuable if someone is willing to pay for it and the value of it is less than it would cost to be able to create something similar from scratch. You have to be able to understand where it fits in the market place and the opportunity it brings to others to be able to truly put a value on it. Don't just assume just because you have "something unique" that its valuable.

The most common mistake I see is that people think that IP value is a fixed number. This is a dangerous assumption, especially when IP values can fluctuate by orders of magnitude - up or down - depending on the context. I specialise in changing the context to maximise value.

As the valuation is somehow subjective, the evaluation exercise is also a negotiation tool, and depends on the layers of investors, the valuation might be underestimated or overestimated, so it’s good to have 2 views and then may assess come up with a closer value.

Build it fast and test it lots with your audience. You will fail a lot so keep the failures fast and cheap. Don't get caught up in the details too soon, a great idea stands out and can be nuanced over time. A detailed, highly polished, bad idea ...is an expensive bad idea.

IP valuation usually provides uncertain results with very high variability. It is however helpful - at least as a bracket number, an order of magnitude. Two things are of the highest importance to me: (1) Make the IP valuation in light of the intended purpose: -Buying IP ? then what’s important if the intended business and how the IP will help it). -IP has a securing element of the technologies you have developed ? Then make sure to understand what true level of proprietary benefits the IP brings. (2) Apply common sense and beware of esoteric/new/highly sophisticated methods (and of those who promote them). Simplicity is key.

Uno de los errores más comunes es pensar que el valor de la propiedad es estático cuando es totalmente dinámico. El valor depende de muchas variantes y es transversal.