Valuing Patents Is More Difficult than Rocket Science?

That’s what David Wanetick, Managing Director of IncreMental Advantage thinks, and he is in a position to know. In a recent article repeated in Business Week, Mr. Wanetick warns valuation analysts against a propensity to overvalue companies just because they own patents or have patents pending.  His statistics are sobering and critical to the IP audits and strategic assessments organizations should be undergoing on a regular basis.

Let’s look at some of them.  Half of all patents have NO strategic value. Between 2 – 5% of patents generate any royalties. The average length of time for USPTO to make a decision on a patent is now 32 months (albeit pushed up dramatically by particular technologies).

Here’s the key statistic for valuators: the “ONLY way a patent’s validity can be proven is through litigation,” and while filing for a patent might cost the holder, say, $10,000, on the average, in legal fees, the cost of litigation is closer to $7M (where $25M or more is at stake). Whether or not the patent owner able and willing to protect the patent becomes a crucial question with respect to value. Add to this the fact that rate of success in defending patent validity is not overwhelmingly positive.

Valuators must research the likelihood of success, based on results to date, other deals and their experience in the industry. The other effect of all of this, of course, is to force “small” or risk-averse inventors to sell their inventions or monetize their licenses. Then too, IP buyers know well of these risks, and monetization rates are startlingly low.