BVR is blogging last week’s Management Roundtable workshop on valuing early stage companies (led by Mike Pellegrino) in stages. The first report was on why we value IP. Today we cover the challenges IP managers and valuators face.
How does IP get its value? Most obvious, though not necessarily easiest to value, is when the owner of the IP uses it directly in their business or process, i.e., they exploit the IP directly. IP also provides the owner with opportunities for strategic alliances and joint ventures, cross license and co-development opportunities, and can be used defensively to deflect infringement lawsuits.
IP can generate a benefit stream through the use of out-licensing, and a favorable reallocation of resources through in-licensing.
IP can be used as collateral and IP can be sold. And ownership of but not using IP can still prevent a competitor from entering or advancing in a market.
Let’s look at the challenges. As comes as no surprise to those who have to do it (nor to those who attended the workshop), valuing IP can be extremely difficult. It’s misunderstood, even avoided, by many in the valuation profession. If you look at the International Glossary of Business Valuation Terms, quite telling are the missing terms: relief from royalty, intellectual property, early stage, etc. Mike Pellegrino contends successful valuators of IP have science or technical (engineering) backgrounds in addition to sound valuation methodologies training.
One of the approaches to valuation is the market method, where parallels are researched to discover reasonable proxies. IP presents a unique problem…its very uniqueness. By definition, there are no exact comparables.
IP is generally a standalone asset. Though it may be bundled with other assets, including other IP, it needs to be excavated and valued for its own merits, and it lacks the diversification (read "more risk") a business or a company portfolio enjoys.
As valuing IP in early stage organizations is a prospective endeavor, discount rates are not directly observable.
IP value is directly tied to an organization’s willingness and wherewithal to defend the IP rights. Competitors can attack these rights at any time, and any waivering on the part of the IP owner directly affects value.
Finally, in Mike’s summary list of challenges, is the proverbial elephant in the room. The "great idea" might have no or insufficient market acceptance. Valuators experienced in the IP world model success ratings by product type, by industry, by organization, by team, and by inventor to develop useful outcome probabilities.
Next time we’ll look more closely at Mike Pellegrino's view of different approaches to valuing IP.