Lively debate about the relevance of IP valuation
Events in the intellectual property valuation community in 2023 spurred a debate at IAM about issues surrounding the methods that valuations firms use to place a dollar value on patents, trademarks and copyrights.
The conversation was sparked by former IAM Editor-in-Chief Joff Wild, and two readers wrote passionate responses in defence of the IP valuation profession. Martin Brassell, Co-founder and CEO of Inngot, pointed to the worth of intangible assets in situ and the need to deliver reliable, comparable and affordable valuations. Alec Sorensen, CEO of Tradespace, an AI-powered IP management platform, agrees with some of Wild’s gripes about IP valuation but counters that artificial intelligence is changing the field.
We have re-published Wild’s column and two reader counterpoints from our archives below, edited for brevity and clarity.
The problem with IP valuation
By Joff Wild
Originally published on 24 August 2023
There has been a spate of stories recently related to IP valuation. Not all of them positive.
In August 2023 on this platform Angela Morris reported on a set of significant job cuts at Aon IP Solutions that has seen the firm lay-off around one-third of its roster, including the entire valuation team for brands and trademarks. [Since then, Aon IP Solutions has broken up with two of its teams joining the Aon parent company and others planning to spin-off a separate IP valuation and analytics business.]
Earlier in the month, meanwhile, IAM senior reporter Olivia Rafferty wrote a piece looking at plans in India to develop IP financing in the country. But some previous attempts have foundered.
In 2016, for example, Rafferty noted: “Four years after Kingfisher Airlines went defunct, a number of its investors attempted to recover $1.4 billion by auctioning the company off. But the attempt failed after the lenders realised that the evaluation of its IP, including its trademarks and patents, had been conducted by a foreign company and was carried out completely incorrectly.”
Varying values
These stories followed news in late July 2023 of Elon Musk’s decision to rebrand Twitter as X. It was a move, Time reported, that “wiped out anywhere between $4 billion and $20 billion in value”.
Talking to World Trademark Review, IAM’s sister platform, Brand Finance CEO David Haigh commented: “Brand value can be migrated from one brand to another if very carefully managed. In Twitter’s case, such a rapid abandonment of the brand without a clear migration plan in place will almost certainly have destroyed value.”
The tale that these stories, and many similar ones, tell is that IP sometimes has immense value. If you can identify and capture it, you create significant opportunities. However, doing this is an incredibly difficult process around which there is very little agreement. Give experts the same piece of IP to evaluate and they will very often come up with entirely different estimations about how much it is worth.
That is a problem. It is one that the Financial Times drew attention to in a piece published last month. “If you want to know what Apple’s brand is worth, Brand Finance puts the figure at $298bn, Interbrand says $482bn, while Kantar BrandZ comes up with an $880bn valuation. That is a near-$600bn disagreement about one of the most scrutinised companies on the planet,” wrote Andrew Edgecliffe Johnson.
There is always going to be scope to tell brand owners how much their IP might be worth to enable them to make decisions about protecting their trademarks from counterfeiters and piggy-backers. Valuations will also help with setting licensing rates and in pricing acquisitions.
Beyond that, though, you do have to wonder how it is possible to build the kind of scalable business based on trademark valuation that Aon IP may once have been contemplating. Put it this way, would you lend significant amounts of money on the back of value assessments which are so subjective that smart people can come up with almost diametrically opposed conclusions?
IP is different
But it’s not just that valuations can vary so widely. Trademarks are incredibly important to those that own and build brands around them but by their very nature will tend to be far less so to anyone else.
Take the Apple trademark as an example. In the hands of the company’s marketing team, on the back of Steve Jobs’ legacy and years of investment in building a brand with a defined set of values that has created a very loyal consumer base, the ability to prevent anyone else using the Apple name is clearly a major corporate asset. That makes the trademark incredibly valuable to its current owner. Put it in the hands of another party, though, and that value immediately crashes – not to zero but by a huge amount.
It is slightly different with patents. Although context and ownership can also be very important, they are not necessarily determinative in creating value. Holding the right to exclude others from practising an invention provides options. You do not have to do it yourself. Instead, you can license others to do so and generate a very healthy income as a result. That makes patents a far more realistic collateralisation option than trademarks.
But, of course, it is not as easy as that. While trademarks will always tend to have some value to their owners because they identify products and companies, most patents are never deployed and cost a lot more to secure and maintain than they generate in income – directly or indirectly.
There is a deep-seated skill to identifying the relatively low number of patents that have standalone royalty-generating potential. It is a skill that very few possess and because those individuals that do have it make a very good living as a result, understandably it is not one they are inclined to share. This makes patent valuation extremely opaque.
Then there are copyrights. These are far less problematic because they usually have directly applicable revenue streams that can be measured over sustained periods of time. Either a copyright-protected song, artwork or film sells, or it doesn’t. Most don’t. You can follow the money. This easy-to-absorb transparency creates a level of certainty that does not exist with either patent or trademark valuation.
Hopefully wrong
So, we are left with what seems to be an inescapable conclusion. Most IP is not worth very much. A limited amount is worth a lot to those who own it. Then there is that very select amount that does have real standalone value. But finding it is extremely tough.
Put all that together and scope exists to develop businesses that offer valuation and monetisation services based on IP. However, as things stand, there is no realistic path to moving these beyond what is essentially a cottage industry.
Because there is no transparent, objective means to value IP – and because if there were it would be found that IP usually has no external worth – the idea that there is a significant opportunity for great swathes of IP owners, particularly SMEs, to use their assets to go to market to raise cash is for the fairies. It is a waste of everyone’s time to think otherwise.
I would really like to be wrong about this. Please tell me that I am.
It’s time to make consideration of IP value in lending mainstream
By Martin Brassell
Originally published on 02 September 2023
Joff Wild’s comment piece ‘The problem with IP valuation’ questions whether SMEs will ever be able to use their IP and other intangible assets to raise cash, concluding: “I would really like to be wrong about this. Please tell me that I am.”
I’m very happy to oblige and explain, as far as space allows, why I know this to be the case.
For context, I have spent much of the last 10 years exploring what has and hasn’t worked in all the major markets that have sought to leverage the value of intangible assets for lending. During that time, I have written and co-authored several major reports on IP finance and valuation challenges. So, I can assure you my perspective on this is well-evidenced.
When you say, “most IP is not worth very much”, I assume your test relates to standalone value in isolation of a business. I agree this is a difficult test for IP to pass, because its value lies in the fact that it is not a traded commodity – it is created by institutions and enterprises to do something specific (or stop others doing it).
This is essentially a supply-side constraint. Good IP is too important for most businesses to sell, because it drives the value they achieve at exit and on the stock market – and this is why there are not more recognised and transparent markets for it. If you want to confirm that IP drives business value, M&A is where you need to look.
This brings me on to the main point of my argument.
Collateral strengths
One of the fundamental challenges for the knowledge economy is to recognise and leverage the value IP creates where it is, rather than lambast or mistrust it for not being easy to move between businesses.
In fact, IP makes excellent collateral precisely because it has real value to the enterprise, and hence it matters to those that run and invest in it. I note that, when the British Business Bank and UK IPO investigated the connection between SME lending and IP a few years ago, they found that where IP is present, propensity to default reduces by 40%, and losses reduce by 50%. That’s much more than a marginal improvement.
When businesses become distressed, the usual route is not for a lender to asset-strip (reputationally difficult, with good reason) but to start with restructure and refinance.
Of course, that doesn’t always prove to be possible, and it is vital when considering IP as loan security that consideration is given to whether the specific assets available could have value to other people on their own. We are helped in this by many recent examples where the only assets demonstrating any enduring value at insolvency have been intangibles.
Take Hunter Boots, for example: early in 2023 after the footwear company got into difficulty, Authentic Brands Group snapped up Hunter’s IP for an estimated £100 million ($125 million).
Scalability
Your “cottage industry” point could be interpreted in several ways. In short, I don’t disagree that valuation for IP-based lending is specialist, but there is no reason why it cannot be delivered at scale – as it must be, to overcome the knowledge economy challenge I describe earlier.
As an experienced IP valuer, I know that different contexts and transactions require different approaches, which should be drawn from the recognised methods set out by the International Valuation Standards Council. However, having worked in financial services for many years, I also know that standardisation is vital for consistent decision making.
In the lending context it is vital to deliver reliable, comparable and affordable valuations. The more IP we value and lend against, the more accurate we will become.
Since covid-19, which has made intangible value so much more obvious, we believe we’ve seen a shift in attitude amongst mainstream commercial lenders. Some have already launched products - like HSBC’s Growth Lending proposition last summer, which has already backed a number of clients, including nanomaterials company P2i, femtech brand Elvie and cyber-security company Glasswall, using their IP and intangibles as collateral. I can assure you there are more to follow.
The value of the published deals HSBC is supporting with this product is between £5million and £15million. We believe the ‘sweet spot’ for IP-based finance, where lender opportunity and borrower need have the best overlap, extends below this (as low as £250,000).
Lending at volume at these levels can still be transformative for business growth but enables loan portfolios to be constructed that represent largely non-correlated risk.
Targeting
Apart from people assuming IP finance is all about patents (it emphatically is not), the other common misconception I encounter is that this market is about start-ups. It’s not – at least, not if we are talking about lending.
Start-ups often need equity to build the IP that could be collateral. Even where their IP is more advanced, they don’t have the market traction to prove that there’s real cash flows associated with their IP use, and they cannot service debt (yet). So, they remain equity risk.
Rather, the opportunity is to create ways to leverage the investment that growth companies have made in their IP to allow them to free up some of the value they have created to help them grow further and faster.
To me, the widely differing views organisations can reach about what a brand is worth to a global multinational are of little-to-no interest or relevance. Who really cares how many zeroes you put on the end of the Apple brand value? Why read anything into the Kingfisher Airlines debacle?
Our focus should be on the real opportunity: to make consideration of IP value in lending mainstream, by enabling companies to explain and express the value of assets they cannot show in their statutory financials in a clear and consistent way that banks can take into account in their lending and credit processes.
AI valuation will create higher-quality patent portfolios
By Alec Sorensen
Originally published on 03 September 2023
In his IAM article on 24 August 2023, IAM former editor-in-chief Joff Wild took aim at the notion that a large number of corporate IP portfolios have significant external commercial worth. In Joff’s view, finding pockets of IP with standalone value is “extremely rare”, and to think otherwise “is a waste of everyone’s time”.
As someone who built a career, and now a company, around helping large IP owners unlock the value of their IP, you might think I would take issue with this characterisation. In fact, I couldn’t agree more – at least as it relates to the market today.
However, Joff’s claims about IP value and the intrinsic unscalability of IP valuation are too often used by industry stalwarts to support a more troublesome position. They believe it is inevitable that most IP developed by companies has little external value. They cite the same ground truths that appear in Joff’s article – particularly the fact that valuation is an inherently imprecise art, the practice of which is limited to a small cabal of skilled practitioners.
This is where I disagree.
The developments I’ve seen over the last year while engaging with Fortune 500 IP departments have painted a markedly different vision – one that I am increasingly hearing from forward-looking IP leaders across various industries.
They believe we are at the beginning of a fundamental shift in IP development and valuation that will see almost all corporate IP has meaningful standalone value. This shift will be driven by pressure from the boardroom and enabled by powerful, IP-specific AI models.
Experienced valuation professionals will also play a vital role in this transition, not as the cottage industry that Joff referred to, but as critical parts of a broader infrastructure, empowered by AI to scale their expertise over a massive volume of IP.
IP leaders often ask me how their teams benefit from a portfolio with standalone value if their board prevents them from monetising it. But what we’re seeing today from companies like Sony is that high-value IP portfolios can unlock valuable corporate partnerships, provide access to funding streams, and enable (or defend against) M&A.
What’s more, companies that incorporate commercialisation potential into their IP evaluation processes generally develop higher-quality defensive portfolios.
Catalysts for change
IP has long been seen as a corporate cost centre, however, economic headwinds and the complexity of IP ecosystems for emerging technology have forced executives to think about IP as an asset, not just a cost. In an acknowledgement of this shift, the Licensing Executives Society (LES) recently released a set of standards backed by companies like Ericsson, GE, Merck and Raytheon that outline the role of IP in the boardroom. There is significant interest at the highest levels of corporate leadership to pursue IP portfolios with standalone value. But that still doesn’t address the entrenched challenges that have, to date, prevented the fulfillment of this vision. Joff captures the current state of affairs when he writes:
“There is a deep-seated skill to identifying…[patents] that have standalone royalty-generating potential. It is a skill that very few possess and because those individuals that do have it make a very good living as a result, understandably it is not one they are inclined to share.”
This is where AI comes in. Powerful, domain-specific large language models (LLMs) can be trained to approach a human level of understanding in IP matters and can automate the most time-intensive IP evaluation tasks.
By tuning LLMs on enormous amounts of data – not just public patent data but prior art searches, portfolio evaluations, historic licensing and transactions, it is possible to build a model with enough command of the IP vernacular to perform first-level review for valuation practitioners. Implemented correctly, these models empower corporate IP teams to undertake more rigorous IP evaluation and enable Joff’s exclusive club of valuation experts to massively scale their expertise.
All your IP can be crown jewels
Achieving the vision of universally high-value portfolios requires a fundamental shift in how organisations develop and evaluate new IP.
Deciding what to file is time consuming, especially for large companies that receive thousands of invention disclosures. Faced with this deluge, IP departments use patentability as the key criterion for filing, which results in IP rights with little bearing on the owner’s core business.
Most heads of IP recognise this but lack the bandwidth to answer more important questions about a disclosure’s alignment with a strategic roadmap, its use cases, the opportunity size, and the licensing or commercialisation potential.
Armed with systems that leverage AI to support this early-stage analysis, IP departments can apply these criteria at scale to make better decisions about what to file. Corporate IP professionals can work with AI-enabled practitioners to apply deeper valuation expertise across every new disclosure so that every piece of IP filed could be a crown jewel.
University tech transfer (T2) offices have been early to adopt these AI-powered approaches to evaluating new disclosures and improving IP quality. Even more so than corporate IP departments, T2 offices operate with severe bandwidth constraints and face acute IP quality issues.
A brave new world
Despite the scepticism about IP value shared by Joff and many other experienced IP practitioners, we are on the brink of a profound transformation that could reshape how IP owners think about portfolio value.
AI has always had the potential to disrupt the IP space, but the emergence of hyper-scaled, domain-specific models paired with experts will finally drive this disruption. A fundamental shift towards higher-value portfolios will unlock new approaches to creating value for the business.