Use intellectual property to secure debt and equity-based funding

Cars, phones, watches.

It is easy to put a value on physical objects when we can see their differences and compare their quality. But what about the intangible assets that make up the designs of every car, the brands on the back of watches, or the patents that fuel the smartphone wars?

The abstract nature of intellectual property (IP) presents a double challenge: It can be demanding to protect and can be equally complex to express its value. This activity can present a significant obstacle for companies seeking to use patents in their fundraising efforts, especially since many companies rely on forward-thinking concepts aided by technology. .

Recent years have seen increased financial support for companies seeking debt and equity financing fueled by new ideas in startups and tech companies that are at the forefront. From 2011 to 2020, 58% of venture capital went to startups with patents or patent applications. Deal sizes for patent startups during this same period increased 40% to 60% over those of nonpatent startups. When considering valuations during the patent boom, patent firms raise capital at higher valuations than non-patent-seeking firms. Looking only at angel round deals, the average annual median is 93% larger.

From human resources to car wash companies, technology is now so pervasive that putting a value on intangible assets seems out of reach. However, AI and other emerging technologies are adding gray areas to the world of patent financing, asking investors to reopen their minds and wallets.

Determining the value of the patent

When a company intends to use patents as collateral for debt, it is common practice to refer to the annual reports published by the Richardson Oliver Law Group. Richardson Oliver helps companies make IP decisions and provides average values ​​for a patent or patent family in the brokered market.

The abstract nature of intellectual property presents a double challenge: It can be difficult to protect and it can be difficult to convey its value.

Alternatively, if the goal is to sell a company to private equity, companies can use the fair market value method, which is also called relief from royalty. The relief-from-royalty number is based on a company’s patent portfolio and details the amount of money a company does not have to pay in patent royalties.

Another option is for companies to collaborate with reputable patent valuation firms when evaluating the data integrity of their patents. This option is especially true for companies in emerging fields that require more information or historical standards.

When choosing a patent valuation company, the quality of the data that the company can provide should be emphasized. Ideally, companies should look for companies that rely on publicly accessible data from legal proceedings or publicly available patent transactions. This data should be used to establish a reliable valuation of the patent portfolio tailored to the specific purpose at hand. Companies should exercise caution when encountering patent valuation groups that present overly optimistic valuations without a clear foundation in data.

Leave a comment