Patent Analysis

Portfolio Valuation: Forming a Rational Assessment Structure

Patent Valuation Analysis Firm

Did you ever consider what a patent valuation analysis firm means when it talks about value? An economist would tell you that a value is a structure based on normative expectations – value is determined by its future economic benefit (discounted to an NPV). However, valuation needs to be made in a business context. There is no such thing as objective value, only subjective value, which is based on the relationship between the valuer and the item under valuation. Objectified value further “immunizes” the valuation process in which efforts are made to remove the biases of the valuer or third parties.


While cost is focused on production inputs, value is focused on preferences for fulfilling subjective needs. Price, which focuses on negotiation and transaction, then serves as a proxy for value – a monetary indicator that represents an exchange value of an asset. In such a context, valuation is clearly understood as a subjective process, rather than just turning the gears in motion. This is because experience frames expectation. Valuation is ultimately the practice of comparison and decision (patent search and patent analysis in the patent realm) under conditions of uncertainty and risk in the context of an IP strategy & management framework.


When portfolio valuation is performed subjectively by one or more of the concerned parties, evaluator bias is unavoidable. Besides classical cognitive biases, substantial endowment effects have been shown (see for example Buccafusco & Sprigman in the Cornell Law Review) to be present in IP transactions in which pricing anomalies “arise from a combination of optimism bias and regret aversion” which lead to “inefficiencies within the rational choice framework.”


In forming a rational assessment structure to patent portfolio valuation, it is critical to define what constitutes IP value on a conceptual level. At such a level, IP value is the merging of a value-potential assessment, an exploitation-scheme assessment, and a complementary-asset assessment – the basis for the IP strategy & management approach. As an example, for a pharmaceutical company with patent rights, one can envision the value potential being exclusivity, the business model being a marketable product, and the complementary asset being production facilities. While such a simplistic illustration serves its purpose, uncertainty and risk are not represented at all.


With the perspective of the “rational actor” model, the valuation procedure is still a case-dependent process. Detailing the scope of such a process here is impractical. However, the basic methodology involves choosing either a cost-based, market-based, income-based, or option-based approach. The choice of which approach to employ is largely determined by the goals and concerns of the party commissioning the valuation. Each model has its own variants (such as cost avoidance, relief from royalty, and real options) which attempt to ameliorate conditions specific to the assessment at hand.


Inherent to the process is assessing uncertainty and risk. The models mentioned above rely on the availability of accurate information for cash-flow projections in assigning appropriate discount rates. In a mature market, such data is more readily available than in emerging markets. Speculation and litigious environments complicate the process of obtain meaningful valuations with regard to intangible assets.


Such uncertainty can be mitigated through legal opinions and other due diligence, while risk assessment can be used to qualify and quantify risks. In general, patent valuations performed by a typical patent valuation analysis firm are conducted for the most part without factoring in legal risks such as enforceability. In his article in Research Management Review on “An Overview of Intellectual Property and Intangible Asset Valuation Models,” Jeffrey Matsuura has the following to say on the matter.


One of the apparent weaknesses of the most commonly used valuation models is the failure to incorporate legal rights into their calculations. Creation, maintenance, and enforcement of legal rights of ownership and control for intangible assets form a critical component of the total economic value of those assets. The failure to account for the value of those rights undermines the accuracy and the utility of the overall asset valuation process. This paper advocates a concerted effort by professionals involved in intellectual property law and intangible asset development and management to integrate more effectively the legal aspects of intangible asset creation, protection, and transfer into asset valuation models. Absent such integration, all intangible asset valuation models will continue to be incomplete.


Factoring in such legal aspects (including potential court awards for damages) can create a strong assessment structure in that while concerned parties may still disagree about the inputs and discount rates selected in a given valuation, the assessment framework remains intact. With entities that rely on litigation-based, royalty-seeking business models in the IP arena on the rise, such approaches will become the norm not the exception.


FlashPoint IP, a leading patent valuation analysis firm, endeavors in this regard to provide an enlightened perspective for its clients to move forward with business ventures with the assurance of being well-informed. FPIP strives to implement these diverse issues into a unified framework, using patent search and patent analysis in a business context. Our engagement managers are adept at synthesizing the many facets needed to create a winning formula for your IP. We can create a valuation model and assessment that is right for your venture. Contact us to discuss your options regarding IP strategy & management, and how best to advance your business interests.