A fourth week in the life – Cracking the IP Value Code

by Andrew Watson on 8 November 2009

(thanks Richard Boulton)

Phew. What a long long week. In fact October end to end has been hard work every step of the way. I’m not by any means saying that I’m pleased to see the back of it, but it’s been full of lots of ups and quite a few downs. I suppose though that I’ve learned through the years that in trying out something new the magic is to look for the upward trend, whilst treating the little downs as correction points to warn against getting ahead of yourself or becoming arrogant.

This week was full on closing out an investment round for one of our clients. We went from carrying out a relatively easy piece of diligence to managing an ownership issue, correcting old documents that did not reflect the parties’ original intentions. And, as usual with ownership issues, what looked relatively simple to fix took a little life all of its own, and close on two full weeks of work.

I spent some time on Monday with David Jones of Exponent IP chewing over the development of the IP market and how boutique organizations that share the same ethos (quality, professionalism, can do mentality, longevity) can help to grow the market by working together. I like David and Ben as they share these principles and are easy people to work with. This catalysing has become a bit of a theme for us at ipVA, particularly as we know that there are so many pretenders out there who talk without having gone out and done it.

This must be one of the challenges of a growing market, picking out the good from the bad. So I’ll end this week’s post as a call to fellow pioneers and to raise a theme that David and I talked about as one of the key steps in developing this market. That is speaking with a common language. We think that without this, it becomes very hard to communicate and understand even each other. Never mind to communicate with the 95% of the market who don’t get IP.

I was explaining to David that, in our view, the IP world fixates itself on those imposters of value, patents. Just because they are publicly viewable and every second advisory firm has a way of rating them, is this really an indicator of corporate value? Is it heck! If one understands where patents typically come from or rather don’t come from, it is bizarre to badge them as any indication of a corporate worth or surefire predictor of value.

We see all the time that the smartest engineers devalue their own ideas, patenting things that should be better maintained as trade secrets, and retaining as know how little implementation nuggets that would be great patents. We see investor pressure to file greater patent numbers driving a behaviour of filing everything whether good or bad. We see large corporates binging (thank you Craig Opperman) on filing huge patent numbers to help cross licensing discussions, whilst some cultures (France is good at this) spurn the system as creating fraudulent indications of the worth of inventions. In short, one cannot rely on the vagaries of human experience and behaviour towards patenting as giving a reliable result. Sorry IV, you will no doubt capture huge amounts of license revenues, but will you really carry the true debate forward? Will you crack the IP value code and start to explain what drives value in the best companies?

As an alternative, to work out the true comparative worth of companies, we need to work hard at obtaining this common language. And, for us at ipVA, this means following the accountants’ language. Intangibles is the word. This message in a bottle is to those out there who follow that same principle. Ignore the imposters that are patents as nothing more than one way that inventions can be properly protected. Not irrelevant, but just because they’re easy to see does not make them any more important that any other part of the intangibles tree. The accountants have actually given us a pretty good guide in the categories of IP assets able to be valued in IFRS3. Examples of intangible assets to be separately recognised and categorised within the purchase cost are set out in the regulations and include:

Marketing related – intangible assets are typically those assets associated with the market or promotion of a company’s products or services (trademarks, brands, trade names, trade dress, internet domain names, newspaper mastheads, non-compete agreements).

Customer related – intangible assets are assets, which are utilised in the development, procurement, management and maintenance of a company’s customers (customer lists, order or production backlog, customer contracts and related relationships, non-contractual customer relationships).

Artistic related – intangible assets relate to artistic products or services which are protected by a contractual or legal right, such as copyrights (plays, operas, ballet, books, magazines, newspapers, musical works, pictures, photographs, videos, films, television programmes).

Contract based – intangible assets represent the value of rights which arise from contractual arrangements (licensing, royalty and standstill agreements, contracts for advertising, construction, management, service or supply, lease agreements, construction permits, franchise agreements, operating and broadcasting rights, use rights such as drilling, water, air, mineral, timber cutting and route authorities, servicing contracts, employment contracts).

Technology based – intangible assets represent the value of technological innovation or advancements, and can be protected through legal or contractual rights (patented technology, computer software, unpatented technology, databases, trade secrets).

As comprehensive as could be….don’t you think? Does anyone want to join in the debate?

{ 3 comments… read them below or add one }

David Jones 11.11.09 at 10:40 am

Andrew, I hope it’s not just you and I having this discussion! I sympathise with your argument. The ‘problem’ with patents is that they are the most tangible intangible (if you see what I mean), and in a business world that has little understanding (or even inclination to understand) of the full impact of intangibles (taking your 5 categories of intangible as an eg), patents become a convenient placeholder for all that is ‘intangible’. Added to this, for those companies active in transacting patents, there is the fact that patent AAA sold for amount XXX, and then patent BBB sold for YYY, and so on, and so on. This – the ready turning of patents into cash – of course highlights their ‘tangibility’ even further, and possibly at the expense of the other intangibles in their business. Your point about France is very interesting, and leads to a whole different discussion about how the civil codes/moral rights systems have traditionally dealt with patents and whether that is perhaps preferable to what we have. In the context of a more holistic view of intangibles (like the one you outline), I suspect it undoubtedly is. On the issue of Trade Secrets v Patents: as Coca-Cola will testify, some things (eg, recipes) truly lend themselves to being kept as a Trade Secret whilst others (eg, demonstrable mechanical processes) truly do not. Though, again, I suspect that the balance here is changing as technology increasingly blurs the distinction.

Andrew Watson 11.11.09 at 12:45 pm

I don’t think its just you and I. I know there are economists, consultancy firms, analysts and others who believe that there is a connection between IP/intangibles done well and business performance. And the common link to all the conversations we have is that the early market of trading and enforcing patents tells us one thing, but is 1-D in its thinking. I do agree that patents are the tangible-intangible and easy to see (therefore, easy to assess, easy to rate and rank, easy to use NLP or other tools to search etc etc). An evolution from 1-D would be a start at least.

I picked up an interesting insight from a head of IP at a Fortune 500 company who believes that patent numbers are likely to fall quickly over the next few years, with more focus on quality and far fewer being granted. I think this plays into both of our hands as advisory firms. As IV’s slow down in buying has impacted on the market, patent quality is critical to broking, and as patents maybe move away from being the weapon of only choice, businesses need to think way more creatively about what and how to protect their key innovations.

A space worth watching.

David Jones 11.11.09 at 4:42 pm

I broadly agree. I see patents as currently being mid-way through a state of high flux which will, at its conclusion, see them re-classified or re-appraised altogether as something other than simple private property rights. The pressures on patents and patenting are simply too varied and too important to allow patents to merely stay as they are, or even to be left to develop incrementally. And if a decisive change in the character of patents coincides with the maturing of the theory of ‘intangibles’ becoming (commercial) orthodoxy, so much the better: we have the box seats!

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