The what, why and how of IP valuation

 

Spending by U.S. universities on research and development grew $8 billion USD in 2022, reaching a total of $97.8 billion USD that year. This represents significant innovative progress and, therefore, rich opportunities to leverage the full worth of Intellectual Property (IP) generation. However, to understand how growing expenditures create returns on investment, universities and research institutions need to grasp the what, why and how of IP valuation.
 
Understanding appraisals: the what and why
 
IP valuation aims to create a projection of worth by measuring an intangible asset's benefits and risks. While these uncertainties vary depending on the context and may concern the likelihood of infringement, the benefits are often based on a few specific avenues for income generation, particularly in the case of patents.

In covering inventions, patents primarily contribute revenue for vertically integrated businesses by enabling the exclusive production and selling of new goods and services. This also lays the groundwork for indirect value creation through both outwardly and inwardly facing investments. Essentially, the more recognized an organization's IP becomes, the more chance it has to attract attention from potential partners.

As universities and research institutions are generally not concerned with manufacturing and distribution, patent licensing is their main IP capital driver. The process involves allowing other organizations to utilize proprietary technology while charging a set royalty. Similarly, universities can enhance IP value by cementing partnerships with other institutions to share research expenditures, commercialization efforts and associated risks.
 
When taken together, these opportunities can represent significant returns on investment, but in order to extract maximum benefit from solution-based as opposed to market-catering technologies, it is necessary to arrive at a sound estimation of their financial worth.
 
Valuing IP assets: the how
 
There are three main methods of IP valuation:
 
Income projection
With this calculation, an organization estimates how much income an IP asset could reasonably generate, adjusted to present-day value. This assumes future revenue is relatively stable and predictable, meaning market volatility and strategic shifts can impact its accuracy over time.

Cost of development
Here, an organization compares the cost of developing an IP asset against the expected investment needed to generate a similar or identical IP. This method only applies to easily reproducible IP, overlooking key factors like novelty, and fails to represent future earning potential.

Market analog
In applying this process, an organization finds an asset similar to the one being valued and locates this referent's purchase price under normal conditions. While this approach can be relatively straightforward, it represents challenges if no similar IP assets exist or if there have been no recent rights transfers.

Each method has strengths and weaknesses, so choosing the appropriate formulation for a given academic context is crucial. Contact the Dennemeyer team for help at every step of this vital process.