A company’s intellectual property, or IP as it’s known, is arguably its most valuable asset. Intellectual property allows a company to build and strengthen its brand and gives it the freedom to operate.
The Business Development Bank of Canada and the Council of Canadian Innovators recently hosted an Intellectual Property Symposium in Toronto focused on how to leverage intellectual property and the value it brings to Canadian tech companies. The goal was to bring awareness to the topic and to get the industry thinking about how to use IP in order to be more competitive globally and leverage the intangibles to grow the business.
The intangible assets affiliated with IP are misunderstood and underutilized by many in the business world. Ocean Tomo’s Annual Study of Intangible Asset Market Value shows that 90 per cent of an S&P 500 company’s assets are considered intangible, however when companies seek financing, only the 10 per cent of tangible assets are taken into account in a bank’s evaluation model. The shift from tangibles to intangibles has been significant in the past few decades, further emphasizing the need to change the way we view intellectual property as an asset class.
The four main components of IP are trade secrets, trademarks, copyrights and patents.
- Trade Secret: Any confidential information that can benefit the company or value that can be derived from its secrecy. This could be anything from the formula for Coca-Cola to Google’s search algorithm.
- Trademark: A symbol or word that represents a brand or company. This could be a logo or slogan that is legally registered by a company.
- Copyright: The legal right to copy or reproduce the work. The owner of the copyright and anyone else authorized by the owner are the only ones who have the exclusive right to copy the work.
- Patent: A patent is a legally protected intellectual property that gives the owner the exclusive right to make, use and sell an invention for a specified amount of time (in Canada, 20 years from the date it was filed).
In terms of intellectual property, patents are the most tangible of the intangible assets. Patents are extremely useful for protecting new technology, products, or processes from being copied by other organizations.
Thousands of dollars and countless hours are spent obtaining a patent, which can be used offensively to generate licensing revenue or defensively to protect an idea. A patent creates shareholder value, so why is it not a factor when evaluating the value of a company? The thing is, patents are valued based on two factors: validity and enforcement. But who sets the value? For the patent to have value, there needs to be someone willing to acquire it. Therefore, the value is generally set by the acquirer and how much the market is willing to pay for it. An acquirer is willing to pay for a patent if:
- They are not able to create the technology or concept themselves.
- It provides time to market advantage, as the patent can block a competitor out of the market.
- It has already received initial market validation.
- It will add to their bottom line.
- It will protect them in the event of a lawsuit.
How is IP currently valued? There are three approaches: cost, market, and income-based.
The cost-based method focuses mainly on the costs incurred to develop the patent and the amount it would cost to replace it. This method quantifies all the expenses incurred in the process and is the easiest to calculate and apply as it is based on historical cost.
The market-based method considers similar market transactions as part of the valuation. A number of conditions must be met for this method to be effective, such as similarity in utility as well as the perception from within the market.
The income-based method uses future projected profits from selling products protected by the IP as part of the evaluation model. By calculating the present value of the projected profits the IP asset brings, a quantitative value can be determined.
All three approaches determine a monetary value of the asset, however no approach is entirely accurate or all-encompassing as there are many variables that should be considered.
Patents are barriers to entry. They are protective and dynamic as the patent can play many roles according to what the business needs. The roles range from simply giving the company the freedom to operate to a more high-level role of having significant influence on the industry adoption of new technology.
Imagine you are the CEO of a start-up. You don’t have physical inventory or equipment, and your cash is low because you are reinvesting your profits into developing patents and other intellectual property. From a current financing perspective, your company would not be worth much due to your lack of tangible assets. However, your intellectual property protects your technology and gives you a competitive advantage in the market. Potentially, this is an asset available to be leveraged, albeit one that requires a deeper analysis of the market the IP serves, the competitive landscape and demand for it, and who may already be infringing.
Although you may not be able to directly impact how banks underwrite loans, there are some things you can do to strengthen your IP portfolio. Ensure that your intellectual property is valid, useful, and protected. Don’t just file a patent in Canada. The United States, the European Union, Israel, and China are all important places to file a patent as well to ensure international protection. In your patent application, make sure you include all possible alternatives as to how your product could be used, and verify that your description is complete. All of these precautions help increase the strength of your patent, which in turn makes it more valuable.
According to the Canadian Intellectual Property Office, a company’s innovation is not automatically protected by the law. It is up to the company itself to maintain its secrecy and create a strategy to protect it, whether that be through a patent, trade secret or other form of intellectual property. By constantly monitoring and maintaining the strength of your intellectual property, you can help ensure the value is stable and consistent.
Rome wasn’t built in a day but changing the way we view intellectual property as an asset class is a crucial next step in the future of Canadian tech competitiveness and our systems’ ability to create wealth.
Banknotes is an occasional column offering financial advice to startups.
Communitech is a partner of Startup HERE Toronto. This article originally appeared on their site.