Think carefully about a company’s IP before you invest

Graphic created by Multi-Innovation.

What if a business opportunity you invest in gives you dominance in a marketplace as if you had a monopoly? With the right IP portfolio, you can get closer to that reality!

How many investors know that most patents do almost nothing to protect a company’s value? Shocking, isn’t it? The good news is with the right IP, a company’s value can shift exponentially.

I am an inventor with over 40 patents and hundreds of published provisionals. I also have several decades of experience in making ideas profitable for startups and for Fortune 100 companies. My experiences have shown me that patents can exponentially shift the value of a business — both positively and negatively. With the right set of patents, a company can dominate the competition and see almost infinite opportunity. Without those patents, a company can quickly lose its footing and see exponential losses in its value.

Let’s explore how, as an investor, you can be sure the companies you select are on the winning side of that balance. Let’s explore three big ideas:

  1. IP is a big business and time is NOT on your side.
  2. Patents often fail to protect the value of a business.
  3. The Game Changer protects the opportunity, not just your technology.
IP is big business and time is NOT on your side.

Fundamentally, IP is about money. Between acquisitions, litigation, and licensing, billions of dollars flow each year in the US economy alone. Ninety percent of patent lawsuits do not go to trial but are settled outside the courts for licenses. Of the 10% left in the courts, only a few hundred are litigated and about $5 billion is awarded every year. You do the numbers. This is a big business.

How does this affect investors and the world of M&A? Investors care deeply about the business potential of the IP they are purchasing, and the risks they are undertaking of being sued for IP infringement or theft. They spend lots of time looking at the business potential — the marketplace, the potential customer segments, the competition, the supply chain and pricing, and the expense picture. But how many investors pay attention to whether or not the patents associated with their investments actually serve to mitigate risk, protect the business value, and even boost its value? How do they know?

Let’s look at what the “big boys” like Google and Apple are doing. When they look at a potential acquisition target, they consider the revenue potential, costs, competition, etc. But they also look closely at the quality of the acquisition prospect’s IP. They’ll likely value the potential acquisition in one of three categories:

  1. Offer pennies: For companies who have just copy protected their technology, it is often very easy to just create a new version of what the acquisition target is doing without infringing on their patents. An acquirer’s perspective will be, “if we can buy this company more cheaply than we can make this ourselves, let’s explore it, but not at a high price — the risk of infringement costs is very low.”
  2. Offer some real money: If the patents are strong enough to pose a litigation threat, the offer price will likely go up considerably, if the rest of the indicators look strong. In this case, the acquiring company will want to purchase the company to mitigate its own risks of high lawsuit settlements and to put itself in a position to go after competitors, if needed. While litigation is never desirable, licensing agreements and settlements represent big money for the owner of the IP, over and above whatever the ROI is for the product itself.
  3. Pursue aggressively: When the IP has been developed to truly protect the business opportunity, people notice. A strong acquisition team will see that beyond the the company’s profit potential through strong sales and efficient operations, their IP creates a strong barrier to entry because competing in this space will almost certainly involve the burden of licensing fees or risk infringement costs.

Knowing where a target company’s IP fits in this spectrum should be central to your investment evaluation process. And time is not on your side…if a business you are considering is solving a real problem, it is probably not alone. In this fiercely competitive market, you need to make quick decisions or other investors will snap up the goldmines.

Patents often fail to protect the value of a business.
Are you confident in knowing how to evaluate the value of a company’s IP? The fact is, patents often fail to protect the value of a business. In my view, IP value depends on how hard it is to circumvent. If it can be circumvented for under $20 million dollars and/or in less than 2 years, the value of this IP is very low. Just pennies. The only reason to invest in this IP is to use it as a placeholder until you can develop something that is better protected.

As you move toward IP that can be circumvented for $20–200 million and/or in less than 5 years, you’re starting to look at some real value. Here, the value of acquiring the IP includes the value of the litigation and licensing opportunities — and risks — you will inherit if you own the IP.

The goldmine is when an innovation has significant barriers to circumvention. It would cost over $200 million to circumvent, would take over 5 years, is protected by legislation, and/or has been established as a standard. In this case, you can be a dominant player in the market and reap huge rewards from the investment.

Now, take a moment and ask yourself: Do I know how easy it is to circumvent the IP that I own? Do I know the value of the IP I am considering purchasing? The vast majority of patents are very easy to circumvent. Most would land in the “pennies” category, while very few could be deemed a “goldmine”. Be sure you know what you are entering into.

The Game Changer protects the opportunity, NOT the technology.
What if a business opportunity you invest in gives you dominance in a marketplace as if you had a monopoly? With the right IP portfolio, you can get closer to that reality!

The key — the real Game Changer is to focus on the value proposition of the business opportunity, and protect what is common to any solution that could emerge in that space. That’s where the REAL value lies. Take the time to truly understand the use case your target investment is really solving, and make sure that the patent portfolio protects the overall use case, not just specific technology.

That’s right! Don’t worry about protecting specific technologies. Worry about protecting the business opportunity first. Once you have done this, you’ll have all the time in the world to develop and market the specific technologies.