22:27
Faizan
How does industry value a patent or a patent application? The short answer is it "depends". It depends on several factors such as what type of industry your invention falls into (ie: a new drug patent will be valued in a different manner than a new software patent). However, there are some fundamental valuation techniques that are used across all industries. The two most common are:
1. Estimated future income (also called discounted cash flow or "DCF")
2. Market comparables or "market comps"
Let's start with the income approach or DCF since it's a little more complicated. This valuation approach tries to estimate how much income your patent will generate over its life (usually 20 years). There are many things which go into this calculation such as;
-market size and growth rate (how many customers are there in years 1-20?)
-market penetration (how many of these customer will by your product?)
-market penetration curve (will more customer buy your product as your brand grows?)
-costs (how much does it cost you to produce your product?)
-taxes
-net income (essentially your profit per year)
-discount rate (this accounts for risk and the time value of money)
You can essentially use the categories above to build a spreadsheet that projects the amount of profit (net income) your invention will hopefully make over the life of your patent. You then use the discount rate which is a percentage such as 10% that accounts for risk and the time value of money (since a dollar earned 20 years from now is less valuable than a dollar earned today). You use all these numbers to calculate the estimated value of your invention in today's dollars. This is called the Net Present Value or NPV and investors love to talk about NPVs.
Don't worry! There is an easier method.
The market comparable or "market comp" method should be familiar to most of you since that's what is commonly used to price your house or a piece of properly. Just like you can value a house based on how much a similar house in the neighborhood sold for, you can do the exact same for a patent. When looking at a house you would have to account for things like; square footage, number of bedrooms, lot size, etc. When valuing a patent based on a comparable, you would have to look at the actual deal or transaction that took place. Was the deal for world-wide rights? How long was it for? Was it an exclusive deal or a non-exclusive deal?
1. Estimated future income (also called discounted cash flow or "DCF")
2. Market comparables or "market comps"
Let's start with the income approach or DCF since it's a little more complicated. This valuation approach tries to estimate how much income your patent will generate over its life (usually 20 years). There are many things which go into this calculation such as;
-market size and growth rate (how many customers are there in years 1-20?)
-market penetration (how many of these customer will by your product?)
-market penetration curve (will more customer buy your product as your brand grows?)
-costs (how much does it cost you to produce your product?)
-taxes
-net income (essentially your profit per year)
-discount rate (this accounts for risk and the time value of money)
You can essentially use the categories above to build a spreadsheet that projects the amount of profit (net income) your invention will hopefully make over the life of your patent. You then use the discount rate which is a percentage such as 10% that accounts for risk and the time value of money (since a dollar earned 20 years from now is less valuable than a dollar earned today). You use all these numbers to calculate the estimated value of your invention in today's dollars. This is called the Net Present Value or NPV and investors love to talk about NPVs.
Don't worry! There is an easier method.
The market comparable or "market comp" method should be familiar to most of you since that's what is commonly used to price your house or a piece of properly. Just like you can value a house based on how much a similar house in the neighborhood sold for, you can do the exact same for a patent. When looking at a house you would have to account for things like; square footage, number of bedrooms, lot size, etc. When valuing a patent based on a comparable, you would have to look at the actual deal or transaction that took place. Was the deal for world-wide rights? How long was it for? Was it an exclusive deal or a non-exclusive deal?
Posted in: business
