Economists like to use analogies since they often find themselves explaining concepts that might be a bit over the head of the average non-economist. They also like to use analogies that involve real estate, since that is a high-value economic transaction that many civilians are familiar with. This was the case last week at the “Best Practices in Patent Monetization” conference when Dr. Ryan Sullivan, president of Quant Economics, Inc., gave a lecture on the best approaches to patent valuation.
He outlined three different approaches to valuation of assets. The first is the “cost approach,” where you form your valuation based on the costs that go into creating something. With a house, it would be lumber and real estate. You consider historical costs and reproduction or replacement costs. In terms of patents, this valuation would be based on the cost to develop the invention or by comparing it to an invention of equal quality. While this strategy works well for a home, it is not best suited to valuing a patent, since there is far more involved in the creation of a patented technology than just the materials that go into it.
The second method is called the “income approach.” In real estate terms, this means using your home as an asset, say, renting it out to tenants. It takes into account factors like future income streams, timing and duration of that income and associated risks. In terms of patents, this equates to licensing deals, where the valuation is dependent on the economic benefit derived from ongoing utilization.
Finally, Sullivan discussed the market approach. This, of course, is the equivalent of putting your house up for sale. Factors to consider are the nature of the transaction, the nature of the assets and the relationship of the entities involved in the transaction. You can also look at other, similar transactions to help inform the value of the asset. This market-based approach is foundational to companies like Ocean Tomo and the IPXI exchange.
For more news from the conference, check out the following: