Adapt IP Ventures LLC
Prior to a speaking engagement, the moderator of the panel advised me not to use the term ‘monetisation’ as some members of the audience placed a negative bias on the word. The assumption was that monetisation equated to patent litigation and patent ‘troll’-like activities. In this chapter, the term ‘monetisation’ is broadly characterised and defined as the creation of value from a patent portfolio by means of sales, licensing and financing based on the value of the patents, among other things, with compensation in forms ranging from upfront or deferred cash, to equity and business partnerships. The chapter also focuses on aspects of building an effective patent monetisation programme and addresses fundamental questions that all executives face.
Patent portfolios are valuable assets that can provide important leverage to supplement the revenue-generating activities of an organisation. However, developing programmes to realise value through the monetisation of patent assets can be challenging, time-consuming and bring uncertain outcomes. Building organisation strategies
around aligning goals, curating and optimising the patent portfolio and fairly valuing these assets are critical starting points for successfully managing patent portfolios.
Why monetise? How to define success
Establishing goals, defining performance metrics and gaining buy-in for monetisation efforts
Patent portfolio owners have a responsibility to actively assess the current and realistic value of their patent portfolio and to manage it accordingly. However, the approach to the process of considering a monetisation programme varies with each group. The big question of ‘why monetise’ can be challenging without understanding the goals of a patent owner’s desire to monetise. Obvious answers include the following response categories:
- generate cash-flow events;
- validate R&D, patent cost and innovation programmes;
- expand partnership opportunities in current and new markets; and
- protect innovation and product development ecosystems.
The effectiveness of the programme will be measured against a wide range of objectives and indicators. Building a team with both internal and external support aligned around common objective metrics and related compensation models improves the likelihood of meeting objectives. Further, defining success across a variety of metrics will add clarity to the programme.
Example performance metrics include:
time to monetisation events;
- expenses associated with managing monetisation programmes;
- purchase price or licence price (expressed as deal value, price per asset, royalty rate or other pricing metric);
- expansion into new markets; and
- cumulative value generated.
Defining success should also anticipate deal structure types, as the timing, expenses and value associated with deal types often varies. In the context of patent monetisation programmes, the decision for a patent owner to license rather than sell their patent portfolio is part proactive, part reactive. Patent portfolio owners may begin the monetisation discussion with a clear objective (ie, sell or license (with or without litigation)), and in many cases that outcome can be achieved. However, the market often returns different considerations compared to the originally intended outcome. Alignment between key decision-makers is paramount to see patent portfolio monetisation programmes through to successful resolution (ie, revenue generation, cost reduction or both). Further, alignment among the team must set realistic time expectations, as patent portfolio monetisation programmes often take years to fully execute.
Table 1.Guidance for deciding between building a sales or licensing campaign
If yes, consider
If no, consider
Will competitors, partners or investors perceive (or misperceive) monetisation activities in any way that could be considered harmful?
Holding and assessing
Holding and assessing
Concentration of patents from patent portfolio available to monetise
Does the portion of the patent portfolio selected for monetisation represent a majority or minority of the total patent portfolio?
Is the asking price for the acquisition reasonable relative to the potential target’s business case or would a licence at a discounted price meet the target’s objectives?
Is the transfer of the assets to a new buyer in order to save on paying maintenance fees and annuities a critical factor? Does the owner want to reduce ongoing monitoring and compliance obligations?
Patent portfolio development strategy
Does the patent portfolio have sufficient life, relative to the rate of change in relevant companies and products in appropriate geographic regions to support maximum value extraction? Can improvements be made before monetisation?
Selling or licensing
Selling or licensing
Diversified market opportunities/convergence
Can the patents be applied to multiple end markets or industries (eg, communications, image recognition/processing or sensor technologies) and, if so, would selling the selected patents to a company in one end market generate enough value for the assets to forego licensing opportunities in other unrelated markets?
Enterprise value considerations of holding asset base and license versus divest
Does the patent portfolio represent a significant corporate asset that would, if held and licensed rather than sold, add value to other aspects of the business?
Option of litigating
Does the company believe that aspects of the patent portfolio may be infringed by products currently on the market? Does the company need to retain the patents to preserve the option to litigate either offensively or defensively?
Additional non-patent portfolio value transfer
Does the company have non-patent assets or complimentary services that can be transferred as part of a transaction?
Selling or licensing
Selling or licensing
The framework and considerations in Table 1 should provide guidance for deciding between building a sales or a licensing campaign.
In addition to determining the desired deal structure outcomes, patent portfolio owners contemplating launching a monetisation programme must adequately assesses the target profiles of potential buyers and partners to best understand the risk and opportunity associated with monetisation programmes (Table 2 summaries various buyer and partner types). Aligning ideal target and outcome characteristics from the outset of a programme will better inform and align expectations and preparation activities before launching monetisation programmes.
Table 2. Buyer and partner types
Established industry leader
Value drivers for purchasers
Risk mitigation – are members/clients infringing the offered patents?
Actionable infringement by multiple industry players with demonstrable infringement and damages model.
Risk to patent owner
Value proposition validation considered by C-level executives and often board members.
Often utilises outside advisers or intermediaries, including patent aggregator organisations, to support transactions.
Assessment of potential infringement across multiple members to consider value-spreading opportunities and perceived risk.
Deep diligence on infringement, damages and validity with investment team and litigation team.
In general, limited but creative deal structures are more likely, including equity.
Funding tightly held, but deal structure generally consists of a single, upfront payments.
In general, single, upfront payments.
Significant capital available and success based on executing monetisation campaigns.
Table 3. Patent portfolio monetisation audit approaches
Remaining life and fees
Identify assets with fees that are due and which can either be divested or allowed to lapse.
Reduce cost – will the maintenance fee paid?
Identify groupings of similar categories of patents based on internal classifications and taxonomies.
Organise assets – how similar are clusters of patent assets?
Identify geographic coverage of existing patent portfolio.
Reduce costs in unnecessary markets or seek to generate revenue with new regional partners.
Prior licence renewal/expansion
Identify previously executed licensing contracts with a licence that has or will expire in the near term.
Generate revenue with existing or previous customers.
Identify companies and related clusters of assets that can be targeted against unlicensed companies.
Generate revenue with new customers.
An often cited response is that patent portfolio owners do not reasonably consider the buyer or licensees budget capacities. Acquisition offerings are typically overpriced relative to, and disconnected from an understanding of, annual patent budgets. If a small patent portfolio was being marketed for sale for $500,000, that may equate to approximately one third of their surprisingly low annual budget (despite the company consistently generating billions of dollars in revenue). This typical scenario would require an incredibly compelling business case to clear that percentage of the patent acquisition budget. Further, there is little chance that this potential acquirer would assert the patents against others. Therefore, licensing at a much lower price would be a deal that could be cleared through management to reduce risk.
What do you have?
Developing a monetisation-focused patent portfolio audit process
Companies presumably have processes in place both to:
- capture and protect new innovations from both internal development and via intake integration following a merger or acquisition transaction; and
- assess existing patent assets to affirm that those assets still meet the internal objectives originally set before capturing the innovations.
However, monetisation audits can provide additional perspectives to validate the business cases for keeping or paring the patent portfolio.
Tracking patent activities alone falls short of providing a full picture based on delays in publication of new filings. Patent portfolio monetisation audits should consider product analysis and development plans, competitive intelligence into patenting and product development activities, earlier stage company and investment activity and litigation activities, among others. They should also be considerate of various perspectives associated with managing the patent portfolio, ranging from the goals of managing costs to generating revenue (see Table 3).
What is it worth?
Assessing realistic value for patent portfolios
Pricing guidance: Valuing patents for monetisation programmes is a process made up of structured approaches and considerations; yet wildly varied outcomes often result. If a company decides to pursue a patent portfolio transaction, numerous valuation approaches factor into the ultimate pricing of a deal, including:
open-market comparable transactions;
- anticipated litigation costs; and
- the cost of filing inter partes reviews.
Open-market transactions: Deal transparency and pricing transparency are limited. There are many reasons for this, but certainly increased transparency would help to inform decision-makers about the attractiveness and validation of investing in or divesting patent portfolios.
One source for considering the potential outcome of a monetisation programme is to consider comparable, open-market transactions. Groups such as Allied Security Trust (AST) and RPX publish limited data related to their acquisition efforts. The business models of these companies are similar in that both groups organise structured acquisitions of rights to patent portfolios for their members or clients, allowing those that participate to effectively share the cost of transactions among multiple groups. AST manages an annual buying programme entitled IP3, with many leading technology companies participating. Fortunately, AST publishes aggregate data from their IP3 buying programme and RPX has historically published limited transactional data. Additionally, Richardson Oliver Insights (ROI) publishes a significant amount of data on the patent transaction marketplace. Historically, ROI has presented detailed data about offering prices and overall market value of transacting intellectual property but are now moving to collect and publish executed patent transaction data.
According to AST, 19 members contributed to the IP3 2018 buying programme, totaling $3 million spent. If those 19 contributed equally to the acquisition of the patent lots acquired, these companies would pay approximately $5,200 per patent family (or an average of approximately $158,000 per company). Buyers and sellers of intellectual property must find additional value drivers and winning solutions to support patent transactions or face continued stagnation in deal values.
Inter partes review costs and anticipated litigation costs: Potential purchases and/or licensees will consider the risks and costs associated with litigating the assets. If average inter partes review costs and litigation costs range from $100,000 to $700,000 and multiple millions respectively, those costs and the probabilities of related events can be calculated to determine expected valuation ranges. Risk probabilities should be monitored and adjusted as filing data, success and failure rates and damages figures are made available to appropriately reflect the current environment.
Identifying market opportunities: In order to meet (and hopefully exceed) objectives of the patent monetisation programme, patent owners and advisers should diligently and creatively seek out channels to extract meaningful value from their patent portfolio. The following considerations are useful to explore for identifying value creation opportunities:
- gaps created by M&A activity (especially when the acquisitions are vertical integrations, outside core technical or geographic markets or of early-stage companies where the patent portfolios of the acquired company have not been developed sufficiently);
- corporate venture capital investment activity outside of core product offerings (eg, Microsoft, Siemens and Porsche investing in additive manufacturing company Markforged, and Johnson and Johnson Innovation investing in additive manufacturing company Carbon);
- convergence of technologies and companies (eg, medical device companies incorporating wireless technology and automotive companies incorporating imaging systems);
- diffuse potential litigation risk (eg, transfer patents to companies that are being targeted by corporate licensors for cross-licensing); and
- patent prosecution blocks (ie, analysing 102/103 rejection analysis to identify companies that may have a need to build their patent portfolio to fill gaps).
The approaches that patent portfolio owners take to generate value from their IP investments are as diverse as the reasons why companies file for patents to begin with. Patent portfolio owners can creatively approach monetisation activities with a focus on forging new partnerships and developing new value streams with organisations which value patent portfolios as a strategic, competitive asset. Monetisation programmes should be built with careful consideration of market-based pricing, risk assessment and an eye towards additional value outside of the patent portfolios that can be conveyed.