Patent protection is an investment in technology. Like other investments, it can be expensive and uncertain. But for a technology startup, patent protection can also yield an outsized return by attracting investors, increasing valuation, and generating royalty income. A patent portfolio can also be used as collateral or sold at a profit.
A patent portfolio’s value derives from the ability to use it as a barrier that stops competitors from making, using, importing, or selling similar products or providing similar services. The ability to stop others from reaching a particular market is especially relevant for technology industries and business models, where the only other barriers to entry are often just time and money.
Here are a few ways to realize the value provided by a well-developed patent portfolio:
- Investors look for patent protection. Experienced investors usually look for patent protection when conducting due diligence. Patent protection helps investors preserve their investment by establishing and maintaining a barrier to competition that can enhance the value of your technology in the market.
- Patent protection should increase your valuation. If erected properly, the barrier provided by patent protection should increase the value of your startup by enabling you to control access to the market(s) for your technology. All other things being equal, a startup with patent protection that provides tight control of access to a large market should have a larger valuation than a startup without meaningful patent protection. A future buyer will typically consider the strength of your patent portfolio in determining the value of your business.
- Patent licensing may generate royalty income. If your patents cover a product or process that you don’t plan to sell yourself, you may be able to license your patents, on an exclusive or non-exclusive basis. Under the license, you would receive a royalty in return for permission to make, use, or sell the products or processes covered by your patents. You can structure the license fee as a one-time payment, a recurring payment equal to a percentage of gross sales of the product(s), process(es), and service(s) covered by the patent(s) under license, an up-front payment against future sales, etc. A patent license can bring in thousands to millions of dollars per year, depending on the technology, the industry, and the strength of the patents being licensed. For instance, Kodak made about $3 billion licensing its intellectual property between 2003 and 2011—including almost $1 billion from licensing a pair of patents to LG and to Samsung.
- Patents can be sold. Patents are assets that can be sold, often at a profit. In 2011, Nortel sold 6,000 patents to Apple and Microsoft for $4.5 billion, or about $750,000 per patent—far more than the cost per patent. In 2014, Google’s purchase of Motorola included $5.5 billion for 17,000 patents, or about $323,000 per patent. While few companies have patent portfolios of such magnitude, even sales of single patents can provide meaningful proceeds.
- Patents can be used as collateral. Using patents as collateral is a convenient way to raise funds without diluting ownership. This is especially useful for start-ups, which are often short on more traditional forms of collateral. In fact, the recent uptick in patent sales seems to have spurred the use of patents as collateral in venture lending.
- Patents can be cross-licensed. Occasionally, your patent portfolio may cover something someone else wants to make, use, import, or sell, and they may have a patent portfolio that covers something that you want to make, use, import, or sell. That other party may be a competitor, a supplier, a customer, or someone operating in a tangential technology area. In this situation, you can trade access to your patent portfolio for access to their patent portfolio with a cross-license.
- Patents can be enforced. If your patent is being infringed, you can enforce it by filing suit in federal court. Patent litigation tends to be very expensive and last for years, so enforcement usually does not makes sense for most start-ups. Nevertheless, a patent portfolio’s value derives directly from the ability to enforce it. The most valuable patent portfolios cover profitable markets for technology, are easy to enforce, and less susceptible to attack during patent litigation. Even if you don’t plan to enforce your patent portfolio in the short term, you might enforce it five, ten, or fifteen years in the future. And if you plan to sell, the buyer may want to enforce the patent portfolio. Thinking about enforcement while developing your patent portfolio will help you maximize the return on your investment in patent protection.