The modern patent ecosystem owes much to the great US innovators of the 19th century, who pioneered the use of intellectual property as a business tool. They fought infamous patent wars and created a secondary market in invention by licensing, trading, swapping, pooling and litigating their patents.

The resurgent 20th century interest in developing a large-scale secondary market in patents was underpinned by two phenomena. The first was the dramatic growth in patent filings of the last 30 years, catalysed by the invention and commercialisation of semiconductors and software. The second was globalisation, which unbundled international supply chains, decoupling invention from manufacturing and creating asset-light balance sheets. The contribution of intangible assets to enterprise value had never been higher and the role of intellectual property in competitive strategy was unprecedented.

It was inevitable that the US venture capital industry would exploit this phenomenon, driving financial investment into patents. Intellectual Ventures (IV) led this effort, raising several billion dollars and creating a one-way market where there was a ready buyer of patents for cash. Intermediaries flourished as brokers for that flow and an ecosystem developed around them. Second movers with high-risk tolerances entered the market in IV’s slipstream, most notably hedge fund investors.

Liquidity for infringed patents emerges as the driver for growth

The most attractive patents for the secondary market were those with the most predictable licensing value. These were patents where infringement, damages and invalidity risks could be managed. In an adaptation of modern portfolio theory, the creation of resilient multi-patent portfolios emerged as a primary risk management strategy for licensors to hedge against potential failures of individual patents. However, adding resilience to portfolios was costly.

Smaller companies or individual inventors could not afford the legal costs of monetisation and lacked the appropriate risk management skills that fuelled this market. For these patent owners, secondary market liquidity was the only way to generate value from their IP rights. But the ‘little guy’ was by no means the only provider of inventory, and multinational companies seeking to maximise shareholder returns also sought to monetise both core and non-core patents. Licensing revenue was pure bottom line for patent owners large and small.

When Google, Apple, Samsung and others gate-crashed the smartphone market between 2007 and 2010, even more liquidity was injected into the secondary market. The smartphone wars violently disrupted what Sanford Bernstein called the “oligopolistic Gentleman’s Club” of telecommunications companies. In a technology built on a high density of innovations, progenitor patents held great value and portfolios traded at unprecedented prices as speculators followed the money to help smartphone vendors shape their defensive strategies.

Evolution in patent valuation techniques created opportunity scale

Only a tiny fraction of granted patents have significant value and finding the proverbial needle in the haystack is expensive. The companies that had the most opportunities to buy, sell and license patents developed know-how and proprietary data sets for locating the needles. This opportunity scale drove cost reductions and accuracy in patent valuations. Foremost among these firms were the non-practising entities (NPE).

The best NPEs became experts in identifying and acquiring patents whose licensing value far exceeded the accounting value. As a result, NPEs could generate significant profits in the open market through licensing or sale to strategic counterparties. Moreover, NPEs found that the valuations of many of their patents had a floor based on both the relative costs of defence versus settlement, and the asymmetric risks facing a defendant in a patent suit. So many NPEs took advantage of this ‘cost-of-litigation’ floor, that they collectively became known pejoratively as ‘patent trolls’.

NPEs could generate attractive returns on their investment by monetising the value of a patent to an entire industry. This pure-play patent investment strategy generated an information asymmetry that was subject to network effects. The more licensing that NPEs did, the greater their insight into real pricing became. Opportunity scale proved invaluable in more accurately pricing settlements and managing large portfolios on a probabilistic basis.

The NPE network effect created opportunity scale by three methods:

  • Outsourcing – leading NPEs built the Indian patent research market;
  • Patent analytics – rich in proprietary data sets, leading NPEs pioneered the use of technology to reduce the unit cost of patent analysis; and
  • Expert networks and crowdsourcing – the NPE phenomenon birthed more efficient models of due diligence (eg, expert consulting networks and crowdsourced prior art searches).

As NPEs’ structure and processes became more systematic and liquidity grew, the NPE investment story became more accessible. NPEs entered the public markets via initial public offerings and attracted investors whose cost of capital was lower than traditional IP hedge fund financiers. These companies rose to prominence on a simple narrative: they were liquidity, valuation and monetisation providers to a multibillion-dollar market of patents. For retail investors, it was like buying a lottery ticket, with the possibility of outsized returns from assets whose value was hidden in traditional balance sheets and often ignored (or simply not understood) by Wall Street.

From value to volume: the patent broker’s dream

Patents had now entered the mainstream and a number of patent market intermediaries realised the potential to upgrade their business model from high-risk episodic transactions to an institutionally friendly volume/flow business. The notion that patents might trade like regular securities pushed brokerage firms to build a liquid market where even patent derivatives were imagined. There were a number of attempts to structure an exchange, but these foundered on poorly defined business models, real transaction costs or simply a lack of two-way flow.

Meanwhile, NPEs such as Altitude Capital Partners, WiLan and Acacia Research made outsize profits, which attracted significant new investor interest. Dozens of smaller firms sprang into existence and a patent bubble ensued. Contingent law firms proliferated, litigation funders expanded and a vast disgorgement of patents sought monetisation into cash where previously the market had been supply constrained.

The benefits of liquidity that could have emerged

The benefits of a liquid secondary market in any asset class are well established. A secondary market provides valuation comfort. If you think that you know at what price you can resell an asset, you are more inclined to buy it in the first place. Further, assets that hold their price in the secondary market command a premium in the primary market.

As any patent broker knows, patents have significant contextual value that drives huge bid-offer spreads. A secondary market that provides greater clarity on value should help companies to make better investment decisions. This would also allow lenders to assess patent collateral value for financing purposes, for example. Since it is estimated that more than 95% of granted patents have no discernible market value, a liquid patent market could also result in a significant decrease in the cost base of inventive companies as they abandon zero-value patents. Examining the entire value chain for product companies, the ripple effect of lower cost of goods means higher corporate profits or lower prices for the consumer. However, such liquidity-driven benefits were never given time to emerge. As quickly as liquidity arrived in the market by 2012, it had mostly drained away by 2016.

Patent reform catalysed a liquidity squeeze

The dramatic inflow of new money into the patent market challenged the status quo and was by no means popular with incumbent technology vendors whose sheer size and scale had previously made them impervious to licensing entreaties. NPE activity, buttressed by patent law, created asymmetric outcomes whereby a patent owner – even a lone inventor – could successfully challenge a multinational technology vendor, since the owner could sell its patent to an NPE and collect a portion of the profits. Moreover, NPEs were starting to bid up prices for patent portfolios of larger patent owners that were driven to bankruptcy.

As a result of this perceived threat, the benefits of a secondary market in patents became obscured by the technology vendors’ fight to regain the status quo. The fight was led by actors whose source of competitive advantage was primarily market share, scale and an effective oligopoly, and thus could best afford to weaken the patent system. Patent reform ensued and the secondary market in patents dried up. At this point, what once was a flood of liquidity became a trickle.

The reduction in market liquidity arose from three changes that collectively offset the all-important opportunity scale developed by NPEs over the past decade. These are well known, but perhaps not previously expressed in this manner:

  • Net present value discounting – the realisable financial (non-operating) value for patents was reduced:
    • damages were reduced;
    • the credible threat of injunctions was removed;
    • subject-matter restrictions were imposed (software);
    • inter partes reviews increased time-to-money by 12 to 18 months;
    • district court judgments were reversed by the Federal Circuit; and
    • antitrust scrutiny for NPEs was increased.
  • Increase in weighted average cost of capital – the cost of realising value was increased in terms of time, money and risk as the number of patents that could trade decreased:
    • reduction in portfolio scale and size increased concentration risk;
    • more binary portfolio outcomes made returns more volatile;
    • increase in unit valuation and realisation costs per patent drove up capex; and
    • fee shifting for bringing and maintaining weak cases removed the valuation floor.
  • Change in market dynamics – the fundamental nature of the market had changed with reference to what was traded, why and how:
    • reduction of asymmetric threat to incumbents reduced demand for patent rights;
    • market migration towards technology away from patents reduced supply;
    • consolidation of intermediaries and reduction in market capacity also reduced supply;
    • focus was placed back on strategic versus non-core assets; and
    • withdrawal of IV and many vendors for strategic and operational reasons wounded the market.

These changes achieved their stated objective of reducing the number of patents that could be monetised. They also raised the investment required to run screening and valuation processes, and the timeframe required to deliver an economic return to investors. This cost of capital cycle created an adverse selection bias in patent acquisitions, leading to greater risk taking and more aggressive monetisation strategies that ultimately backfired on the NPEs. The secondary market’s largest players have since gradually scaled down their operations and with it the secondary market itself.

What lies ahead?

First, we must bury the idea that patents are liquid assets. A hallmark of a liquid asset is its maintenance of a relatively consistent and predictable value, even as it is transferred from owner to owner (notwithstanding discounts for forced sellers). Most patents do not predictably maintain value as they are transferred. Post-patent reform, the most basic benefit attaching to a patent – the probability of winning an injunction and a sizeable damages award – swings violently as the patent changes hands. The swings depend on a number of factors that are in no way inherent to the patent itself, but rather to the contextual nature of the buyer’s and infringer’s situation. Patents thus have situation-specific valuations tied to characteristics of the counterparties that are notoriously difficult to predict.

Once we accept that the valuation of patents is highly contextual, it becomes clear that sophisticated screening and valuation techniques need to evolve to generate situation-specific valuations cost effectively. To this end, several enterprises have pioneered the deployment of the new or heretofore under-used valuation techniques outlined in Table 1.

Table 1. Future valuation approaches

Deep learning

Economies of scale can be re-established by lowering the costs of screening and valuation. Artificial intelligence techniques such as deep learning and natural language processing are poised to re-establish opportunity scale.

Innovation versus monetisation

Liquidity tends to originate at the point of greatest utility. This is likely to be in earlier-stage or new patents. Utility and value have migrated towards innovation, financing, technology transfer and job creation.

Useful patent value

Useful patent value will focus not only on the current addressable market of deployed intellectual property, but also probabilistic technology path adoption and future value. The IP community is converging more with the venture capital community than the distressed debt community.


Patent monetisation and trading will become a more holistic skill that will be based on information far more sophisticated than the way specific claims read on successful products (ie, claim charts). Increasingly, patents are merely a part of the value proposition and not the value proposition. Illustrating where they fit in the value chain will become a key input to patent value analysis and price formation.


The adoption of IP building blocks for new technologies means that value stacking will become more prevalent and understanding the business impact of the patents in the stack will drive value to a greater extent than evidence of use – a value chain analysis approach similar to that being adopted by the Organisation for Economic Cooperation and Development for the taxation of global IP-driven companies.

Long-tail intellectual property

Increases in opportunity scale in patent analysis and more general IP analysis will enable a larger number of smaller-value opportunities to be evaluated and analysed. This will create a convergence between early-stage venture capital, innovation and intellectual property and a portfolio approach to probability-weighted bets on future technology via the IP route.

Portfolio economics

Tomorrow’s NPE will be a market intermediary more akin to an investment bank/venture capitalist hybrid building a portfolio of investments in fundamental technologies and patent swarms, both directly and via network economics (ie, tiering of risk).

Deeper connection with and triangulation to capital markets

There is a direct and significant correlation between patent quality and dynamic default probability. During quantitative easing when default rates are at all-time lows, this has been irrelevant. As interest rates rise, this correlation will become more important. The securitisation of debt (including venture lending) is one market where this insight will be useful immediately.

Next, we must realise that subsets of patents are trading and will continue to trade in markets that are characterised by a great deal of liquidity. IP Watchdog estimated the market value of the brokered IP market at $165 million in 2016. Moreover, in many secondary markets there have been periods of growth and retraction as varying market subsets vacillate between liquidity and illiquidity. This means that for patents, in the foreseeable future, liquidity will not be uniform across technology areas or any particular point in a business cycle. Secondary market participants must recognise that some subsets of patents will have greater liquidity than others, because of structural, strategic or asset/market-specific reasons associated with those subsets (listed in Table 2).

Table 2. Catalysts for liquidity



Lower transaction costs

Competitive intensity

Supply/demand imbalance

Precedent transactions

Less regulation

Economic value of exclusion/adoption

Risk-free rate

Place in technology lifecycle

Existence of market makers

Asset (ie, patent) strength

The foregoing structural and strategic factor analysis also illustrates a number of monetisation activities that themselves are primed to bring liquidity back to patents at large. These are summarised in Table 3.

Table 3. Current horizontal market opportunities




IP financing

Ultra-low interest rates have resulted in mispricing of credit risk. The correlation between credit default probability and patent strength is therefore undervalued. As interest rates rise, IP finance will become highly profitable.

Due diligence is prohibitively expensive for lenders. Use of deep learning tools to scale valuation and default modelling has re-established the opportunity scale. Alternative lending is focused on performing loans.

Early-stage patents

Mismatch between the number of potential investments and venture capital resources. Investment affected by availability and familiarity bias. Quality patent strength analysis provides access to a global sample set and alternative perspective.

Asset-centric diligence driven by market utility scoring. Leveraging deep learning into the venture capital process to benefit from expert industry insight around technology path convergence and whole market value.


Chilling effect of patent reform and collapse of NPE universe has stranded many quality patents.

Holistic monetisation strategies that combine patents with technology to offer business solutions. Revenue = licence + service

Price is inversely correlated to volume

Patent owners, intermediaries and service providers all have a role to play in bringing liquidity back to the market and they will need to take a realistic approach to valuations and deal structures.

Apart from the economic and operational challenges, psychological barriers must be broken to kick-start liquidity, including accepting the ‘zero upfront’ licensing model. This also means rebasing off balance-sheet assets that comprise the vast intangible value of many companies and challenging the utility of those patents that incur substantial annual maintenance fees but appear to drive minimal operational or strategic value.

By adopting new valuation approaches, market participants can increase the relevance of their valuations and this will directly drive liquidity. Liquidity will not be evenly distributed, but clear markets with the appropriate conditions for it will emerge in subsets of patents.

For the active participants in the secondary patent market, only the truly skilled will survive this part of the liquidity cycle. Holistic strategies that go beyond market data spreadsheets and claim charts are now prerequisites to success.

This article first appeared in IAM. For further information please visit

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Chris Donegan


Chris Donegan is an IAM 300 ranked IP strategist with a focus on the intersection between intellectual property and the financial markets. He began his professional career at Accenture, after which he moved to lead the alternative investment structuring team for UBS Warburg. An independent entrepreneur and financier for the past 17 years, he has advised on the deployment of over $3 billion during his career, of which $500 million has been into IP-rich investment opportunities. He co-founded Invention Capital Associates, a strategic consulting firm focused on generating business and financial impact from intangible assets. He obtained a PhD in molecular neurobiology from Imperial College and graduated from the University of Leeds with a BSc in biochemistry and industrial microbiology.

Matthew Vella


Matthew Vella is an IAM 300 ranked patent attorney at the firm Prince Lobel Tye, LLP. He is a co-founder of Invention Capital Associates.

Over his 17-year career, he has led patent licensing teams that have generated nearly $1 billion in revenues. Until 2016, he was president and CEO of Acacia Research Corporation, having joined as vice president in 2007 and eventually becoming president in 2012 and CEO in 2013. Before joining Acacia, he was lead patent licence counsel for Nortel Networks Corporation and senior IP counsel for ATI Research, Inc. He is a graduate of the University of Toronto School of Law and Carleton University’s Faculty of Engineering and Design, and is licensed to practise law in Canada (Ontario) and the United States (California, Massachusetts). He is a registered US patent attorney.