Patents: The Lowdown

Patent definition

Often when we start talking to companies about intangible assets someone around the board table will say “you mean IP right? Like patents?”

The answer is “yes… and no.”

For good or ill patents tend to receive an outsized share of attention relative to their actual impact. Many companies (and countries) boast about the number of patents they file and patents are regularly cited as a measure of innovation. But, (spoiler alert!) in reality, research has shown that there is no link between company performance and the number of patents filed.

The three data points below should suffice to explain why:

  1. The United States Patent & Trademark Office’s (USPTO) own data shows fewer than 3% of US patents ever make any money.
  2. There were 308,853 patents issued in the US in 2018. By comparison there are 18,200,000 business in the US. Even assuming patent distribution was perfectly flat (which it is not) this means that less than 1 in every 58 businesses would file for patents – to the vast majority of businesses, patents are just not relevant.
  3. An economic calculation of the Patent Wars that raged across the Smart Phone Industry in the first half of the 2010’s, showed the entire economic impact was less than 2c earnings per share across all the major smartphone players.

Despite this, one of the common mistakes we see many companies make is an overemphasis on patents “we must have patents” (or worst still) “we have no patents so we have no intangible assets!” Occasionally you see the opposite too “patents are a waste of time!” The reality is none of these statements are correct.

Patents can be expensive and distracting mistakes but they can also be incredibly useful and extremely valuable. For example, EverEdge sold a single US patent on behalf of investors in a failed start up for 10’s of millions of dollars, returning $45 for every $1 the shareholders had invested. Equally we have seen companies spend millions of dollars annually on patent portfolios of limited value and impact.

The takeout: the potential impact and value of a patent needs to be judged very carefully against its cost and the implications of filing it, as patents are only one of many different tools in the intangible asset toolbox. Today, companies and boards are more likely to reach for data, code or regulatory approvals from their intangible asset toolbox than patents necessarily. This doesn’t mean companies should ignore patents, but just that it is important to understand the risks and opportunities associated with filing before making a decision.

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