Investing in Patents: Everything You Need to Know
An investor sees economic potential in an idea and then provides the money and resources needed to bring it to the market.3 min read
2. The Risks of Investing in Intellectual Property
3. Overcoming Patent Investment Problems
4. Some Patent Investment Funds
An investor sees economic potential in an idea and then provides the money and resources needed to bring it to the market. An inventor should know how to lower the risks of investors and persuade them that a product can be profitable. Unfortunately, patent investment can be complicated. Patents are hard to fit on a balance sheet, and they're usually recorded and grouped as "good will" or as a "non-current" or "intangible" asset. It's difficult for shareholders and investors to determine the exact value of a business's patents or the values of similar patents, but they can be sources of significant profit.
Patents can help generate revenue and attract new customers. They can even be sold to other companies. About 75 percent of the value of publicly listed companies in the United States comes from intangible assets, and U.S. firms held patents worth $2 trillion in 2010. Even though firms are underusing $1 trillion in patents, $19 billion in patent deals happened in 2012. This is a big increase from 2011's $450 million in deals.
There's also a secondary market for patents that's mostly made of specialized institutions called patent assertion firms. These organizations are sometimes called patent trolls because they only buy patents to license them to others or to sue patent infringers. Some of these companies are public, and they drive the prices of patents up in many industries. Defensive aggregators are similar, but they buy patents to protect investors from litigation. Retail investors also buy patents occasionally. Buying a patent from another company could be less expensive than going to court over an accusation of infringement, or it could help you prevent the accusation altogether.
How Patents Can Help You Make Smart Investments
Patents can help businesses make smart investment decisions by:
- Revealing the future plans of companies, including competitors
- Helping companies decide how to expand
- Letting investors gauge the potential of startups
You can also make money from litigation against patent infringers. However, you could lose the rights to your patent if a judge rules against you in court.
The Risks of Investing in Intellectual Property
Investing in patents is riskier than most other forms of investment because of the possibility of patent infringement. Despite this, direct investments in patents are increasing every day because returns are often high. Investors purchase patents or buy shares in them by supporting independent inventors. The value of an investment depends on the inventor's rights to the patent and its marketplace applications. A weak patent could let outside interests steal the idea and produce competing products.
Also, patents help guarantee that products are unique, but they're not related to their commercial viability. Investors should make sure that patented inventions or ideas can produce a good return on any investments. They should also try to estimate the worth of patents accurately. Overvaluing a patent could make profiting from the investment difficult.
Overcoming Patent Investment Problems
Inventors can use several methods to eliminate the objections of possible investors:
- Using a patent attorney or consultant to make sure the patent is strong
- Considering the marketability of an invention before applying for a patent
- Using a professional to find out the worth of intellectual property
Some Patent Investment Funds
In 2008, Nathan Myhrvold, Microsoft's former chief of technology, raised almost $3 billion to invest in inventions and patents. His private equity firm, Intellectual Ventures, has purchased 35,000 patents and launched several lawsuits against patent infringers. Unfortunately, his investments haven't been very successful. Invention Investment Fund II, his second and largest patent buying fund, has an internal rate of return or IRR of negative 2.55 percent. Another Myhrvold fund, Invention Development Fund, has an IRR of negative 69.23 percent, and its investors haven't received any returns.
Myhrvold's other funds also aren't doing very well, but the patents for just one or two popular inventions could make a fund extremely profitable anytime. Since it's difficult to decide on accurate values for patents, some funds that seem like failures could make their investors lots of money in the future. Other funds that seem very successful could simply contain overvalued patents.
If you need help with investing in patents, you can post your legal need or post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.