Decoding intellectual property valuation: Why the ‘human touch’ is still important

A recent report by the WIPO and UK IPO highlighted AI’s potential as a lower cost alternative to custom IP valuations. Here, we discuss why understanding the true value of IP still needs the human touch.

The value of intellectual property (IP) is a complex, yet increasingly crucial, consideration for both funders and the innovative, early-stage businesses in which they are considering investing. This is particularly the case in the UK, where SMEs, and investment in SMEs, are recognised as a fundamental part of the UK economy, contributing around half of national private sector turnover. Furthermore, with trading and licensing IP becoming more common in an increasing variety of sectors, the need for accurate valuations is evident.

According to a report by the World Intellectual Property Organisation (WIPO) and the UK Intellectual Property Office (UK IPO), intangible assets such as IP make up an estimated 70-80% of the value of UK businesses, yet “IP-rich, high-growth firms find it difficult to attract non-dilutive follow-on (debt) funding because most of them lack the forms of collateral that banks and other lenders traditionally require (namely tangible assets)”.

While this is improving, with more high street lenders launching services that offer finance based purely on intangible assets such as IP, two key barriers still remain: a lack of understanding of how IP is actually valued, and the costs inherent in securing a valuation.

One solution offered by the report is replacing custom IP valuations with AI-powered IP analysis, particularly in well-established sectors where data are more readily available for cross-referencing and comparison.

According to the report: “These bring down the cost of valuation and assessment using methods that are optimised to the specific circumstances of a loan transaction. They provide an alternative to custom report services, which may still benefit investors, especially where a technology in question is new and unproven.”

Trusting the entire process to a low-cost, technology-based solution, however, also risks oversimplifying the multifaceted ways in which intangible assets are valued. This could, ultimately, lead to a business’s IP being under or over-valued, something most can ill-afford in a business climate described by many commentators as “VUCA” (volatile, uncertain, complex, and ambiguous).

Why is IP valuation so challenging?

IP encompasses a spectrum of intangible assets, including patents, trade marks, confidential know-how, copyrights, designs, and trade secrets.

Unlike tangible assets, such as buildings or machinery, IP’s value lies in its ability to generate future economic benefits, whether that is creating or improving innovative products, developing faster product cycles, or enhancing market share through brand recognition. This, in turn, is often driven by the form in which IP is secured.

Patents, for instance, grant exclusive rights to inventors, allowing them to capitalise on their innovations for a specified period of time, albeit on the condition that they disclose their invention in the patent.

Backed by well-established frameworks of law, granted patents are stronger and more enforceable than unregistered IP rights. Know-how and trade secrets, for example, can be powerful and long-lasting forms of IP, but do not prevent a competitor from developing the same knowledge independently, which may make them a less attractive prospect for potential investors.

Market dynamics also play a pivotal role in IP valuation. As a scalable concept that may be used, re-used, expanded, and explored over a long period of time, IP’s value is often intrinsically linked to its commercial viability over both the short and long term.

As such, valuing commercial viability requires having a strong grasp of the competitive landscape, market demand, trends, and technological advancements of a particular sector – even one that is relatively under-developed. Valuers will need to examine, for example, where IP will sit in the market relative to a competitor’s IP. They will also need to assess the risks of fluctuations and market ‘bubbles’ in certain technology areas, which may lead to IP assets being under or overvalued.

The intrinsic nature of innovation also makes more traditional valuation methods, such as observable market prices and predictable depreciation/ amortisation profiles, more complicated and less reliable.

IP’s value often hinges on uncertain future outcomes, making any accurate predictions concerning the success and longevity of an invention or brand entirely contingent on a blend of quantitative analysis and qualitative judgement. This is no mean feat considering the volatility and unpredictability of the current economic climate.

The role of technology in IP valuation

Technology does have a place in IP valuation. Advanced algorithms and machine learning techniques can empower IP valuation professionals to analyse vast datasets, uncover hidden patterns, and predict future market trends at a significantly faster rate than would have been achievable prior to the emergence of digital platforms and data analytics.

Nevertheless, these tools cannot, and should not, serve as a replacement for custom IP valuations undertaken by professionals. The landscape is too inherently complex and requires a subtle blend of art and science that AI simply cannot achieve, regardless of its level of sophistication.

Ultimately, IP’s value hinges on more than data and financial metrics. It reflects human creativity, innovation, and ingenuity, all of which data alone cannot qualify.

As businesses increasingly rely on intangible assets to drive growth and build a competitive advantage, the need for robust, defendable, and reliable valuation methodologies will only intensify.

By embracing the intricacies of IP valuation and leveraging the expertise of industry professionals who specialise in all aspects of IP valuation and commercialisation, businesses can unlock the true value of all their assets – whether tangible or intangible – and chart a course towards sustainable success, even in the most challenging economic environment.