Intellectual property is one of the most important assets of a technology company. For many companies, it accounts for approximately 60 percent of the assets. This article summarizes how patents are valued, and how companies can monetize patents, i.e., obtain funds against their patent or patent portfolio.

To gain a competitive edge in the marketplace, a company needs to have a well-crafted patent portfolio strategy in place. An effective strategy encourages development of ideas into technologies, patenting of such technologies, and deployment of the patented technology to meet the company’s business objectives.

A crucial factor in tapping the potential of a patent is timing. A patent may encompass a useful, breakthrough, or disruptive technology, but if the sale is ill-timed, the utility of the patent will decrease over time. Hedy Lamarr, a Hollywood actress, and George Anthiel, a music composer, jointly patented their idea on spread spectrum wireless communication in 1941. During the 20 year life of the patent, they did not earn a penny from their patent. But, today spread spectrum technology is widely used in wireless communications including GPS!

David Kappos, assistant general counsel at IBM who manages patents, said, “Right now, what you’ve got is a marketplace where nobody knows what the asset is worth.” Nevertheless, patents need to be valued to get a substantiated idea-to-profit conversion. Patent valuation refers to its estimated market value. A patent’s worth is in its utility. A patent’s valuation depends upon several factors. First, the utility of the patented technology in addressing a market need is evaluated to determine the profitability that will accrue from use of the patented technology and the advantage of deploying the new patented technology.

Second, a patent is evaluated for its ability to replace existing technology, or, to start a new technological trend. Third, a patent is valued based on the scope of its claims. Many patents that share a given technological space with narrow claims are less valuable than a patent with broad claims. Fourth, valuation of a patent depends on the $ amount of the market as a whole for the patented technology, the projected market share that the patent can capture from the overall market, and the projection of the market share in $ over the life of the patent and on any continuation patent applications filed on the original patent to extend the patent monopoly.