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Wednesday, May 23, 2012

Crafitti's Patent Valuation Approach - The MDMP Valuation Methodology


Crafitti’s Multi-Dimensional Multi-Perspective (MDMP) Valuation Methodology

Valuation of assets has been a well-established field. There are established methodologies for valuation of assets which are being used globally, backed by comprehensively developed theories. With the advent of global innovation economy, the assets have become more and more cerebral, conceptual and contextual. This has created a mismatch between methodologies developed for physical assets valuation and the need of the information, knowledge, innovation and intellectual assets.

Although the existing valuation methods have been adapted and adopted for the valuation of “soft economic assets”, their success has been limited to say the least. The very nature of ideas, inventions, intellectual property, products/brands, ventures, etc., calls for a different approach than adapting the existing methods for valuation. CRAFITTI consulting has established a unique methodology to value intellectual assets based on sound scientific principles on the value of the soft assets. The result is the multi-dimensional valuation methodology that takes care of, past, present and future possibilities. The multi-dimensional valuation methodology combines multiple perspectives from financial, legal, utility or functional, complexity and collaboration viewpoints. This results in a more robust and comprehensive valuation methodology for well-informed consensus decisions.
Crafitti Consulting’s MDMPTM valuation methodology has developed on a series of methods starting from financial valuation approaches (capitalization approach, cost-based approach, income approach, and market approach), enhancing with a Balanced Score Card perspective, and including a multi-criteria decision-making process such as Analytic Hierarchy Process (AHP). However, we realized the perception of future, although being captured in these enhanced methodologies, don’t take care of multiple futures that may unfold. For example, the drawback of commonly used Discounted Cash Flow model under income approach is that it does not capture the unique independent risks associated with patents. All risks are lumped together and are assumed to be appropriately adjusted for in the discount rate. In nutshell, the models used for valuing patents are general not specific. They cannot be used to value each and every patent.  Sometimes a single method cannot value patent so more than two methods are also used. Although these methodologies are widely used to value patents, they don’t provide accurate results.

With these experiences, we enhanced the valuation methodology with Theory of Inventive Problem Solving (TRIZ) and Scenario Planning techniques and Citation Analysis of an existing patent or a similar patent if we want valuation of a patent application.  The result is a Multi-Dimensional Multi-Perspective (MDMPTM) Valuation methodology. This is a comprehensive methodology grounded in scientific principles.
 
The MDMPTM is based on following high level dimensions and perspectives
·         Current State
o   Evaluating the current state of an asset – Idea, Invention, Patent, Other IP, Product, Product families, venture, etc. What is the protection level, if any?
o   Evaluating utility, main useful function performed, customer value provided – Functional, Financial, Brand, etc.
o   Assessment of Complexity, Stability, Risk of design around, and, Competitive market position – How close to ideal is the asset?
o   Height of the Inventive Step (HIS) is a metric developed by Crafitti to quantify one of the most controversial and least understood condition of patentability called non-obviousness or the inventive step over prior art. An invention besides being novel has to be inventive over prior art. TRIZ proposes a 5 level qualitative scale to measure the strength of an inventive solution. Crafitti has combined the level of invention over prior art with lines of system evolution in a relative index of Height of the Inventive Step over prior art. The HIS not only gives a relative measure of non-obviousness or inventive step over prior art but also gives a measure of strength of the invention over prior art. The strength parameters of an invention are – level of difficulty to invent around, level of ease with which the infringement is verified and height of inventive strength. The HIS metric leads to first such metric and can also be used to draft stronger claims which are likely to be granted as their non-obviousness will be quantified.
 

·         Past
o   Cost already spent
o   Cost of Sale
o   Cost of Maintaining, Enhancing and Adapting to the foreseeable immediate future changes
o   Capital Borrowed to develop and status of all such pending financial debts
o   Partners with existing stakes


 


·         Future
o   Technological Evolutionary Paths of the Asset based on TRIZ Evolution Laws
o   Possible ways – and probable timeline when asset will be designed around
o   Estimated remaining life of the asset
o   Possible scenarios which may emerge in the markets the asset is operating in.
o   High level view of freedom of operation in the markets/jurisdiction the asset will be operating in. Caveat: This is not the freedom to operate (FTO) opinion, but an overall assessment of high level view of barriers to operation which may impact the valuation of the invention. 
 

·         In each of scenarios (i)  that emerge during the valuation study what are the potential benefits that can accrue from the patent (bi) and the risks (ri)
o   Incorporating the Invention in the existing products
o   Potential Market Share enhancement
o   Using the invention to Invent more adjacent areas
o   Does it denies a space to competitor
o   Does it enhances the portfolio of the inventor – the synergistic effect
o   How easy it is to design around the patent?
o   How easy it is to verify the infringement?
·         In each of scenarios Value (vi) of Patent will vary within a range based on benefits and risks of the patent losing its relevance (bi) and (ri)
·         Each Scenario also comes with an estimation of likelihood or a probability estimation (pi)
·         Overall value V = ∑ pi x vi  = ∑ pi x f(bi , ri)
 
Crafitti Consulting’s MDMPTM valuation methodology is multi-dimensional and takes into account multiple perspectives to produce a robust valuation considering multiple futures, current state and past trends

We have combined multiple science based methodologies to come up with the valuation framework
o   TRIZ Based Patent Analysis
o   Value Network Analysis (www.socialcitnet.com)
o   Analytic Hierarchy Process
o   Scenario Writing
o   Standard Patent Landscaping and Analysis
o   Systems Analysis

Multi-Dimensional Multi-Perspective (MDMPTM) Valuation does not produce a single $ number. The methodology gives a sum total of past, current and potential future value that the asset may create in a range of possibilities. Typical output will be

Value of the potential invention is 2 Million USD with a range of plus-minus 15%. Given the potential of entering a new market using this product the ability to create new, enhanced and/or cutting-edge products will increase by 50% which has an estimated value of 1 Million USD. If the product is not enhanced with sustained customer feedback and/or an effort is made to completely revamp the product, it is estimated that product life will not be more than 3 years. This requires the need to generate the next version or a new version of the product within 18 months. Further, given the very high design and architectural complexity of the product which is currently estimated to be 10 times higher than the ideal design possible – that is the least complex design, the next version should not be more than 5 times the ideal design in terms of complexity. We propose if the next version is not released in 30 months with cleaner, less complex design, the value of the product will be reduced by 25%. Hence in the worst case scenario, the value of the product is equal to 0.75 x (1.7+0.7) = 1.8 M USD. In the best case, the value of the product is estimated to be 3 M USD. In the most likely scenario, this comes out to be 2.4 M USD ±15%.

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