By Danny Cook, Guy Manno and Kevin Bellette
Overview
The dream of most inventors is to turn their idea into a commercial reality.
The goal of most investors is to minimize their capital outlay, reduce their risk and maximize their return.
A new paradigm – Patent Syndication, provides inventors and investors with the opportunity to realize these dreams and investment goals.
This White Paper highlights;
The problems currently facing inventors and patent owners in protecting and commercializing their idea around the world.
How Patent Syndication solves these problems for inventors and patent owners.
How Patent Syndication opens up a massive untapped market for investors to participate in the gap between a patent being published (un –granted) and the patent being granted.
How Patent Syndication provides new opportunities for the Intellectual Property & other industries.This white paper also highlights how investors such as Venture Capitalists, Angel Investors, Angel Groups, Seed & Early Stage VC & Capital Groups and High Wealth Individuals can participate in Patent Syndication to generate a better return in a shorter time period.So whether you’re a first time or prolific inventor, an intellectual property professional, an entrepreneur, a small business owner, an investor, an employee or from a major corporation this white paper will provide an insight into this new and exciting paradigm.
Current Situation facing inventors and patent owners
For many inventors just getting through the patenting process is hard enough but to then have to go through the pain of transforming their patent into profit globally is just too hard, and that’s where it comes to a halt.
This theory is supported by statistics from the World Intellectual Property Organization (WIPO) & Inventionstatistics.com that show that there are approximately 2.1 million patents filed each year globally and that patents in force on average have a low commercial success rate of around 2%. (WIPO and Inventionstatistics.com source links.)
(Source link.)
Interestingly though, data shows that successful patents are generating approximately $180 billion USD in licensing each year. (Source link.)
If only 2% of the patents are successful, why do the other 98% of patents not achieve success?
The main reasons for the low success rate come down to a number of factors including:
Insufficient capital to fund the costs of filling the patent in all the countries desired.
Failure to obtain sufficient market research for the invention, the target market, current competition and the players in the industry.
A low quality patent in terms of potential application and use within the market.
No awareness or understanding of local country business customs on an international basis.
Lack of strong international commercial contacts and networks.
Little or no marketing and licensing skills or the lack of sufficient funds at the disposal of the patent owner or inventor to drive the outsourcing of the necessary skills to achieve commercial success.
How Does The Patent Owner Currently Solve These Problems?
Insufficient funds – To solve this problem the patent owner must either fund the patenting costs themselves or seek funding from family or friends, investors, joint venture partner or attempt to take out some form of loan.
Over the last couple of years a new opportunity has become available to inventors, patent owners and entrepreneurs to raise capital. This new method requires the patent owner to have their patent independently valued. Based upon the valuation and current positioning and development of the IP in the patent process, the patent owner may receive an investment from angel investors or other alternative investment groups, which may also include some venture capitalists for up to one third of the accredited independent patent valuation. There are many other influencing factors, advantages and disadvantages of this new capital raising model and they are beyond the scope of this white paper.
Above: The growing trend of valuation based VC deals from one private equity and venture capital research database firm called Pitchbook who has over 11,000 valuations on privately backed companies. (Source link.)
If an inventor / patent owner seeks funding from an investor they must understand the investor mind set and tailor their offer so that it meets their investment criteria, is realistic and commercially viable.
Although the offer may be realistic and commercially viable the investor may decline the offer due to;
A high perceived risk that the patent will not be granted.
High capital exposure.
No or limited exit strategy options.
The return on investment time frame is too long.
Our upcoming book will highlight how these problems will be solved utilizing patent syndication
Poor Market Research – Solving this problem requires the time and skills to conduct the required amount of market research. If they lack the skills to carry a detailed analysis of the markets they are entering they need to hire a professional that can complete this for them.
A low quality patent – This is a difficult problem for the inventor to solve as the reason most inventors patent their invention is because they believe that their patent will be viable and have a utility value to the market.
No awareness or understanding of local business customs – Without first-hand experience to solve this problem, the patent owner must engage advisory or consultancy firms in each country.
Poor commercial international contacts and networks – To overcome this problem the patent owner must continually network to develop the required contacts and relationships.
Little or no marketing and licensing skills – The solutions for the patent owner is to either engage marketing / licensing professionals or develop their own marketing / licensing skills to a proficient level.
If the inventor was to gain funding to protect their intellectual property (IP) in multiple countries they would then need to know how to successfully market the IP to entities that are willing to use the IP and pay for its utilization via licensing.
Unfortunately most inventors and patent owners rarely possess these necessary skills, and many also lack the ability and or resources to outsource this crucial element of monetizing the IP through licensing.
There are certainly successful IP monetization systems in existence in the marketplace that help the patent owner in deriving income from their patent, but these are usually for granted patents or patents that are valued by independent IP valuation professionals that are more commonly valued in the multi-million dollar range. Further details on current IP monetization systems will be outlined in our upcoming book, “Making Patent Syndications Work”.
The top 2% of highly successful patents are usually the domain of high wealth individuals, major corporations or large universities who are aware of the importance and benefits of patents and how they allow them to stay competitive and generate innovation, that’s why they invest millions and in some cases billions of dollars on different patents to acquire or build and continually stay ahead of the competition. (Source links here and here.)
For the remaining patent owners and especially the first time inventor, there are very limited options available to assist them – until now.
The Solution: – Patent Syndication:
Patent Syndication is simply a group of individuals, companies or different entities that come together, to pool their resources and share in the ownership of a patent within a country with the original owner of the patent. The costs associated with the patent or any upside to the value of the patent within the country are shared by the syndicate owners in accordance with the patent syndication agreement in proportion to the number of shares each shareholder owns in the syndication.
All shareholders are entitled to the benefits of the patent syndications unique system including the right to either license or utilize the technology themselves depending on the intentions and goals of the syndicating shareholder group.
Examples of the different types of groups include;
Pre-granted Patents only: Participants include – Early Seed Investor groups, Angel Seed Groups, Some Venture Capitalist firms and Accredited Investors etc.
Licensing the IP only: Participants include – Companies, Private Equity Firms, Hedge Funds, IP Monetization Firms etc.
Utilizing the IP for the life of the patent only including for defensive and offensive purposes: Participants include – Insurance Companies, Companies, Defensive Patent Aggregators etc.
Further explanation of the types of groups will be discussed in detail in our upcoming book.
Syndicating a patent is like having access to a global marketing network without the large financial burden that comes with it, where the shareholders of the syndication in each country have a vested interest to make the inventors and / or the patent owners IP a commercial success.
As a patent owner imagine having your idea protected, marketed and licensed in multiple countries with your new patent co-owners, working in cooperation towards making the patent a financial success. This is achieved as the new shareholders share a real vested financial interest in the patent wanting to utilize their skills, experience and local professional connections in generating multiple licensing revenue streams and to increase the overall value of the patent.
Patent syndication provides the patent owner with a means to protect their intellectual property in as many countries as possible, by simply sharing the ownership of the patent through patent syndication in each country.
How will Patent Syndication solve the Patent Owners problems?
Insufficient funds – The Syndication Shareholders pool their money together and fund multiple different scenarios that patent owners encounter. For example funding the patenting filing costs of the patent within the syndicating countries.
Lack of Market Research – The patent owner is able to raise funds from new syndication shareholders to fund the cost of professional market research if the patent owner lacks the necessary skills and capital to conduct the research.
Poor commercial international contacts and networks – The shareholders pool their resources, networks and contacts to assist in the commercialisation process.
No awareness or understanding of local business customs – Depending on the shareholder syndication group, some shareholders who join the syndication in each country will have the relevant understanding and knowledge to be familiar with the local business customs and be able to assist the syndication.
Little or no marketing and licensing skills – The solution for the patent owner is to utilize the experience and knowledge of the existing new shareholders of each syndicate and or engage marketing / licensing professionals to assist with the patent depending on the type of syndication group.
What are some of the Benefits to the Patent Owner of Syndicating Their Patent?
The patent owner retains shares in the Patent Syndication in each country the patent is syndicated.
The patent is protected in multiple countries, which reduces the risk of someone else benefiting from the inventors idea and their many years of hard work.
With protection in multiple countries the overall value of the patent will increase.
The syndicate shareholders have a vested financial interest to make the patent a commercial success.
The patent owner receives a share of any licensing revenue generated by the syndication shareholders depending on the type of syndication group.
The patent owner can create an income stream by licensing the patent in each country the patent is syndicated in depending on the type of syndication agreement in force.
The patent owner can invest the funds allocated to patenting in other countries to further develop the patent or new ideas.
The patent owner has the options to sell some of their shares in the syndication to recover their costs.
Syndications:
Syndications are not a new concept in fact people have been forming all types of syndications for many years.
There are many large IP intermediary firms that operate within the industry but in most cases they only acquire granted patents. Below is a summary of the main groups and the companies that operate within these different models. A more detailed analysis will be highlighted in our upcoming book.
Non-practicing entities (NPEs)
The main purpose or business objective for NPE’s is to acquire patents from inventors and other patent owners and seek out potential licensing revenues from different entities, which are predominately small and large companies through the use of litigation or by threatening to take legal action. (Source link.)
The largest of the NPE’s in the market place would be Intellectual Ventures (IV).
Defensive patent aggregators
Defensive patent aggregators have come about due to the strong rise in attacks and claims by NPE’s over the last few years. The aim of these companies is to reduce the potential patent infringement costs for different entities by purchasing patents on behalf of their clients and issue them with a license to mitigate these risks. (Source link.)
RPX is a defensive patent aggregator that charges its clients annual fees and in return offers licenses to its clients from the patents it has acquired that they believe may be a potential threat to their clients. (Source link.)
Allied Security Trust (AST) on the other hand has a slightly different business model to RPX corp. AST is run for their members and is a non-profit type organisation. AST sets out to acquire patents or a portfolio of patents, utilizing their own capital and then attempts to seek various bids for the patents for licensing from its subscribers. After it has purchased a series of patents and successfully licenses them to their members who have bid on them, they offer the patents up for sale. (Source link.)
Intellectual Ventures
Intellectual Ventures (IV) is more of a blend between a NPE and a defensive patent aggregator. Spending over $2 billion over the last decade or so growing their patent portfolio to be the world’s third biggest covering approximately 35,000 patents. IV has structured their business into a series of different funds similar to private equity or venture capital firms.
The two biggest funds specialises in acquiring granted patents from the international market from a variety of sources including inventors and companies. Its third fund is directed to building and developing IV’s own inventions in conjunction with scientists in partnership. The fourth fund looks at further developing and purchasing pre-filing inventions which it sources predominately from universities around Asia through various technology transfer deals. (Source link.)
The IP intermediaries that function within the global market, each provide a unique business model and service to the industry however no one type of business model is able to facilitate the development and funding of patents in the various stages of development including the un-granted patent market like the patent syndication system can.
One of the ways that patent syndication can achieve this is by ensuring that patents that have not yet been proven in the market place start at a lower price per share when they are syndicated. This is to encourage as much demand and investor participation as possible and provides a significant potential upside reward to the syndication shareholders.
Based on the chart below the scope for new growth in revitalising dormant patents currently in force, can give patent owners a new alternative to releasing some of their capital back and potentially generating cash flow rather than eventually letting the patents lapse, considering only around 2% of patents are currently commercially viable. A more in depth look into dormant patents in force will be outlined in our upcoming book.
Patents in force top 10 Offices – 2011 (Latest WIPO Data)
(Source link.)
Below is a scaled example of the possible starting syndication share price range depending on the quality of the individual IP being put forward for syndication.
Due to the lower price of the patent syndication shares, it will encourage many “on the fence” investors to consider and potentially invest in one or more shares in the IP. This provides a safer alternative instead of asking any (1) one investor, to invest a large upfront amount in the IP that has not yet been proven to be commercially viable and hence may or may not be successful.
Most patent syndication systems will also reduce the risk to investors by providing means to trade their syndication shares and therefore providing an exit strategy.
For investors it’s ideal to access varying types of patents at different stages of the patents’ life cycle. It provides an excellent avenue for investors across the globe to take equity positions in patents that are currently waiting to be granted, that could go up in value by at least 2 – 6 times in price once the patent is granted, which can take up to 15 months from the publication date of the patent depending on any patent office issues, legal matters or patent back logs.
When the patent is proven in the market place through market demand, the patent has the potential to rise by around 10 times or more in value from the granted patent price.
Patent Value Investing:
Most patents, regardless of its position in its life cycle, has a market value including patents that have been published but not yet granted.
What this means to an investor is that the market value of the patent and therefore their shares, are immediately open and subject to market forces. The value of each syndication share could increase (or decrease) in a relatively short time frame, regardless of whether the patent has been granted or the patent has been licensed.
An investor could take advantage of the shifts in patent value by trading in and out of the patent syndication just like investors do with publicly listed stocks.
Some of the factors that influence the market value of the patent include;
The stage of the patent in the patent granting process.
Whether the patent has been proven within the market place.
Whether another company or entity is breaching the patent.
If there have been challenges by other parties when the patent was filed and displayed within the public domain.
Whether the patent office has raised some questions that required the patent to be modified.
How disruptive the patent can be or currently is within different industries.
What type of technology the patent covers i.e. electronics, mechanical, telecommunications, software or pharmaceutical.
The demand for the syndication shares.
Whether the patent has been granted.
Investors therefore do not necessarily have to wait until they or another shareholder have created a licensing agreement for the value of the patent syndication shares to go up in value.
Just as publicly listed stocks on exchanges fluctuate whenever market sensitive related news is released by the company, patent syndication shares will move in a similar fashion but significantly higher percentages compared to shares, as a patent moves from not-granted to granted by the patent office, or news has been issued relating to some entity infringing on the patent. For example a publicly listed stock may jump 3%, 5%, 10% or higher based on positive news, whereas patent syndication shares are more likely to rise by 50%, 100%, 250% or higher on different developments in the patent.
These very large increases in value of the price of patent syndication shares based on the changes in events for the patent, will allow for significant opportunities for capital gains and wealth creation by investors and other entities taking advantage of this opportunity.
As highlighted above, one of the factors that affect the value of the patent is whether another company or entity is breaching the patent.
The chart below highlights from a sample of infringement awards in 2011 the types of damages that were achieved from a patent.
(Source link.)
The actual valuation attached to a patent that has been infringed upon would vary depending up many factors, such as its potential reach within industries and the potential awards that could be achieved. The final price will always be determined by the market. In any rate the prices and returns on investments that could be achieved on patent syndication shares are extraordinary depending on the varying circumstances that occur with each patent.
An Example of Patent Value Investing:
Mulpin Research Laboratories Limited (MRLL) conducted an independent valuation on their Generation One type Patent.
The valuation realized $54 Million which assumed the patent was granted (this valuation excluded any licensing agreements created to reach this figure).
As the patent is currently waiting to be granted the value of the patent can be calculated by using a methodology commonly used by many Investor Angel Groups.
Their methodology typically discounts the valuation by approximately 66%.
In MRLL’s case the discounted value of the patent equates to approximately $18 million ($54 million – 66%).
Considering the patent has not had any challenges by the market and the company has made modifications to alleviate the patent office concerns previously, this would soothe some of the concerns and risks investors would currently see with the patent.
If the company was to generate licensing agreements and assuming the patent is also granted, the accredited independent valuation expert has placed a valuation of approximately $600 million. Further details will be expanded upon within the MRLL pilot program.
As this example illustrates, the wealth creation possibilities of the patent syndication system is quite profound, when considering syndications where the patent is waiting to be granted by the patent office. It is important to note that not all patents waiting to be granted will be granted by the patent office and if granted not all patents will be able to achieve an increased market value, as they will be rejected by the market for various reasons including not having a sufficient commercial utility benefit to market users.
New Opportunities
With the shift to online business models, up and coming strong growth is coming from different platforms and websites that are now catering to crowd funding and angel syndication styles of investing like Peer to peer lending, Donation and Investment Based. Within the Investment based style the investors receive equity, debt, or a revenue share of the company. Further details on the different new investment platforms will be outlined in our upcoming book.
The patent syndication model will be the ideal investment sourcing mechanism in conjunction with these new up and coming alternative funding groups for patent owners, where by the funding size from each of these syndicates range from $50,000 to over $2,000,000 each allowing each investor exposure in securing numerous patent shares, in multiple countries utilizing patent syndications. (Source link.)
Based on these investment fund size ranges patent syndication also allows investors to be creative with their investment dollars.
For example, if a Venture Capitalist (VC) or Angel Group had $500,000 to invest they could either;
Spend $500,000 to purchase or invest in 1 patent or start-up company.
Or through the patent syndication system;
Purchase 1 share in 2,000 different syndications OR
Purchase 1 share in 66 different syndications in 30 countries.
Or any combination of the above.
The VC or Angel Group could also choose to own 1 syndication share of a particular patent in say 100 countries for an investment of approximately $25,000.
The chart below taken from Pitch book’s latest data in 2013 shows the median round amount in Millions VC and angel groups are currently investing in each start-up company. The latest median figure for all sectors in 2013 is $1.5 Million for seed / start – ups based on median valuations of just over $5 Million for all sectors.
When comparing the amount that is currently being invested in each Seed / Start-up company to patent syndication investment options, it clearly illustrates that patent syndication offers the better value for money and bang for buck per dollar invested.
For investors if the risk reward ratio is evenly balanced and priced accordingly, many participants would consider the patent syndication system as an ideal alternative investment vehicle, compared to the current practices and opportunities that solemnly exists for investors, when it comes to investing in patents whilst they are still in an un-granted status with the patent office.
Below is a chart that shows the average holding period for VC investments and the relative multiple returns achieved based on the investment time frame. As stated in the white paper the returns are vastly superior, and the time frame is significantly shorter than the expectations of returns that is generated among various VC investments, due to the very high multiple returns that can be achieved with the patent syndication system.
The most likely prediction is that patent syndications will be another new high demand asset class for VC and Angel group companies as well as investors to join and participate in.
(Source link.)
The graph above shows that typically after 3 years the investor returns between 0 – 35% on their investment.
The chart below highlights the estimated returns for the MRLL syndicated investment model based on when the patent shares are acquired by investors at the various stages of development the patent progresses through.
(Source link.)
In MRLL’s example, they will be syndicating their patent in multiple countries at an initial discounted price per syndication share. Based on the MRLL patent being valued at $18 million the initial Offer Price reflects a discount of 50% or $9 million.
There are many reasons why the share price has been discounted including to ensure those investors that participate in the MRLL pilot program are successful and to provide initial shareholders with the opportunity of generating a capital gain in a relatively short time frame.
Once the syndicate has been fully subscribed, the syndication shares can be traded.
Assuming the $18 million valuation, the MRLL patent example graph shows that once IP Trading begins the value of each syndication share rises 200% to reflect the $18 million patent valuation. Once the patent has been granted the price increases by 300% to $54 Million. If the patent was to establish licensees the price per syndication share increases upwards by 1100% approximately to around $600 Million valuation.
These returns are based on the independent valuation documentation from MRLL. Please note that actual returns achieved may not reflect the future market estimated valuations due to market forces beyond MRLL’s control and or any significant shifts in the patents development and licensing.
This example illustrates how by investing in a patent that has not been granted or established any licensing agreements, the upside potential for syndication shareholders to realize a sizeable capital gain.
Further Examples – Investment returns potential.
Example 1 – A syndication group buys an un-granted patent for protection in Germany only directly from a patent owner for $15k (the patent has not been filed for PCT national phase) and later decides to syndicate to its investors.
Based on the investors involved and shares issued (25 shares out of 50) the patent is syndicated and the price starts at $600 a share.
15 Months has passed and the patent has been granted and is now worth approximately $145,000 based on an independent valuation, which considers the quality of the patent and the technology it covers.
The new granted Syndication price is based on a total of 50 shares = $2,900 per share. The investors have increased the value of each share by $2,300 per share.
The Return on investment (ROI) = 3.83 times their investment. ($2,300 profit / $600 syndication price)
Example 2 – A syndicator syndicates a patent for protection in Israel on behalf of the syndication with the assistance of the patent owner to raise the funds to cover the costs of $7,500 for filing for the PCT national phase.
By selling a total of 20 of the 50 shares to investors and retaining 30 shares for the patent owner the syndication price has been set at $375 per share. ($7,500 filing cost / 20 shares sold) valuing the patent at $18,750 based on the total of 50 shares in the syndication.
10 Months has passed and the patent has been granted by the patent office and is now worth approximately $90,000 based on an independent valuation.
The new granted Syndication price based on the total 50 shares = $1,800 per share. The investors including the patent owner have increased the value of each share by $1,425 per share.
ROI = 3.8 times their investment. ($1,425 profit / $375 syndication price)
Example 3: – A Venture Capital (VC) Firm creates a new $12 Million Investment fund from 1200 Investors each contributing $10,000 each.
The Investment Fund decides to invest $300,000 of the $12 Million in un-granted patent syndications.
They decide to purchase 1 share in 40 Different Un-granted Patents in 30 Countries for a total of 1200 Patent Syndication shares with an average price per share of $250 for their $300,000 Investment. (1200* $250 = $300,000)
22 Months has passed and 70% have received granted status from the patent office a total of 840 granted patents.
The VC firm decides to sell their portfolio of 840 granted patent syndication shares to realize their investment returns.
Depending on multiple factors including the quality of the patents, the industries the technology benefits and how disruptive the patents are, the total portfolio of 840 granted patent syndication shares could be worth between $1 Million to $3 Million.
This would realise a ROI for the VC firm and its investors of between approximately 230% and 900%. Generating a profit of between $700,000 and $2.7 Million.
N.B: The granted patent valuation price in each of the examples above were for illustration purposes only, however the valuation prices used are typical of the prices that can be achieved for granted patents internationally. For example the median value of granted patents in the US is $264,000 based on the latest data from IP offerings. (Source link.)
Currently the legislation in the US for investing in private companies is restricted to accredited-investors (1% of the US population), however with the full implementation of the Jobs Act non-accredited investors will be able to invest in the same opportunities.
According to the Crowdfund IQ report below, over 57% of the US population based on the surveys conducted are likely to invest $1000 or less in equity crowd funding platforms.
(Source link.)
The Patent syndication system will provide this segment of the market another investment opportunity to consider.
Further detailed options on Crowd funding and how the new Jobs Act in the US will impact non accredited investors will be available in our new book.
Syndication Groups:
The varying outcomes desired by investors will drive the formation of different types of syndication groups.
These syndication groups will have different focuses including but not limited to;
Syndication of an un-granted patent – holding the patent until granted – selling the patent for a potential Capital Gain.
Syndication of an un-granted patent – development of the patent – holding the patent until granted – selling the patent for a greater potential capital gain.
Syndication of an un-granted patent – licensing the patent to generate income streams.
Syndication of an un-granted patent – development of the patent – licensing the patent to generate greater income streams.
Syndication of an un-granted patent – utilization of the patent as is, in shareholders own businesses for competitive unique advantage.
Syndication of an un-granted patent – development of the patent – utilization of the patent in shareholders own business for a greater competitive unique advantage.
The different outcomes required by the syndication groups will also create opportunities for related industries within the IP market including patent attorneys, patent valuation professionals, litigation and licensing professionals, patent brokers and patent auction firms
The Untapped Market Potential of Patent Syndication.
The following overview of the untapped market potential of Patent Syndication is based on the statistical information available from the World Intellectual Property Organization (WIPO) as at November 2013.
The data used below to illustrate the untapped market potential of Patent Syndication was determined by calculating the average of the data over an 11-year period from 2001 to 2011 utilizing the WIPO IP Statistics Data Center tools.
Patent Applications – 1,745,000 – average per year (Direct – 1,353,000 & PCT 392,000)
Patents Granted – 715,000 – average per year (Direct – 587,000 & PCT 128,000)
Patent Publications – 1,544,900 – average per year (Source link.)
Untapped Market Potential Example: Patents Published but Not Yet Granted.
The gap between a patent being published and a patent being granted is where most inventors seek to raise capital to further develop their patent or to commence the protection of their invention worldwide through the PCT system. Unfortunately, for most inventors, they are unsuccessful in raising capital during this critical period and this is one of the areas where Patent Syndication will greatly benefit the IP industry and investors.
The CEO of Mulpin Research Laboratories Limited, Mr Perry Kelly, recently stated
“One of the major stumbling blocks has been the repetitive comments from companies we have approached ‘When the patent is approved come back and talk to us’”.
“If patent syndication was available for the MRLL patent it would have freed us of the financial burden of finding the capital required and at the same time enabling us to patent in the 50 countries we originally set out to achieve. In addition it would have allowed interested parties to invest via syndication, in the countries of their choice”.
Patent Syndication provides the opportunity for patent owners to protect their patent in multiple countries and will assist companies similar to Mulpin in achieving their goals of patent protection internationally.
Untapped Market Potential Example – Continued
For the period 2001 to 2011 the average approximate number of Patent Publications per year was 1,544,900.Source link
Therefore the untapped market potential for patent syndications utilizing the system is approximately 1.5 million patents per year. More detail of the patent syndication market potential will be addressed in the upcoming book.
Example 1:
The following scenario is illustrating the market potential of patent syndication if only 40,000 patents published were syndicated each year.
Assumptions:
Average Number of Patents Syndicated each year – 40,000
Average Number of countries each Patent is syndicated in – 30
Average number of shareholders per syndication – 40 (up to a maximum 50)
Average price per syndication share – $250
40,000 x 30 x 40 x $250 = $12 Billion
Example 2:
The following scenario is illustrating the market potential of patent syndication if only 70,000 patents published were syndicated each year.
Assumptions:
Average Number of Patents Syndicated each year – 70,000
Average Number of countries each Patent is syndicated in – 30
Average number of shareholders per syndication – 40 (up to a maximum 50)
Average price per syndication share – $400
70,000 x 30 x 40 x $400 = $33.6 Billion
Once a patent has been granted the value of the patent will increase significantly. The multiples that can be achieved would vary depending upon the market conditions / sentiment, the quality of the patent, how disruptive the technology is and the subsequent demand.
Benefits of investing in a patent syndication.
Low entry cost – Shareholders need only buy 1 share to participate in the syndication.
Income Potential – Each syndication share comes with the right to use or license the patent and generate licensing income depending on the syndication group.
Investment diversification – The syndication shareholder can own a share in patents across different industries and in different countries or economic environments spreading their risk.
High capital gains potential – New patents offer the investor a ground floor opportunity to benefit from the upside of the patented idea.
Level playing field – the profile of investors can range from group investors, mum and dad type investors to professional investors or high net wealth individuals.
Improved liquidity – There is a greater number of different entities who are able to participate in buying a share of a syndication rather than the entire patent.
Lower risk -The underlying patent has reached the PCT status which means the inventor has received the search results of an international search report and believes that the there is a good chance of patentability in each country.
Tax Advantages: The shareholder may enjoy tax benefits depending on the tax laws in the relevant country.
An Opportunity to Syndicate Existing Patents:
In an article by Robert S. Bramson, President VAI Patent Management Corp. titled “Mining the Patent Portfolio for Licensing Opportunities and Revenues” he discusses that “many (indeed most) companies that have substantial portfolios of patents do not fully understand what they have and its value. ”
He states “These companies are missing opportunities to establish important new revenue sources or obtain other commercial advantage and develop significant shareholder value”.
Patent Syndication will provide these companies with a system to generate new revenue streams.
This white paper has specifically focused more directly on the un-granted patent market. The new upcoming book, will address in more detail opportunities for existing patents and its owners.
Industry Benefactors:
As more inventors and patent owners utilize the patent syndication system, it is anticipated that many related industries will also benefit.
The industries that will benefit include the Intellectual Property Valuation industry, the Licensing industry and the Insurance industry as examples.
One of the keys in the value method of investing in a patent syndication is to know the value of the patent. This means that syndications will need to have the patent valued in its infancy and may also require the patent to be valued at other milestone events including if the patent is being sold outright or taken over.
The Patent Valuation industry will enjoy the benefits of the increased volume in valuations.
Currently the 2% of patents that are successful are generating approximately $180 billion USD in licensing each year. (Source link.) If the success rate was to triple within the next 5 – 8 years the licensing income generated could potentially exceed over $500 billion in revenue per year.
Based on the graph on the following page the total supply of worldwide patents can certainly support a tripling of licensing income considering a small percentage of total patents are utilized for licensing.
The Potential to license out patents has plenty of room for growth
The Graph below highlights the share of patents licensed out as a percentage of total patents owned by companies in selected high-income countries, 2003-2005.
(Source link.)
Depending upon the expertise and skill of the syndication shareholders will determine how successful they are in establishing licensing agreements.
For many shareholders / groups they will engage the services of licensing professionals to establish their licensing agreement. This provides the licensing industry with a massive opportunity to share in the untapped market that patent syndication will create.
The insurance industry can also benefit from patent syndication by utilizing syndication share/s as a defensive and offensive tool for clients.
For example, if the insurer provides insurance to a company in the electronic industry it could allocate say 10% of its premiums to buy a share/s in syndications that could potentially reduce or remove the risk of the insurer having to pay claims on behalf of their clients.
If the global intellectual property insurance industry was to actively utilize the patent syndication system to manage its risk, you would see a substantial increase in the trading volumes of patent syndication shares on an ongoing basis.
Ideally this system of syndication provides numerous benefits to many different parties including the different types of investors who will have the opportunity to access patents that have not been granted by the patent office at an appropriate risk reward price per share. When patents are granted by the patent office, investors can enjoy substantial multiple increases in value of each patent syndication share as a direct consequence.
For patent owners and companies the opportunities and benefits are clear, especially those who are not able to fund the cost of patent protection in multiple countries through traditional means, or would rather prefer to leverage the international marketplace of potential syndication shareholders, to assist them in developing the ability to license their technology to the world.
The patent syndication method is flexible to the varying needs, circumstances, goals and requirements of inventors, patent owners and investors. Only one model is mentioned here, however further options will be detailed within our upcoming book “Making Patent Syndication Work”
When in the Patent Process can Patent Syndication take place?
As the patent syndication system can start once the patent has being published investors, companies, individuals and other entities that want to participate in a patent syndication automatically save between 1 – 3 years of time, as they have skipped all of the early development and initial patent filing process stages. Therefore the waiting time for the investor is the period from patent publication to the granting of a patent. The timing in this period will vary based on the different waiting times and back logs from each patent office worldwide.
Expanding the $180 Billion licensing pie.
The patent owner has a significantly higher probability of earning substantially more licensing income from syndicating in multiple countries rather than owning 100% of the patent in only one or two countries.
The main reasons are that the patent owner now has access to funding and human capital and they receive a small percentage of any of the licensing income generated by the other patent syndication shareholders, from each country of syndication. The patent owner leverages these to enhance the chance of their patents success.
If the patent owner has the funds and resources to patent in multiple countries but chooses instead to syndicate, the patent owner is still able to benefit tremendously with patent syndication as it lowers the risk of failure for the IP, by tapping into a larger network that the patent owner would in most cases normally not have access to, without spending a considerable amount of money and time, to find and outsource this function to professionals who assist patent owners in monetizing patents.
With the licensing income potential for the patent owner and the savings created, it allows them to recycle and redistribute their own funds to invest in other areas of interest for the patent owner.
For example they can expand upon opportunities available within their own business for further growth potential. The extra costs that the patent owner saves can be placed back into the existing patent, through increased R&D or divert the extra cash to another invention and continue the positive cycle of increased innovation which benefits the patent owner, individuals, businesses and society as a whole.
With a potential increase in R&D the patent becomes more valuable as the invention becomes better with advancements. With advancements of the patent and invention the patent owner and shareholders benefit, as it enables all shareholders to potentially earn higher royalty rates with the improvements made, which are then able to be utilized and experienced by individuals, businesses and various other entities. By enabling the patent owner to reinvest it can assist in building on the worldwide $180 Billion dollar annual licensing market. (Source link.)
Since the technology is the same in every other country the patent is syndicated in, the licensee potential demand would also likely increase in every country, as news of a new licensing agreement has been established in another country. This signals the market that the patent commercial viability has dramatically improved, which increases the likelihood the patent will be licensed by other shareholders across the globe where its syndicated and increase the income potential for all shareholders, further driving increases in the global $180 billion licensing market.
As more and more inventors and patent owners utilize this new system of syndication and leverage the network of the world, more inventions will be patented over time that would otherwise not find the resources and or skill sets to do so. The number of actual patented inventions that become successful within the marketplace should therefore rise, potentially driving up the success rate from the current 2% for all patents created to potentially 6% success rate within the next 5 – 8 years.
Opening up transparency and lowering the costs of innovation.
As patent syndication brings together patents and the opportunity for all types of investors to take part and own a part of a patent via syndication, it opens up the previous dark and opaque non-transparent nature of patent transactions, especially within the un-granted patent market that has traditionally had very little sales activity in the marketplace, unless the patents are bundled together with granted patents in the sales process.
Over time the transparency will improve dramatically as many more participants take part in this unique system and together with other types of parties in the marketplace, will allow patents over time to create better price discovery that will assist the market in determining the value of IP more accurately.
As the prices for patents trade to reflect a more orderly and open pricing mechanism, it should encourage and give confidence over time to more entities including businesses to want to learn and consider being part of patent syndications and start investing and utilizing a patent or a portfolio of patents as part of their business plan for future growth.
With patent syndication the costs to own a part of a patent is dramatically reduced for businesses that are considering owning a patent for protection, or to create further innovation within their business, instead of potentially spending significantly large investment outlays to acquire patents, which would be out of reach for the majority of smaller businesses budgets.
Utilizing the patent syndication method a business can pick up a couple of shares in a relevant patent that could literally transform their business through its utilization in their business.
Below is the 2nd quarter 2013 summary of recent patents sold in the US provided by IP Offerings by technology and average price paid per patent to illustrate the potentially large investment outlays that are required to acquire certain patents within various technologies.
(Source link.)
Conclusion
There are many challenges and obstacles for inventors, patent owners and investors in achieving commercial success and realizing their investment goals.
Currently there are many IP intermediaries that function within the global market, each providing a unique business model and service to the industry however no one type of business model is able to facilitate the development and funding of patents in the various stages of development including the un-granted patent market like the patent syndication system can.
The new Patent Syndication system provides solutions to the problems facing inventors and patent owners, whilst simultaneously creating an opportunity for investors to create significant returns in a relatively short time frame.
Patent Syndication provides patent owners with access to a new source of funding whilst their patent is un-granted and investors are able to participate in patents at the ground floor level, taking advantage of the significant increases in multiples achieved once a patent is granted.
If syndication shareholders establish licensing agreements or the patent was being infringed upon, the patent syndication shares would further accelerate in value by several multiples whilst providing an income stream for the shareholders and the inventor.
Enormous opportunities will be created for the licencing industry by growing the patent success rate from 2% (approximately $180 billion dollars of royalty and licensing income) to a potential 6% success rate (a 300% increase).
Patent syndication will facilitate an increased supply of patents to the global market and productivity will begin rising faster around the world as the costs fall to patent. It will also provide a more open and transparent market to trade in.
The Patent Syndication unique model is a new and innovative way to bring more patents to the global market place and offers the Intellectual Property industry with the ultimate win – win – win scenario.
Appendix: Additional Resources on Key IP Contributing Countries
China has surpassed all other G20 countries to be the number 1 countries to create the most inventions. Interestingly just over 75% of the patents filed are done domestically by the China’s residents. (Source link.)
(Source link.)
Japan currently the second highest country for inventions created and granted and has been in a slow decline since, 2004 which could have longer term implications for Japans innovation and future development.
(Source link.)
The US is in third place for inventions created, and has been fairly consistent with new inventions growly slowly since 2003.
(Source link.)
The EU region has been growing quite consistently up to 2008 only to taper off after the 08 GFC period, with new inventions stalling and going sideways the last 2 years.
(Source link.)
Germany one of the powerhouse countries for specialized technology has seen a stable rise in new inventions since 2003 with the 08 GFC having little effect on innovation.
(Source link.)
South Korea is home to several large global technology companies like Samsung and LG, the level of new inventions has grown approximately 30% from around 70,000 new inventions a year to around 90,000 since 2003.
(Source link.)
Methodology:
The statistical information used in this report was gained from multiple sources including the World Intellectual Property Organisation (WIPO).
NB: The information obtained from WIPO’s website and their latest annual reports are for the calendar year ending 2011 which was released in December 2012.
In some instances, the data was averaged over an 11 year time frame to ensure that the outcome was not affected by short term anomalies.
Future reports from WIPO may result in variances in the projections and statistics that are presented in this report.
Definitions
GFC – (Global financial crisis) The 2008 – 2009 period where the international economy experienced a sharp reduction in global GDP, due to a massive asset bubble bursting and a sharp contraction in the supply of credit. Many countries experienced severe recessions like EU countries of Greece, Spain, Italy, Ireland, North America and many other countries
Infringement / Breach of Patent – It is normally defined as, when a patent or a series of patents has been found by a court to have interfered with another patent’s claims and utilization.
Intellectual Property (IP) – “Intellectual property (IP) refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce.” (Source link.)
Investment Syndicate Groups – These are investment groups who pool their resources together to fund investments in companies who are usually in the start-up period life cycle. They sometimes also provide mento