Invention Due Diligence: Where Real Value Begins

If patent protection will increase the present value of your future free cash flows more than the present value of the patent legal costs and fees, including future maintenance fees, then yes, it will. This is not patent valuation per se, but an informed quantitative estimate of how patent protection could affect the value of your business based on the time value of money, which requires deep understanding of the market and knowledge of how it will react to new innovation. Therefore, it is essential to carefully consider market strategy before pursuing a patent.

A patent should be treated as a cash-flow generating asset and subjected to net present value analysis, just like any other capital project. The asset itself may be intangible, but the increased cash flow resulting from the market protection it provides is real and quantifiable.

When you choose to pursue patent protection, you are essentially financing a capital project, therefore the patent's internal rate of return should exceed the cost of capital. This conflates the problem for startups, and challenges the notion that pursuing patents at an early stage creates value. Furthermore, if successful and the patent issues, the asset may have value, but that value is entirely dependent on the capability of the business entitled to its protection and the nature of the market it serves. In other words, a patent has much greater value when it is owned by a large multinational company with the infrastructure and personnel necessary to rapidly capitalize on the time-limited legal monopoly it creates. For smaller companies, the cost of patent protection may exceed the value they are able to extract from the market before competitors overcome the technology or the patent expires.

A patent lawyer is unlikely to tell you any of this, because you are supposed to know it before you make that call. Their job is to follow your instructions, draft the broadest claims possible for your invention, and then defend those claims before the patent examiner as they try to narrow their scope or eliminate them altogether. Regardless of the outcome, the patent lawyer has done their job.

That is why it is so important to fully understand the entire financial picture before applying for a patent.