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Lessons from value investing

IP capital allocation

One of my favorite things to do is value investing. I find it fascinating to learn about different business models and try to value companies based on the information you can gather. It is relatively easy to get a good idea of the value of current assets and earnings based on the company's financial statements. Of course, you have to spend some time understanding the accounting. But that is only half of the equation in valuing a company. Much of a company's value usually lies in its prospects. So investors spend a lot of time trying to figure out what a company might do with its cash earnings. The distribution of cash, such as dividends, reinvestment, or acquisitions, is called capital allocation. I think it is quite logical to understand that good and mindful capital allocation is critical to a company's positive performance. Therefore, good returns on an investment in the company highly dependent on it.

Investment in the future

So why am I talking about capital allocation in a blog that focuses on intellectual property (IP)? I believe that investing in and creating valuable IP rights, such as patents, utility models or designs, is part of a good capital allocation. IP rights are primarily an expense, but they are considered an investment in the future of a company. Similar to other capital allocation decisions, the outcome and benefits are not certain at the time the money is spent on IP applications. In addition, it is nearly impossible to calculate a reliable return on investment for the IP rights generated.

Clever use of IP budget

Good capital allocators think like owners, treating their cash earnings like gold and spending it wisely. The same goes for smart IP spending. The IP budget should not be treated as another unavoidable expense. Every IP application or project must have a clear connection to the underlying business and the company’s goals. If you cannot answer the question of how a particular IP application can advance your business, it is probably not worth pursuing.

Practical advice

So before you rush out and file an IP right such as a patent application consider the following:

  • Be sure to gather all relevant information. This is not limited to the technical details of the invention. It is helpful in this sense to use the knowledge about the product and the market that is available in your company. For example, you can talk to sales and marketing.

  • Take enough time to think about the planned IP application in terms of your business. The extra time and perhaps a slightly later filing date will be well spent.

  • A key question that should be covered by the IP application is:
    “Why does the customer buy the product?”
    The scope of protection such as defined by the claims of a patent application must comprise the essential features that are relevant to your customers.

I'm interested in your thoughts. How do you allocate capital to IP applications and projects, and how do you think about your IP spending?