Intangible valuation myths

The latest issue of Intellectual Asset Management (IAM) magazine has an article on the Ten common myths about intangibles value and valuation (subscription required). IAM editor Joff Wild has posted a summary on his blog Ten intangible/IP valuation myths revealed. I will let you read the 10 myths for yourself. I agree with most - but want to focus on Myth #4:

Each intangible should have only one official value. A single intangible may have several very different values at the same time; all of them valid, depending on who owns it and for what purpose it will be exploited.

This characteristic of an intangible (and these folks use the word to really mean IP) makes the valuation highly context specific. I like to use the analogy to the housing market. There are those who want to use a house as shelter; those who want to rent it out; those who want to use it a speculative investment. In that case of a patent, there are those who want to use the patent to create a product and those who want to own the patent to collect royalties. There are also those who want to sell the patent at a later date -- as part of a pool of patents that would be more valuable than a single patent, or after doing further development work on the technology to increase its value, or use the patent for infringement litigation. On top of these categories, we also have defensive ownership. In the housing market, this is buying the lot next to you so no one builds there to block your view.

Yet, for all these different reasons for buying a house, housing prices are generally accepted as valid -- even in periods of extreme volatility such as today.

So let me add Myth #11: Intangibles can't be valued in the market place.

The solution to the valuation problem, it seems to me, is in building up a robust market. And, ironically, building up a robust market requires more attention to disclosure - rather than valuation methodology. If you get the items out to the market - if you let people know they are available for transactions - the market will set a price. It won't be perfect - in fact it is guaranteed to be subject to all sort of irrational and arational behaviors. But if it is transparent and the process is seen as fair, then the price will be legitimate.

And that is the best valuation methodology of all.