How to Value, How to Use, Patents

Joseph G. Hadzima has an interesting advice column up on Forbes' site this week advising business leaders on how to value patents. Hadzima is a professory at MIT and among his jobs has been working with various start-ups spun out of MIT to determine just what valuation they should be placing on their intellectual property. These valuations matter when start-ups seek rounds of funding, or when companies are considering partnership or buy-out offers. For example, Google has been in the news several times in the past few years buying up patent portfolios to protect its businesses in areas such as mobile computing. Patent holders approached to sell or license their holdings want a way to value them, and of course buyers want to know what to pay.

We're seeing more emphasis placed on the patents that remain when companies collapse - some of the worst practices by this year's trolls are based around patents left after companies failed to commercialize on new ideas. Other IP is left over when an established company such as Polariod goes out of business.

Hadzima's idea is to evaluate both individual patents, and the total portfolio, particularly relative to the portfolios of likely competitors. He also touches on one of my favorite whipping topics, stating directly:

Frequent citations of prior art are an indicator that it is a good patent.

Yes, quite. Hadzima also has some advice that I wish more established patent-holders would follow: license generously, and wisely. He gives the example of Stanford University's handling of a basic gene-splicing patent: use of the patent required only a small up-front fee and further money only if a product based on the patent was successfully brought to market. By keeping entry costs low, Stanford was able to encourage widespread use. Rather than penalizing attempts to innovate, or people who incorporated ideas into standard practice, the license terms focused on sharing profits from new inventions.

My informal impression is that most patent-holders behave sensibly; it's just that some have become so egregiously trollish that they're blackening the entire idea. It's nice to read about a sensible success story for once.