Intellectual property (IP) is often the most valuable but least understood asset of a successful business. It belongs to a broader class of assets known as intangible assets which according to a 2015 research report by Ocean Tomo1, represent on average 84% of company value. This compares with just 17% back in 1975.
So what is driving growth in the comparative value of intangible assets? To answer this, we need to understand what they are, and the role they play in business.
As the name suggests, intangible assets are non-physical and non-monetary. They comprise things like know-how, processes, brands, skilled people, confidential information, strong customer relationships and culture, as well as more formalised forms such as patents and trade marks.
What’s characteristic of nearly all intangible assets is that they often represent the primary means by which a company creates sustainable competitive advantage. Consider the value of Apple’s brand, Facebook’s user base, Amazon’s processes, for example. All are significant drivers of value helping underpin and sustain the company’s position in the market.
In an era where businesses are increasingly competing on new ideas and innovation rather than control of physical assets or raw materials, intellectual property has therefore become one of the most effective means of creating a proprietary, defensible market advantage. How so you may ask?
Over 80% or a company's value is now considered to come from its intangible assets, which encompasses a wide range of things such as know-how, processes, brands, skilled people, confidential information, customer relationships, and culture, as well as more formalised IP rights, such as patents and trade marks.
Where intellectual property fits in
In broad terms, intellectual property assets are used to:
- strengthen a company’s ability to exploit new markets through exclusive or monopoly rights;
- help distinguish products or services in the market;
- create customer loyalty and repeat business;
- minimise the risk of others copying or benefitting commercially from your inventions or innovations;
- provide a means by which to extract commercial value from break-through technologies;
- secure lucrative partnerships or customer contracts;
- send strong signals to customers or competitors around expertise;
- attract investment.
Invariably, it is by cultivating one or more forms of intellectual property that a company’s fortunes take off. That may sound like a simple formula for business success, but it doesn’t mean it’s easy or straightforward to apply.
Know your value drivers
A business that can identify what intellectual property is central to its core business, or competitive advantage and importantly, how best to leverage it for long-term value creation, will have a far better chance of success. This calls for a strategic approach that integrates and aligns intellectual property and how it’s managed to the business’ overall commercial objectives – a topic we cover in more detail in the next article.
In the meantime one thing’s for sure, when over 80% of a company’s value can be attributed to intangible assets, they can’t be ignored.
This is part 1 in a 6 part series on IP. The full series can be found here.
Ceri Wells is a founding partner of national intellectual property law experts James & Wells. He has been involved in patent drafting, litigation, trade mark ownership, unfair competition and copyright matters for around 30 years and specialises in working with start-up companies, venture capitalists and seed-funding organisations to encourage and commercialise NZ innovation.