The Challenge of Valuing Patents and Early-State Technologies

The enormous risk of commercializing inventions is not captured by standard valuation models and can cause their results to be wildly misleading. As a consequence, the valuation results seem irrelevant to managers and investors, and the models are not used in key business decisions. This article is about building relevant valuation models for patents and early-stage technologies.
The importance of valuing innovation goes beyond the details of dueling models. Numerous academic studies have placed innovation at the center of economic growth. Improved valuation models for patents and early-stage technologies can help to attract capital and facilitate transactions, thereby strengthening incentives for innovation.
As this review demonstrates, however, valuing patents and early-stage technologies is a difficult problem with no easy answer. One must choose and then customize a model to match the salient features of the application—and even then, the analysis will often provide at best a range of possible values. But even if quantitative real options models are likely to be of limited use in many cases, real options thinking has a major role to play in both "framing" the valuation and guiding the management of patents and early-stage technologies.