The document discusses how intellectual property (IP) plays a role in startup valuations, based on studies of unicorns (startups valued over $1 billion) and their IP positions. It addresses common questions about developing a patent portfolio, the importance of patents for software companies, when startups should increase their patent portfolios, observing the value of IP in financial statements, recommended patent valuation approaches for startups, and the impact of the Supreme Court's Alice decision on software company valuations and exits. The key takeaways are that a patent portfolio is more valuable if aligned with a startup's core assets, patents may be less important for software companies focused on brand or data, and startups should consider expanding their patent portfolios

1. TIMELY NEWS, ANALYSIS, AND RESOURCES FOR DEFENSIBLE VALUATIONS
Vol. 26, No. 2, February 2020
BUSINESS VALUATION UPDATE
bvresources.com
Reprinted with permissions from Business Valuation Resources, LLC
By Efrat Kasznik, Foresight Valuation Group LLC
(Palo Alto, Calif., USA)
During a BVR webinar,1
I discussed the role that
intellectual property (IP) assets play in startup
valuations and the IP strategy implemented by
startups that recently went public. The webinar
featured a series of studies we have been con-
ducting and updating since 2015, which cover
unicorns (pre-exit startups with valuations ex-
ceeding $1 billion) and their IP positions. Since
some of the unicorns recently went public, we
were able to follow them throughout their life
cycle and observe what types of IP issues fre-
quently emerge for startups and how are com-
panies dealing with them.
The questions below represent six of the most
common questions that routinely come up with
regard to the correlation between IP and startup
valuations. I consider this article to be a compan-
ion reading to the webinar, as it provides a recap
of some of the key takeaways that are important
for each startup (particularly in the software in-
dustry) looking to manage IP as a strategic busi-
ness asset.
1. Q: How can a startup develop a patent portfolio
that will increase its valuation?
A: There are legal aspects to a company’s patent-
ing strategy, and there are business aspects to
that same strategy. The legal side is best handled
1 The IP in IPO: IP Valuation Lessons From Recent Public
Exits, a BVR webinar, Oct. 31, 2019; archive recording
available at sub.bvresources.com/pastevents.asp.
by lawyers, who can search and determine where
patent protection should be pursued based on
prior art and the patent landscape in the market.
From a business/valuation perspective, a patent
portfolio will have value if it is well-aligned with the
assets that bring the most value to the business.
In the webinar, I presented a chart (Exhibit 1) that
lays out the typical intangible assets (technology,
brand, and data) one finds in a software company
and the types of IP rights associated with each
type of asset, as represented by the lines con-
necting assets to IP protection.
In companies where technology is the most
valuable asset (usually correlated with heavy in-
vestment in R&D, such as pharma and biotech),
patents can have more value compared to com-
panies where the brand is the main asset (con-
sumer products, as an example). Similarly, in
companies where data are deemed to be the
most valuable asset (as is the case in many soft-
ware companies), patents may have less value as
the preferred mode of protection, since patents
cannot protect data. The underlying assets that
bring value, such as brand or data, are often not
subject to patent protection and are better pro-
tected by other types of IP.
2. Q: Are patents still important to the valuation of
software companies, if the main assets (software,
data) are not necessarily protected by patents?
A: For software companies, there is seemingly
no observed correlation between having patents
and having a large market share, or a high valu-
ation. As seen in Exhibit 2, taken from one of the
Examining the Correlation Between
IP and Startup Valuations

2. 2 Business Valuation Update February 2020 Business Valuation Resources
Examining The Correlation Between Ip And Startup Valuations
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EDITORIAL ADVISORY BOARD
BUSINESS VALUATION UPDATE
Executive Editor: Andrew Dzamba
Managing Editor: Monique Nijhout-Rowe
Senior Copy Editor: David Solomon
Desktop Editor: Warren Simons
ExecutiveLegalEditor:SylviaGolden,Esq.
Chief Revenue Officer: Lisa McInturff
President: Lucretia Lyons
CEO: David Foster
studies covered in the webinar (Unicorn study
of 2015), if we look at a group of U.S. unicorns
(about 95 companies) and compare the distri-
bution of patent holdings to the distribution of
valuation, we can see the greatest discrepancy
when it comes to the group of consumer internet
companies (software companies such as Uber
and Airbnb); that segment of unicorns accounts
for about 40% of the valuation but holds less than
10% of the patents.
However, patents increase in value in software
companies as they mature and approach an exit
event or enter new markets (as history has shown
with companies such as Facebook, Google, and
Microsoft). A startup (particularly pre-exit) is still
in a building mode. There may be industries the
company would like to enter in the future, where
the patents could benefit them in leveraging
freedom to operate with incumbents/competi-
tors. Additionally, if they haven’t exited yet, a
patent portfolio can be much more valuable to
a potential buyer than it is to the startup holding
the patents, so there is an upside to having more
patents as the company is still figuring out its exit
strategy.
3. Q: How can startups increase their patent port-
folio and when is the right time to do that?
A: There are several junctures where any
company, and in particular a startup with an ab-
normally high valuation, is most vulnerable when
having a weak IP position: entering new markets
with established incumbents and approaching
an exit point such as an IPO (or M&A). Under
current U.S. “first to file” patent regime, startups
that show no organic patent growth may have
lost the ability to patent a large portion of their
core inventions due to missing key priority dates
and may need to make up for it by buying patents
(or companies holding patents) in response to
competitive threats, spending millions of dollars
in the process.
A later acquisition of patents (a phenomenon
often referred to as “backfilling”) takes place
R. JAMES ALERDING, CPA/ABV,ASA
ALERDING CONSULTING LLC
INDIANAPOLIS, IN
CHRISTINE BAKER, CPA/ABV/CFF
ADVANCED ARCHITECTURAL PRODUCTS LLC
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ALVAREZ & MARSAL VALUATION SERVICES
SEATTLE, WA
JOHN A. BOGDANSKI, ESQ.
LEWIS & CLARK LAW SCHOOL
PORTLAND, OR
ROD BURKERT, CPA/ABV, CVA
BURKERT VALUATION ADVISORS LLC
MADISON, SD
DR. MICHAEL A. CRAIN, CPA/ABV, CFA, CFE
FLORIDA ATLANTIC UNIVERSITY
BOCA RATON, FL
MARK O. DIETRICH, CPA/ABV
FRAMINGHAM, MA
JOHN-HENRY EVERSGERD,ASA, CFA, MBA
FTI CONSULTING
SYDNEY, AUSTRALIA
NANCY J. FANNON,ASA, CPA, MCBA
MARCUM LLP
PORTLAND, ME
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FINANCIAL RESEARCH ASSOCIATES
BALA CYNWYD, PA
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STOUT RISIUS ROSS
IRVINE, CA
THEODORE D. ISRAEL, CPA/ABV/CFF
ISRAEL FREY GROUP LLP
SAN RAFAEL, CA
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DELAWARE PLACE ADVISORY SERVICES, LLC
CHICAGO, IL
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CPA/ABV/CFF,ASA, CFE
KEITER
GLEN ALLEN, VA
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SUTTER SECURITIES INC.
SAN FRANCISCO, CA
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MERCER CAPITAL
MEMPHIS, TN
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HOUSTON, TX
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MBA,ASA, CPA/ABV, CVA
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3. bvresources.com February 2020 Business Valuation Update 3
Examining The Correlation Between Ip And Startup Valuations
Reprinted with permissions from Business Valuation Resources, LLC
Exhibit 1. Typical Intangible Assets and IP Rights for a Software Company
Data
Technology
Brand
Patents
Trade
Secrets
Copyrights
Trademarks
Intellectual
Property/
Intangible
Assets
IP Rights
(Legal Protection)
Foresight Valuation Group © 2019
Palo Alto, CA
(650) 561-3374
ForesightValuation.com
Exhibit 2. U.S. Unicorns: IP Valuation Distribution by Industry
Foresight Valuation Group © 2019
Palo Alto, CA
(650) 561-3374
ForesightValuation.com
Source: Foresight Valuation Group LLC

4. 4 Business Valuation Update February 2020 Business Valuation Resources
Examining The Correlation Between Ip And Startup Valuations
Reprinted with permissions from Business Valuation Resources, LLC
usually as a result of a threat (or perceived threat)
to the company’s freedom to operate (FTO). The
kind of patents one can buy, as opposed to file
organically, are those that are available in the
secondary market, and those usually have value
since some infringement is associated with them.
The actual need for IP to support current prod-
ucts is usually met by internal (organic) filing and
sometimes through an acquisition of an operat-
ing business (not a patent acquisition, but a busi-
ness acquisition). Google and Facebook are two
well-known examples of companies that had to
deal with these types of situations and ended up
with massive IP acquisitions:
• Google’s acquisition of Motorola Mobil-
ity for $12.5 billion in 2011 was primarily
driven by the need to improve its IP posi-
tion through a massive acquisition, in order
to enter the mobile market; and
• Facebook was hit by a patent lawsuit Yahoo
filed a month prior to its IPO, which is a
very vulnerable exit point where a lawsuit
can be detrimental and potentially even
derail an IPO. Since it had very few patents
to fight back and countersue Yahoo, Face-
book ended up paying hundreds of millions
of dollars buying patents from AOL, IBM,
and Microsoft in order fight the lawsuit and
bolster its IP position to reduce its exposure
in the future.
4. Q: Where in the financial statements of a
startup can one observe the value of its IP assets?
A: There is no place in the financial statements of
a startup, or any company for that matter, where
one can find the value of its internally gener-
ated IP assets. The accounting rules in the U.S.
and around the world do not generally require
companies to report the value of their internally
developed IP assets on the balance sheet. In
that regard, there is an IP reporting gap, which is
exacerbated by the fact that IP transactions are
highly confidential and not generally reported at
all, or at any level of detail that would allow the
creation of pricing databases that could aid in the
valuation of similar IP assets. Finally, even if there
was full disclosure of IP transactions and pricing,
the IP assets themselves are unique and it is not
easy to find a direct comparable, particularly
when it comes to patents.
There are ways to fill in the gap, but they all
involve engaging in a special valuation of the
IP assets of the company. This IP valuation will
not be part of any business valuation because
business valuations are not targeted at valuing
assets separately. In order for the IP valuation to
be informative and realistic, the valuation itself
needs to be preceded by a careful assessment of
the assets, followed by a strategy phase, where
the IP valuation firm is working with management
to identify the possible monetization scenarios to
be included in the valuation (more on that in the
next question).
5. Q: Is there a specific patent valuation approach
(market, income, cost) recommended for startups,
and why?
A: The valuation approach selection is second-
ary in importance to the valuation context and
scenario. First, there needs to be a determination
of whether the startup has created enough IP to
warrant a separate valuation. Something of value
needs to have been created or accumulated
and/or some IP protection needs to have been
secured around these assets. The next question
is: What is the business model of the startup,
and what IP assets bring the most value in that
context? Then comes the question of how the IP
assets bring value to the startup, which would
prescribe the valuation scenario. And only after
all of that has been determined comes the ques-
tion of the valuation approach and method.
When it comes to the valuation of patents, as a
matter of practice, I find that, in most cases in-
volving startup companies, the market approach
is most frequently applied. The cost approach is
generally not suitable, and is very rarely used, in
patent valuations. The income approach—based

5. bvresources.com February 2020 Business Valuation Update 5
Examining The Correlation Between Ip And Startup Valuations
Reprinted with permissions from Business Valuation Resources, LLC
on the out-licensing opportunities associated
with the patents—depends on the likelihood of
licensing and the ability to create projections of
addressable markets. Given the fact that startup
patents are usually young patents, they often do
not have an enforcement potential (since infringe-
ment usually occurs in mature markets where the
patents have been out long enough to capture ex-
isting products) and any licensing potential entails
a technology transfer type of model, involving
licensing the patent into future products that do
not currently exist. This type of modeling, while
feasible, ends up being too expensive for most
startups, and, as a result of budget constraints,
most valuations of patents in startups resort to the
market approach. The market approach entails
two common methodologies: relief from royalty,
which is predicated on the royalty savings enjoyed
by virtue of holding the patent and is based on
market-observed royalties and the startup’s own
product revenues. The other common methodol-
ogy is based on comparable transactions, which
can be gleaned through patent transactions data-
bases and other public disclosures.
6. Q: Has the Supreme Court’s decision in the
case of Alice Corp v. CLS Bank (2014) 2
had a sig-
nificant impact on software company valuations
and exits?
A: The Alice decision of 2014 is one example of
recent Supreme Court decisions, coupled with
other developments at the USPTO following the
America Invents Act (patent reform) of 2011, that
have generally created ambiguity and uncer-
tainty with regard to subject matter eligibility and
2 Alice Corp. v. CLS Bank Int’l, 134 S. Ct. 2347, 2354
(2014).
the overall validity of patents covering software
inventions. In the Alice case, the Supreme Court
ruled that an abstract idea does not become eli-
gible for a patent simply by being implemented
on a generic computer. There is strong evidence
from the patent transactions market showing a
devaluation of software patents and a significant
slowing down in trading in these assets following
the Alice decision and related developments.
That being said, the correlation between these
developments and software startup valuations
and exits is not an easy one to draw. For once,
as our research shows, many of the unicorns
(75% of which are in the general software area)
have managed to grow their valuations into the
billions of dollars without having any material
patent holdings. One might argue that the Alice
decision had something to do with the lack of
patents; others might argue different reasons.
Since there is strong evidence that startups can
grow into billions of dollars in valuation without
patents, and some of them even managed to exit
in a successful IPO or acquisition, I would argue
that the Alice decision has little to do with soft-
ware startups’ valuations and exits.
Efrat Kasznik is president of Foresight Valuation
Group, which is an IP valuation strategy and con-
sulting firm based in Silicon Valley, Calif. She has
over 20 years of experience consulting on the
creation, commercialization, and valuation of in-
tangible assets, including testifying as an expert
in disputes involving IP and startup valuations
and damages. Kasznik is a lecturer at the Stanford
Graduate School of Business, and Intellectual
Asset Management Magazine has recognized her
as one of the top IP strategists in the world every
year since 2013.