Creating IP Assets (Part I) With Rich Goldstein

Intro (00:09):
Welcome to Innovations and Breakthroughs with your host Rich Goldstein, talking about the evolutionary, the revolutionary, the inspiration and the perspiration, and those aha moments that change everything. And now here’s your host, Rich Goldstein.

Rich (00:33):
Rich Goldstein here, host of the Innovations and Breakthroughs podcast. I featured top leaders in the path they took to create change pa include Joe Polish, Roland Frazier, and Kevin King. This episode is brought to you by my company, Goldstein Patent Law, where we help you to protect your ideas and products. We’ve advised and obtained patents for thousands of companies over the past 28 years. So if you’re a company that has software or product or a design you want protected, go to goldsteinpatentlaw.com where there are amazing free resources for learning about the patent process. And you could email my team at welcome@goldsteinpc.com to explore if it’s a match to work together. You could also check out the book I wrote for the American Bar Association that explains, in plain English how patents work. It’s called the ABA Consumer Guide to Obtaining a Patent. So I’m doing an unusual episode here today.

Rich (01:24):
Um, for the past hundred or so episodes, what I’ve done is I’ve interviewed other people and had them tell their stories about innovation and about how they took something that was an idea in their brain and brought it out there into the world. Um, what I’m gonna do in this episode is talk about a topic that, um, is very exciting to me. Something which I’ve, I’ve actually, um, through my career had some notions about. And then ultimately over the last couple of years, it’s really come together in a way, um, that I think leads to a mindset shift. And in particular, the thing that I’m, um, going to be talking about is about how we create ipi assets, um, how we create and grow IP assets. And this is something which has shifted over the years. My, my thinking about it has shifted over the years.

Rich (02:19):
And, um, I’m just very excited to share with you kind of what I’ve learned in the last few years after seeing a bunch of, of, uh, acquisitions companies being purchased and the role that IP played in those purchases. So, first of all, a little bit about my background is I’ve been a patent attorney for 28 years. I have over 2000 patents issued to my clients during that time. And I’ve also had the pleasure of, of writing the book for the American Bar Association that explains patents, that explains patents to entrepreneurs. It’s called the ABA Consumer Guide to Obtaining a Patent. And, um, just a little background here, when we’re talking about ip, we’re talking about intellectual property. Really what we’re talking about is the field of law that deals with property of the mind, um, the protection of ideas. And through ip, through intellectual property, we get to protect things like products and apps, branding, and our valuable content using mechanisms in IP law that we know more familiar by the names, patent, trademark, and copyright.

Rich (03:31):
So on the patent, trademark and copyright law, we protect our products and apps. We protect our branding and we protect our valuable content. So now the question is, and this is again, the thing that’s evolved over time, or my understanding has evolved over time, is how does IP influence the valuation of a business? And, um, my general understanding go something like this, it’s that without intellectual property, when you go to sell your company, the company’s valuation is based upon the sales that you’ve been able to create, the market share that you’ve been able to create. It’s based upon revenue and upon upon profitability. And in essence, through operating your business for a certain amount of time, you’ve been able to acquire a small amount of the market share a, a slim slice of the pie, let’s say. And that little slice of the pie is what the company’s valuation is going to be based on.

Rich (04:33):
However, when you do have intellectual property, the game changes, uh, and now the valuation is based on the rest of the potential market share. And let me explain why. So going back a moment to when you don’t have intellectual property, um, essentially you’ve built your company to a certain level, certain amount of profitability, certain number of customers, certain customer list. Uh, when someone’s looking to acquire you, they’re looking at paying you a certain amount for your business based on that, because at the same time, what also is a consideration if you don’t have IP, is that they could simply, um, spend money to build a company like yours. So instead of paying the money to you, what if they went out and they created their own company and they put that money towards building structures, building infrastructure, building, um, customer lists, spending money on advertising and marketing and promotion.

Rich (05:37):
So if they spent the money they were going to to pay to you to buy your company on instead building a company just like yours, what would it cost them? So that’s always a parallel consideration when there’s an acquisition, and that’s when you don’t have ip. But now, when you do have ip, they can’t just create a company like yours. Uh, the only route toward getting into this business that you’re in is through you. And that’s either because you own the rights to the product itself and they can’t make a product just like yours. Or you own the rights to the branding and, and the customers are looking for your branding. And therefore, that’s what’s creating the opportunity. That’s what’s creating the value. And so when someone’s acquiring a company, they, they’ll say, Well, if we, if we have to go through them and we’re able to acquire this IP that allows us to be the one who operates like they do, then they’re looking at the upside.

Rich (06:41):
They’re not looking at the little sliver of market share that you have, although that’s kind of the baseline, right? They’re also looking at what they can grow from that. Um, they’re looking at the whole rest of the pie because that’s what’s possible if, um, they are able to take what you’ve built and grow upon it. So having the IP can be a multiplier of value. And so this concept, um, what I’ve just described right here is kind of what I’ve been talking about for a number of years, and it’s kind of very, let’s call it empirical or it’s, it’s based upon the, um, experiences that I’ve had. It’s not very scientific is another way to put it. Uh, I mean, I had this same illustration in my book, which was published in 2016. Uh, but recently through acquisitions I’ve gotten to see just the value that IP has come to play, uh, and the way in which it could be a multiplier of value, but nothing is quite as clear as this image, which, um, came from a study by a, um, a British tax, um, British, um, insurance consultancy.

Rich (07:49):
Uh, and essentially they lay out how intangible property, intangible property includes IP has played such a big role in company valuations over the past 40 years or so. Um, said differently that the value that the, the way in which intangible properties impacted the biggest companies in the world has, um, has become dramatic in recent years. So, uh, you know, essentially from this study, um, there’s, there’s a, here’s a, here’s a bunch of numbers from it. So back in 1975, the five largest companies by market capitalization, ibm, ExxonMobil, Proctor and Gamble, GE and 3M had, um, uh, what part of the s and p 500, Uh, and, uh, the total valuation for the s and p 500 was 715 billion. So 715 billion of which 122 billion was intangible, meaning ip, its and branding, et cetera. And, and 594 billion was tangible. So just to make that more clear, um, it was five to one tangible to intangible because companies like ibm, ExxonMobil, Proctor Gamble, ge, 3m, they owned lots of tangible assets.

Rich (09:15):
They own trucks, they own factories, they owned real estate, um, they owned ships. And so through all of that, they own very much, mostly tangible assets. But that was then. Now how about now these days, um, it’s kind of the opposite scenario where you’ve got the biggest companies in the world. Biggest companies in the s and p 500 are Apple, Alphabet, Microsoft, Amazon, and Facebook. And together they amount to $25 trillion in valuation, or the s and p 500, including those five is 25 trillion valuation, but now it’s the opposite scenario. Intangible assets, 21 billion, 21 trillion, tangible assets, 4 trillion. So it’s basically like around five and a half to one intangible to tangible. So now almost all of the valuation in the biggest companies of the world is intangible assets, ip, branding, knowhow, things of that nature. So this has been a huge shift. Um, so it’s, it’s gone from essentially five to one, uh, to 1, 2, 6.

Rich (10:36):
And so this is roughly like a 30 time difference. So, so IP has become 30 times more valuable over the last five, um, four decades, let’s say since 1975. And, um, you know, so, so the point of this is that if the biggest companies in the world are making so much out of intangible property, if basically all of their valuation is based on ip, how come your company isn’t? How come, how come you’re seeing IP as such a small role in the company’s valuation? Uh, and the answer is, it doesn’t have to be that there could be a huge opportunity for scaling your business through ip. So we often look at scaling our business by growing sales or maybe, um, growing the channels that we’re selling our product through, um, by growing revenue, growing profitability. But you could also scale the business by creating and growing ip.

Rich (11:43):
And these are things that are sometimes called Rembrandt in the attic. Um, I get that term from Roland Frazier. He often talks about it. And the analogy being, um, you buy a fixer upper house, um, for a low amount of money, um, expecting that you’re going to maybe fix it up a bit and flip it, make a little bit of money. But in the attic you see a bunch of old paintings, um, that the owner carelessly left behind or just disregarded, let’s say. And among those is a Rembrandt sitting right there in the attic. And so now you have a painting worth millions of dollars that was hiding in this lower value asset or as part of this asset that you purchased for a lot less money. So if you are acquiring a company, um, there may be a Rembrandt in the attic with regard to ip.

Rich (12:36):
There may be an opportunity there, um, for you to consider, um, growing, um, and, and, um, thereby increasing the valuation of the company. So one thing you should do when you acquire a business is you should audit the business for those IP opportunities. And in general, again, we’re talking about a mindset shift here because most bi business owners view their investment in IP as its value while they’re operating the company. They look at it as a value of slowing competition, gaining sales revenue from having differentiated and proprietary products and services, right? They look at it as like, Well, what’s the, what’s it gonna make me toward the bottom line while I’m operating my business? But, um, you know, this, this view towards cash flow, this view towards return on investment in terms of gained revenue, avoiding lost revenue is only a piece of where the true value is.

Rich (13:34):
Um, growth oriented entrepreneurs view their investment in IP as increased valuation of their business because of the IP they create and protect. And this value can lead to a huge roi, a huge return on their IP investment when they actually go to exit their company. And, um, so this is something that I was really excited to talk about here, um, in this episode, um, in this, I guess what they call thought leadership episode, which I don’t usually do. Typically I’m doing interviews, but, um, but this is an essential mindset shift that I think is important to make if, if you want to maximize the value of your company. Uh, and I’m going to continue this. I’m gonna do a second part of this episode. Well, I’m gonna give some examples where you can see where this ROI actually comes about, uh, and, and how it becomes a no brainer to invest in ip. So, uh, thank you so much for listening, and I’ll see you next time.

Rich (14:42):
Thanks

Outro (14:42):
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