By Ong Pei Wen
28 September 2018
Ong Pei Wen, Head of Enterprise Engagement | IP ValueLab
Pei Wen leads the enterprise engagement and strategic partnership initiatives at IP ValueLab.
Reach her at email@example.com
Can and should we place a dollar value on IP?
The need to rethink how everyone from auditors to M&A consultants value businesses has been thrown into sharper focus of late.
In yesterday’s economy, successful businesses relied on the efficient allocation of scarce, tangible resources, such as labour, capital and materials to create value and generate revenue. In today's digital economy, however, business success will increasingly depend on the ability to harness a new, intangible type of resource to scale: intellectual property (IP).
Take Grab, for example. The Singapore-based technology company started initially as a ride-hailing transport service provider and, within a matter of years, has now expanded into payment and food delivery services.
Not many people realise this but Grab’s proprietary technologies, or digital IP, was what underpinned the tech giant’s meteoric rise as a disruptor and enabler in established industries from transportation to financial services—industries that, in contrast, spent decades investing in physical assets (e.g. purchasing taxis, setting up credit processing facilities) to build trusted and proven business models.
But should and can we place a book value on IP? How valuable ‘intangible assets’ may be, can appear nebulous.
David Post, who is the Director of Research at the San Francisco-headquartered Sustainability Accounting Standards Board, articulated in a Forbes interview that “intangible values have a direct correlation with intangible assets, and can be significantly impaired by their mismanagement.”
Because conventional accounting treatments have not evolved sufficiently to account for intangible value as they do with tangible assets, unaccounted intangible assets may inadvertently lead to unrealised opportunities.
Already, a third of all products purchased draw their value from intangibles, such as technology and branding, and that share of value is only poised to grow in the near future. The World Intellectual Property Report 2017 has also revealed that IP, together with other intangibles (e.g. design, brand value, workers’ skills, managerial know-how), adds twice as much value to products as tangible capital (e.g. machines, buildings, warehouses, transport vehicles) does.
In fact, IP swings the odds in favour of nimbler SMEs. In the case of Grab, the start-up broke into the sector with their proprietary technologies and gave incumbent taxi operators a run for their money, and with significantly less capital outlay—no need to purchase expansive fleets of taxis.
For startups like Grab, IP assets significantly raise a firm’s value and, in the absence of revenue or profits, often function as the primary or true assets of value during the valuation process for a sale or a funding round.
Still, few can deny that there is a clear danger associated with IP breaches, as IP constitutes more than 80 percent of a single company’s value today.
A study conducted by Deloitte found that a single cyber theft incident could theoretically cost a US$40 billion IT company more than US$3.2 billion, or 8 percent the company’s annual turnover, resulting from lawyer fees and litigation to the cost of lost customer relationships and contracts, among other contributing factors.
Unlike MNCs, few SMEs can afford to lose 8 percent annual revenue from a single, devastating IP event and expect to recover, let alone bear the brunt of more than one occurrence.
So, can local SMEs safeguard their future interests against bigger players that attempt to infringe their IP? Yes, they can, but they need help. The good news is help is readily available via the Intellectual Property Office of Singapore whether in the form helping to align business strategy with intangible assets or an audit of fit-for-purpose IP protection. All they need to do is seek it.