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Seller Beware! When The Perceived Intangible Becomes Tangible: Spherix, Bitcoin, Start-Ups!

|Includes: AOL, CHAG, FH, GSVC, IDEA, Spherix Incorporated (SPEX), SVVC, TRUE

A company or individual might invest in what many consider and perceive to be "intangible" assets. These might include assets such as Bitcoin as an alternative currency, property, start-ups (as in the case of Y-combinator, Invent Ventures, Inc. (OTCPK:IDEA), Chancellor Group (OTCPK:CHAG) or BoostVC) or, in the case of Spherix, patents potentially worth billions.

Betting against a company's intangible assets can be a risky business. When intangible assets convert to tangible assets, a short squeeze is usually the next thing that happens. This can happen overnight and last for days or weeks. This is currently happening with Spherix, Bitcoin and Invent Ventures for example. Chancellor Group is up next as one of their start-ups, Fuelist, which just released its mobile app, is set to compete with the recently IPO'ed True Car (NASDAQ:TRUE) which holds a $700 million valuation. Vringo (VRNG), as many investors are familiar with, has also benefited from this process in the past and will continue to do so in the future.

In the case of Spherix, understanding how to value individual patent assets is important. If this is done correctly it can result in a tremendous return on investment. For any perceived "intangible" asset, future valuation and potential return on investment must be factored.

In the case of Bitcoin, another perceived intangible asset, it becomes tangible as soon as a transaction within the blockchain occurs. Transactions can take many different forms and occur for many different reasons resulting in a set price per bitcoin, currently at $500+ and climbing. Suddenly, the intangible becomes tangible catching those betting against it off guard while also excluding them from any gains. Take for example, State Farm agents wanting to accept Bitcoin!

In the case of companies such as Y-Combinator, Invent Ventures, Inc. (OTCPK:IDEA) or the Chancellor Group (OTCPK:CHAG), a single M&A offer, or path to IPO, can convert the perceived intangible asset of one of it's start-ups, to the tangible, overnight. Hidden in the portfolios of some of these investment companies could be large billion dollar start-ups as we seen with GSV Capital Corp. (NASDAQ:GSVC), First Hand Technology Value Fund (NASDAQ:SVVC), Y-Combinator or BoostVC (which also heavily invests in Bitcoin and alternative currency start-ups). These start-up companies remain acquisition targets and their value compounds if they have decent patent approaches or hold large interest in alternative currencies.

Missing out on these opportunities can cost you, so seller beware!

Enter the Blockchain

An innovative approach to patent rights and management might be to use the blockchain. In addition, it's also interesting to note that bitcoins as an asset, share unique similarities with patents as assets. Consider the following from Zacks Research:

"A patent doesn't give an inventor the right to use his invention. Rather, it excludes others from making, using or selling the invention and thus provides two ways for the inventor to realize patent value. Pfizer decided to profit from the patent for Viagra by excluding all companies and creating a monopoly for what would become the fastest-selling drug ever. When Philips and Sony agreed on a compact disc technology standard and patented it, they profited by licensing the technology to other companies. Regardless of the way companies profit from patents, they are true assets to a company that represent real economic value.

Intangible Assets

You can see and touch tangible assets, such as a building or a piece of equipment. A patent, however, is intellectual property, also called an intangible asset. Other intangible assets include a company's brand, trademarks and copyrights. In 1975, intangible assets represented about 17 percent of the value of the Standard and Poor's 500 companies. In 2009, they accounted for more than 80 percent of the value of the S&P, according to Ocean Tomo, an intellectual capital investment bank.

Monetizing Patents

Many companies monetize their patent assets by licensing them to other companies, including competitors. Microsoft, for example, owns patents on technology included in a competing product -- the Android operating system. Each year, Microsoft earns more money from licenses on these patents than it earns from sales of its own Windows mobile operating system. However, companies sometimes have to rely on lawsuits to enforce their patents and collect license fees from companies that infringe upon the patents.

Lack of Accounting Standards

After Microsoft paid $1 billion in 2012 to purchase 800 patents from America Online, investors discovered the real value of AOL's patent assets and AOL's stock rose by 43 percent. Before the sale, investors weren't aware of the value of AOL's patents because accounting standards in the United States don't include the value of patents or other intangible assets on a company's balance sheet. Unless a patent was obtained through an acquisition, shareholders, potential investors and even board members and company executives might not be fully aware of the value of a company's patent portfolio.

Value of a Patent

Many factors are considered when estimating the value of a patent, including how important the patent is, the size of the market for related products and services, the number of years left in the patent and the number of other patented products and services in the same area. The most common method arrives at a patent's value from one of three economic analyses: the amount the company might pay for the patent if it didn't have it, the amount the company could get if it sold the patent or the amount of money the company expects the patent to bring in over its lifetime."

Additional points regarding valuing patents, Bitcoin or start-ups as assets include:

A key part of valuing a patent is to obtain a value of the invention in question. It does not make good business sense to obtain a patent on an invention that will not result in a suitable return for the inventor. Because patents are intangible assets, it is often difficult to assign a monetary value to them. The most common patent-valuation method is the economic-analysis method.

Economic Analysis

The economic-analysis valuation method has three approaches: cost, income and market.

Cost Approach

This approach states that a patent's value is the replacement cost - the amount that would be necessary to replace the protection right on the invention. The replacement cost of an item refers to the amount of money that would be paid, at the present time, to replace the item. If an inventor has an item that he or she has patented, the patent's value would be the amount of money required to replace that invention. A prospective client would not be willing to pay more for a patent than the amount he or she would have to pay to obtain an equivalent protection right.

Income Approach

This method looks to future cash flows in determining valuation. It states that a patent's value is the present value of the incremental cash flows or cost savings it will help provide. When a company or individual develops a product that has the potential to be patented, the underlying hope is that the patented product will cause an increase in sales, or at least be a cost-saving measure in the company. This approach states that the patent's value is the current cash value of these future benefits.

Market Approach

This methodology involves determining what a willing buyer would pay for similar property. In other words, the patent's value is the value of similar patents or patented products that have been sold and purchased before. Two things must be in place for this approach to be used for patent valuation:

  • Existence of an active market for the patent, or a similar one
  • Past transactions of comparable property

Look for similar values for the following items when looking for comparable patents:

  • Industry characteristics
  • Market share or market share potential
  • Growth prospects

Both businesses and investors must be able to account for a patent's value. After all, new inventions and innovations often keep companies on top. As intangible assets, patents present a challenge in terms of valuation, but they can be pivotal in determining a company's success - and the success of investors who buy these companies' stocks, bitcoins or entire start-ups!

Disclosure: I am long SPEX, IDEA.

Additional disclosure: I am also long Bitcoin