truth_000The discussion continues on the IP valuation front.  Joff Wild added a reader response to his original “myth buster” post regarding IP valuation myths.  The response is written by Nir Kossovsky, executive secretary of the Intangible Asset Finance Society and CEO of Steel City Re.  The relevant part reads:

Our current markets are volatile because value is uncertain. International accounting standards suggest that all assets be valued at market. There is considerable push back in the US because the market is damaged and price discovery is not efficient. The international school argues that while prices may be the result of inefficient markets, an asset sold in such a market would likely fetch no more than market price, so it is a reasonable valuation. The US school argues that if one held the asset for some unspecified time, the markets will eventually be more efficient and the price will be higher. Better let the asset owners establish their best estimate of what that value should be, argues the US.
Pat Sullivan is arguing the US position. Except that outside of the short life of a few IP auction markets, there has never been an efficient reliable mechanism for price discovery. Only proxies. And there won’t be except in these periodic major market events such as the Sun-Oracle deal. I respect experts. I respect the opinions of experts more where there is a market basis to a valuation. Last, when the market speaks, I accept markets. (emphasis added)

To which Michael Martin of Drinker, Biddle, & Reath and Broken Symmetry blog commented:

. . . transaction prices provide more accurate valuations than experts, although I’m not sure anybody was arguing that point in the first place. What he seems to be side-stepping is the important distinction between IP and other types of assets. IP is illiquid not only (and not mostly) because there is no reliable mechanism for price discovery. Were that the case, there would be a comprehensive private clearinghouse for IP transactional data already. IP is illiquid because its owners — often also the originators of the inventions protected by the IP — often derive idiosyncratic value from ownership that any buyer cannot, and will not pay for.

Which prompted Kossovsky to reply, in relevant part:

Truth, in our case the true value of intellectual property or any of the other intangible assets, is experiential. If the market discovers it, then it is right. (emphasis added)

I, for one, constantly refer to transparency, price discovery, and empirical observation as the keys that will unlock the IP market and consistent IP valuation. While I do believe in the market and its efficiencies, I cannot go as far as to declare that “If the market discovers it, then it is right.” Instead, I think the better statement would be, “if the market discovers it, then it is real.” To fall back on experience as an accurate “truth” may be assuming too much . . . as though a market price is without errors and manipulations. While the market for real estate finally showed its cards and proved it was not a “truth”, or “right”, at all, the market for intellectual property includes, as Mr. Martin asserts, “idiosyncratic values” that influence the market in ways other assets do not. We are willing to flip a house for another one, but an idea means much more than the price on the table. This is where IP valuation stalls.

The answer to IP valuation cannot be found in market transparency alone, nor can it rest solely on the shoulders of experts. It is contextual, as Mr. Sullivan asserts, but it is also flexible. As I mentioned in a comment to the initial “myth” post, we need to adapt to such contextual flexibility with a guideline that is just as flexible - one that sets a standard for every context.

This entry was posted on Friday, April 24th, 2009 at 1:05 pm.
Categories: Burgeoning Business, Investment Intelligence, Portfolio Potential ~ by Ian McClure.

One Comment, Comment or Ping

  1. Ian,

    I’ll accept the term “real” that your propose over teh term I used, “right.” My interpretation of American Pragmatism is that there is no material distinction between “real” and “right.” The more important distinction is between “truth” — which is the intent of either “real” or “right” — and “truthiness.”

    Several years ago, I shared a valuation model with a Goldman Sachs executive. Value, he said, is a function of price and time. I will grant you that your estimation of price is correct and that the market price is wrong. Just tell me when the market will converge.


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