Written by: Keegan Caldwell
In today’s intellectual property-driven market, patents have become pivotal assets in exit scenarios, offering multifaceted strategic advantages. This has become particularly evident around artificial intelligence, where patent portfolios can significantly influence investment decisions and acquisition strategies.
A record $29.1 billion was invested across 691 generative AI deals in 2023, representing a 268.4% increase in deal value over the previous year.[1] This year, AI has continued to earn significant attention from venture capital companies, with VC funding reaching $55.6 billion in the second quarter — its strongest quarterly total in two years, according to a recent PitchBook-NVCA report.[2]
Still, the report indicates investors appear to be growing more selective regarding the investments they make. While the sector is enjoying a 47% increase from capital raised in the first quarter, $14.6 billion of that is sitting with only two companies: xAI and CoreWeave.
This underscores the increasing importance of patents, particularly regarding cutting-edge technologies like those powered by AI. In fact, in the first half of this year, 13 new AI unicorns — private companies valued over $1 billion — emerged in the U.S., and overall unicorn value has grown by $162 billion this year.[3]
The Impact of Patents on Exit Valuations
Recent data illustrates the significant impact of patents on exit valuations. According to PitchBook, patent-seeking companies exit via public markets at a rate more than five times higher than non-patent-seeking companies — 23.2% versus 4%, respectively.[4] Moreover, for acquisition exits, the median exit value for patent companies is 154.9% higher than for nonpatent companies per year on average.
These statistics are further supported by broader market trends. Intangible assets, primarily associated with intellectual property, accounted for 90% of the S&P 500’s value in 2020,[5] up from just 17% in 1975.[6] This shift highlights the growing importance of patents in company valuations across all stages of growth.
The impact of patents on valuation varies across funding stages. Angel deals show the most significant impact, with an annual median valuation 93.2% larger on average for companies with patents.[7] Late-stage investments follow, with an annual median 51.2% larger. This data suggests that early investment in patent development can yield substantial returns throughout a company’s growth cycle.
As companies navigate exit scenarios, a strategically developed and managed patent portfolio can significantly enhance valuation and attractiveness to investors or acquirers. However, it is necessary to do more than simply align patent strategy with business goals. It is just as crucial to focus on high-value jurisdictions and effectively articulate the technical improvements and practical applications of patented technologies.
Developing a Global Patent Portfolio Around AI
As 60% of global CEOs plan to make a major acquisition in the next three years,[8] companies must approach global patent portfolio development with precision.
A strong strategy is to file only in select jurisdictions that have favorable damages, where the cost of litigating is less than the average damages awarded. This nuanced strategy contrasts with the practice of filing broadly in potential future markets. Broad filing can be expensive and shortsighted, as there are several jurisdictions, such as India and Mexico, where patents have little monetary value.[9]
The emergence of AI-assisted inventions has introduced new complexities in patent prosecution and valuation. Last month, the U.S. Patent and Trademark Office provided a guidance update clarifying patent eligibility for AI and software-related inventions[10] under Title 35 of the U.S. Code, Section 101.[11] This guidance, exemplified in Section V’s Examples 47-49,[12] offers insights into the specific disclosures required for AI and machine learning processes.
Per the updated guidelines,
[a] key point of distinction to be made for AI inventions is between a claim that reflects an improvement to a computer or other technology described in the specification (which is eligible) and a claim in which the additional elements amount to no more than (1) a recitation of the words “apply it” (or an equivalent) or are no more than instructions to implement a judicial exception on a computer, or (2) a general linking of the use of a judicial exception to a particular technological environment or field of use (which is ineligible).[13]
This is a positive signal from the USPTO. As we embrace these new technologies in nearly every industry, companies should focus on distinguishing their AI-related inventions from abstract ideas. In order to avoid being characterized as merely “apply it” — and thus subject to ineligibility restrictions — it is essential to clearly articulate an IP’s specific technical solutions or improvements beyond simple data manipulation that can be integrated into a practical application.
Maximizing Patent Value in Exit Negotiations
When a company approaches an exit scenario, whether through a merger, acquisition or initial public offering, the true value of its patent portfolio comes into sharp focus. Maximizing this value requires careful preparation and strategic presentation of the portfolio’s strengths and potential. Due diligence considerations in M&A transactions play a crucial role in this process.
Potential acquirers will scrutinize the quality and scope of the patent portfolio, assessing not just the number of patents but their relevance to current and future market opportunities. They will also evaluate the remaining life of key patents and the company’s maintenance strategies, as these factors directly impact the portfolio’s long-term value.
Demonstrating patent value to potential acquirers or investors is an art that combines technical expertise with business acumen.
One effective approach is to map patents to product lines and market opportunities, clearly illustrating how the protected technologies translate into competitive advantages and revenue streams. This mapping should cover current products and highlight potential future applications, emphasizing the growth opportunities inherent in the portfolio.
Quantifying the future revenue potential of the patent portfolio can be particularly persuasive, especially when supported by market analysis and licensing projections.
Examining high-value exits over the past several years reveals how robust patent portfolios can drive exceptional outcomes. For instance, even though Fitbit Inc., a wearable health and fitness technology company, boasted a more modest active patent portfolio than competitors, the competitive impact of its IP was considered roughly double the average of the top 15 players in the space.[14]
With credit to this enhanced relative value, Google LLC acquired Fitbit for $2.1 billion in 2021. This figure illustrates how important protected IP can be, even if portfolios are smaller than those of competitors.
Google’s Fitbit acquisition offers several valuable lessons for companies seeking to leverage their IP for high-value exits. First, it underscores that strategic patent portfolio development can be more impactful than sheer quantity, even in highly competitive tech sectors.
Second, it highlights the importance of aligning patent strategy with broader business goals, particularly in showcasing technological differentiation to potential acquirers.
Finally, it demonstrates how a well-crafted patent portfolio, even if relatively modest in size, can significantly influence a company’s perceived value and future potential in the eyes of major industry players.
This case exemplifies how companies can use targeted IP strategies to position themselves advantageously in the market, potentially leading to lucrative acquisition opportunities.
The Future of IP in Exit Strategies
Looking to the future, the role of patents in driving exit value is likely to become even more pronounced. The continued advancement of AI is set to revolutionize both the process of innovation and the strategies for protecting it.
Potential changes in patent law and USPTO guidance will require ongoing attention from companies and legal professionals. As the legal framework evolves, staying informed and adaptable will be crucial for maintaining the value of patent portfolios. Furthermore, as AI becomes more sophisticated, we can expect to see new challenges and opportunities in patent development, prosecution and valuation.
For startups and established companies alike, the message is clear: Investing in a strong, strategically aligned patent portfolio protects innovations and builds long-term value, positioning companies for successful exits. A well-crafted patent strategy can open doors to investment, drive valuations and create significant competitive advantages.
Keegan Caldwell is the Global Managing Partner at Caldwell Intellectual Property Law.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Hodgson, Leah. “VCs Go Vertical in Backing Specialized AI.” PitchBook. January 29, 2024. https://pitchbook.com/news/articles/vertical-ai-vc.
[2] Stanford, Kyle, Emily Zheng, and Kaidi Gao. “Q2 2024 PitchBook-NVCA Venture Monitor.” PitchBook. July 10, 2024. https://nvca.org/document/q2-2024-pitchbook-nvca-venture-monitor/.
[3] Kokalitcheva, Kia. “How AI Is Driving the Venture Capital Market.” Axios. March 31, 2024. https://www.axios.com/2024/07/08/ai-stock-market.
[4] White, Andy, and James Ulan. “Q1 2023 PitchBook Analyst Note: Introducing PitchBook Patent Research.” PitchBook. February 6, 2023. https://pitchbook.com/news/reports/q1-2023-pitchbook-analyst-note-introducing-pitchbook-patent-research.
[5] Berman, Bruce. “Latest Data Show that Intangible Assets Comprise 90% of the Value of the S&P 500 Companies.” IP Close Up. January 19, 2021. https://ipcloseup.com/2021/01/19/latest-data-show-that-intangible-assets-comprise-90-of-the-value-of-the-sp-500-companies/.
[6] Ponemon, Larry, Kevin Kalinich, and Jesus Gonzalez. “Financial Impact of Intellectual Property & Cyber Assets: 2020 Aon-Ponemon Global Report.” Aon. July 29, 2020. https://www.aon.com/thought-leadership/ponemoninstitutereport.jsp.
[7] White, Andy, and James Ulan. “Q1 2023 PitchBook Analyst Note: Introducing PitchBook Patent Research.” PitchBook. February 6, 2023. https://pitchbook.com/news/reports/q1-2023-pitchbook-analyst-note-introducing-pitchbook-patent-research.
[8] “US Deals 2024 Midyear Outlook.” PwC. June 24, 2024. https://www.pwc.com/us/en/services/consulting/deals/outlook.html.
[9] Elmer, Michael, and Gregory Gramenopoulos. 2021. Bloomberg Law Global Patent Litigation: How and Where to Win. 4th ed. Bloomberg Industry Group. https://www.bloomberglaw.com/external/page/book_blaw_gpl.
[10] “2024 Guidance Update on Patent Subject Matter Eligibility, Including on Artificial Intelligence.” Federal Register. United States Patent and Trademark Office, Department of Commerce, July 17, 2024. https://www.federalregister.gov/documents/2024/07/17/2024-15377/2024-guidance-update-on-patent-subject-matter-eligibility-including-on-artificial-intelligence.
[11] “Inventions Patentable.” US Code Title 35 Section 101, July 17, 2024. https://www.govinfo.gov/content/pkg/USCODE-2022-title35/pdf/USCODE-2022-title35-partII-chap10-sec101.pdf.
[12] “July 2024 Subject Matter Eligibility Examples.” United States Patent and Trademark Office. July 17, 2024. https://www.uspto.gov/sites/default/files/documents/2024-AI-SMEUpdateExamples47-49.pdf
[13] “2024 Guidance Update on Patent Subject Matter Eligibility, Including on Artificial Intelligence.” Federal Register. United States Patent and Trademark Office, Department of Commerce, July 17, 2024. https://www.federalregister.gov/documents/2024/07/17/2024-15377/2024-guidance-update-on-patent-subject-matter-eligibility-including-on-artificial-intelligence#footnote-66-p58137.
[14] Diakun, Bridget. “Google’s Acquisition of Fitbit Proves Data Is King.” Lexology. November 15, 2019. https://www.lexology.com/library/detail.aspx?g=ceb8aaa5-f9b0-487f-a50d-3b6cf59f5b01.
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