Valuable IP = Constant cash flow

Invest in companies with IP

When searching for great companies, have you thought about licenses, patents, and royalty interests? If not, you really should, as these often provide businesses with stable and recurring revenue streams.

Licensing is a great way to commercialize your technology or IP on somebody else’s shoulders. It often creates a win-win situation, where a manufacturer, for example, can gain access to another party’s technology and create the best solution by combining their strengths.

There are many benefits to being a licensing company. Here are a few examples:

  • Faster time to market. By letting a larger and more well-known company handle the commercialization, it’s more likely that the products are adopted and succeed, as they ride the brand recognition of the larger company.

  • Larger addressable market. If the licensee is a large enterprise with a global presence, the licensor's IP may reach more markets.

  • No need to finance the commercialization. As the licensee's job is getting the products out there, the licensor avoids this financing risk.

How to find companies with IP

When analyzing IP companies, the customer acquisition cost is something to look out for. This is basically the price the company pays to acquire each new customer. You can divide the sales and marketing costs by the company's revenue. If that ratio declines over time, the company’s customer acquisition cost decreases—meaning sustainable growth.

The price-to-sales (P/S) ratio

Another ratio to pay attention to is the price-to-sales (P/S) ratio, which is simply the company’s market cap divided by the revenue. A high P/S ratio means that investors are optimistic about future revenue growth, betting that the revenue will eventually generate profits.