Did you know that 90% of startups that have IP protection raised funding successfully? IP is any form of original creation that can be bought or sold. IP is protected by legal rights such as patents, trademarks, industrial designs and copyright. These are few simple and cost-effective ways of protecting your ideas and your business. This article will help you understand the strong positive correlation between IP Rights and Fundraising.
Presence of IP Assets (Patents, Trade Marks, trade secrets, domain names etc.) helps in
- Adding value to improve the competitiveness;
- Improving sustainability by ensuring freedom to operate, and keeping at bay unscrupulous competitors
- Developing relationships with employees, consultants, suppliers, subcontractors, business partners and customers
- Obtaining funds.
What Investors seek before committing capital?
- Competitive: Patentable Subject matter in your idea
- Right to Commercialize: Manage risks of infringement of Others IP (Freedom to Operate)
But, how does IP correlate with Funds Raised?
- Improve Valuation to get funding or get acquired
- Improve Contribution margin from early sales, thereby needing fewer investment funds
- Even if business fails, the patents may have value for acquiring company
- Defend itself against attacks for IP infringement by rivals
- Negotiating Tool in Joint Development, Customer-Supplier Relationship, Avoid Price War (Commodity)
Most obviously, a startup with strong patent protection will have a higher exit value, i.e. the value when listed on a public market or sold in a trade sale. Loop with IP, Funds, and Startups
- The higher value is a premium paid for a startup with high gross margins that results from the degree of patent-enabled monopoly protection for its products and services.
- Based on patent-enabled monopoly rights, startups that have good patent portfolios accrues larger contribution margin from their early sales, and thus need to raise fewer investment funds in order to further promote their own growth by investment in R&D, marketing, and company enablement.
- For investors in start-ups, typically venture capitalists, patent portfolios also represent downside protection. Even if a startup happens to fail (runs out of cash or breaches debt covenants), the company’s patent portfolio can sometimes be sold, licensed or enforced, in order to recover some of the original investment.
- A Venture Capitalist only gets to share in the profits when the whole fund is profitable, hence it is very important to get capital back from the startups that fail since this helps the entire fund to move towards profitability. Thus for a startup, this means that seeking investment from professional investors usually means committing to creating a patent portfolio.
- A patent portfolio represents downside protection for founders and staff of a startup as well. This means that, even if the business fails, the startup may have value to an acquirer (say a competitor) because of the patent portfolio; this can afford founders and management (who have to negotiate such deals and be rewarded for doing so) some exit value.
In many cases, a startup does not only sticks to the original business plan. As a startup develops, it finds new opportunities, encounters different problems, and has to deal with a rapidly changing and competitive environment. Having a patent portfolio provides a startup with more strategic choices when a change of direction is required. IP Infringement is not new and not only a headache for Small Startups. From Edison losing the IP suit for Bulb to the dispute of Invention of Telphone between Elisha Grey and Graham Bell, From Bajaj & TVS to that of Apple and Nokia, one thread linking all is that one who filed for Patent first and able to commercialize the Idea won the race.
If you are reading this, then you sure have a plan, let’s connect and figure out opportunities for you.