Investments enable companies to expand, hire new talent, build new production lines, establish fresh distribution channels, conduct more research and development and pursue other opportunities too numerous to list. There is no surprise that investors look at these opportunities as a means to gain a return on their outlay. Companies spend hours networking and polishing a pitch to achieve a nod from an individual or firm that their idea is worth the risk.
An investor will pen a check to a company for many reasons. And even though, by many measures, 80-90% of early-stage company value rests in intangible assets, it is rare that the driving reason behind the investment is a company’s intellectual property (IP).
But as rare as it is for IP to be the basis for an investment, it is always considered. Imagine a real estate investor looking to fund a land development project. Even when the market is robust, the land perfectly positioned and demand high, a fundamental question is, “Do you have a deed to the land?”
Such considerations are especially true with tech companies. Investors look well beyond IP in making their decision to give venture funds but the presence or absence of IP is a heavy factor in whether an investor engages or passes. Failing to address and protect IP is a mistake that can easily sink any investment pitch.
All companies, but startups in particular, must pay attention to IP at the earliest opportunity. They need to know what IP rights are required to succeed and how to secure those rights using a strategy for gaining those objectives.
IP protection comes in many flavors, and each tactic protects a different aspect of products and services.
IP rights gained through these vehicles enable inventors and creators to transform their intellectual outputs into tradeable commercial assets. IP rights create options to negotiate business deals or to prevent third parties from using an invention or creative work without authorization. In that way, they help the business create and maintain a competitive advantage. And a competitive advantage attracts investors.
Investors routinely look at a company’s business plan. They want to work with entrepreneurs who have an IP strategy integrated into that plan and recognize that IP is an investment in the future of the business. Understanding the competition is a big part of this equation.
Investors are looking for an awareness of how a company’s IP strategy fits into the market relative to existing and potential competitors. For example, the pharmaceutical industry is heavily engaged in patent filings. Conversely, software is largely protected by trade secrets and copyrights. While companies do not have to follow these norms, they should be prepared to explain their approach and any departures from what appear to be industry best practices.
While many business owners acknowledge that IP can enhance company value and increase opportunities for a rewarding exit, few implement a viable path by which to protect and grow their IP assets. A poor understanding of IP protection and its strengths and weaknesses often leads to the assumption that IP is overly expensive, making it easy to push it aside. Such a failure comes with a huge price tag, especially when seeking to secure investments.
An IP strategy that is aligned with and relevant to the company’s business gives an investor confidence their trust in the business is not misplaced. Business owners need a basic understanding of how different IP rights can be used to advance company goals, as well as the investor’s goals, and how to secure those rights cost effectively.
Certain types of IP rights require that very specific steps be taken before they can be secured. And timing is important.
For example, the ability to claim patent rights hinges on an invention’s novelty. Part of that novelty question is whether the invention has been previously disclosed. An untimely disclosure or failure to properly file for protection can lead to a loss of rights. Certainly, that can be a devastating fact to reveal to a potential investor. An investor not only wants to see that no inadvertent disclosures have been made, but also to see that processes are in place to ensure that such disclosures will not occur in the future.
A business should avoid these types of missteps, including any leakage of information about their new technical developments before they have determined a best path of protection. Patents are not always the answer. An investor will want to see that a company has secured appropriate IP rights for all relevant assets and that management of its IP portfolio is fully aligned with its objectives and processes.
Trade secrets are the default IP protection strategy for many companies. But often those businesses fail to properly identify what exactly they are keeping confidential and why the confidential nature of this information adds value to the company. They also fail to establish and implement means to protect their trade secrets.
Lacking these steps, they find it difficult, if not impossible, to assert trade secret rights and are left with an IP due diligence list that is empty. Investors have learned by the mistakes of their predecessors that IP due diligence is important and will not merely accept a claim that a company’s IP is guarded as a trade secret. They will demand evidence that such secrets are documented and enforceable based on a well-rounded IP strategy from the get-go.
Investors recognize that implementing an IP strategy takes time. It is hard to predict the value of a patent application or if a trademark will become a valuable recognizable brand. But investors are keen on evaluating risk.
Recall the real estate example above. Of course, having the deed to property is important in a land development investment. It establishes the company’s rights in the property. Investors always ask, “Who owns your IP?”
IP assignments, work for hire agreements, employee agreements and the like are critically important to an investor, just as internal trade secrets and IP policies and procedures are. If a company does not own IP central to the business, then the entity that does own that IP can block it from going to market or even shut the business down. Clear IP ownership is critical.
Investors are not looking for a list of granted patents or a string of copyright registrations. But they recognize that the value of patented, copyrighted or trademarked IP (and the company that holds the filings) is much higher than that of unprotected IP (and companies that have no IP strategy).
Said simply from the investor’s perspective, “Why invest in a company that has not invested in itself?”
