IP for Start-Ups | Part 1: Why IP is crucial for Investors
New founders usually deal with a variety of different topics simultaneously, such as concept development, prototyping, financing, accounting, marketing, and much more. In this process, a particularly important area can quickly be overlooked, namely the protection of intellectual property (IP). This article series aims to demonstrate why it is immensely advantageous for start-ups to intensively engage with IP early on and what needs to be considered. In the first part, we explain why start-ups with IP have an edge with investors.
Increasing Attractiveness for Investors with IP
What some experts have long known is now impressively confirmed by the latest joint study of the European Patent Office (EPO) and the European Union Intellectual Property Office (EUIPO): Start-ups with IP have a clear advantage with potential investors!
The study shows, among other things, that the submission of patent and/or trademark applications in the seed or early growth phase is significantly associated with a higher likelihood of subsequent venture capital financing. Thus, for start-ups with a trademark application, there is a 4.3 times higher probability of financing. For start-ups with at least one patent application, the probability of financing increases to 6.4 times! Start-ups that have registered both trademarks and patents have an even higher likelihood of financing.
But why is this the case? There are several reasons for this:
When pitching, young entrepreneurs make many promises that are usually difficult for potential investors to verify. Having an existing intellectual property right or a pending application can be very helpful in substantiating some of these promises.
Moreover, especially patents and trademarks, as well as other intellectual property rights such as designs or copyrights, can significantly increase the value of a company. Particularly in the early stages when there are no other tangible assets, such as machinery or real estate, intellectual property rights often represent one of the few tangible assets of young companies that can be accounted for. From the perspective of investors, they serve as security and mitigate the investment risk to some extent.
Investors also want to ensure that a promising start-up can market its new idea(s) on its own for as long as possible without competitors jumping on the bandwagon. Such a temporary monopoly is practically only enforceable with suitable intellectual property rights. Technical innovations should, therefore, be protected from imitation through patents. Creative names, logos, and slogans can be protected by trademarks. Design protection can be useful for other forms of creative products or their packaging.
Another crucial factor that makes IP popular among investors is the so-called “Exit Strategy,” which savvy investors already have in mind before making an investment. In such exit scenarios, start-ups with IP have a significantly better risk-return profile. While the risk of a total loss is relatively high for all start-ups, there are significant differences in opportunities depending on whether IP is present or not. If a start-up breaks through and conquers the market, the company’s value is much higher if its business model is secured by a good portfolio of intellectual property rights. The high risk of an early investment can then pay off multiple times.
For founders themselves, taking the perspective of investors can also be helpful. After all, they invest a lot of time and often their own capital in their start-up. Whether their investments pay off can also depend heavily on whether their intellectual property is well-protected or not. It is, therefore, crucial to engage in the topic of IP early on and build a solid strategy. This signals to potential investors both economic understanding and foresight, increasing the chances of an investment from this perspective.
Following our motto “we know how to protect know-how,” we share our expertise and accompany start-ups on an equal footing from the beginning in building a well-thought-out and long-term IP strategy. In an non-binding & free initial consultation, we explain the first steps to create a roadmap for IP champions.
In the next part of this article series, we will explain the 10 biggest mistakes that start-ups can make in relation to IP and how these can be avoided.
