When you run an early-stage tech start-up, thinking about how you’re going to raise funding is always on your mind.
But it can be very difficult to attract angel investors and venture capital (VC) funding because sophisticated investors do not invest unless they see a unique and valuable opportunity.
An intellectual property strategy for early funding rounds
VC firms understand the importance of IP in valuing a business. The appropriate IP protections enable businesses to maintain a competitive advantage, mitigate risks, and raise outside funding. Having been apart of several startup that have raised multi-million dollar funding rounds and worked with high-tech startups in a number of industries, there are a few things that VC firms typically want to see in an early-stage company's IP strategy. Learn what you need to prepare ahead of your discussions with early funding rounds (Angel, “Series A”, “Series B”). Of course, every investor is different and every deal is different, so your strategy may need some tweaks. Note, for later stage funding rounds the emphasis may be different where investors want to see a more mature IP portfolio that includes issued patents with meaningful scopes.
WHAT INVESTORS WANT TO SEE IN HIGH-TECH STARTUPS
Investors are often look for unique innovations that can be protected and monetized. Investors typically assess a startup’s IP using the following criteria:
You have a solid IP strategy
You need to know what IP your company needs to protect and how to protect that IP. Be able to explain how your IP fits into your overall business strategy, and how it will be monetized. A solid IP strategy that’s aligned with your business goals includes a forward-looking plan for capturing valuable IP in your industry.
In one example, you plan might be to develop a market for your product, stop others from copying your product, and dominate the market. In another example, you plan might be to develop strategic partnerships and license your IP to other companies. As part of your plan make sure to have solid IP counsel to help execute your strategy. Investors know that a competently drafted patent application hold ups to scrutiny in a litigation context and IPR proceedings. If your invention is relevant in foreign markets, you will need to plan ahead to protect your international rights. There is a limited timeline for pursuing patent protection outside of the United States, so make sure to incorporate foreign protection into your plan.
How does your invention fits into the market relative to existing and potential competitors? IP protection demonstrates that you have thought about whether your product is viable in the market and how to distinguish your product in the market. IP assets are valuable independent of your business operations. IP assets work for you even when you don’t know it. For example, they reduce and deter industry competition. Would-be competitors will have to decide whether they want to risk infringing your IP by entering the market.
IP assets also protect you if a competitor accuses you of patent infringement. You can use your IP assets for leverage to resolve an issue. Instead of costly litigation, you can enter a cross-license agreement to access to your competitor’s technology. Having thought through these scenarios and having a plan to leverage your IP in the face of competition will put investors at easy.
When attract VCs, it’s critical to own the IP for your technology. You should be free of obligations to competitors, old employers, previous inventors, and other third parties. Document ownership of your patent applications and issued patents. Have strong employment agreements, invention disclosure records, non-disclosure agreements (NDAs), and non-compete agreements.
Additionally, you should refrain from signing any ill-advised agreements that could compromise your IP ownership, such as agreements granting broad licenses to your collaborators. Want to show investors that you really have your act together? Show them a catalog of documents that establish ownership of all your company’s critical intellectual property.
Strength of you IP
Investors are interested in the value and strength of your IP portfolio. Your patent applications must be able to hold up under close scrutiny. if your patent application claims are overly broad, your application may have a nearly endless number of prior art references cited against it. If your patent claims are too narrow, it may be easy for your competitors to design around your patent.
What is your track record? Investors might be wary of businesses that have dropped a high number of applications — it suggests that the business’s IP may not actually be enforceable or that many of the applications may not end of issuing. If an investor is not experienced with patents they may just kick the tires during due diligence to make sure there are not major issues. If, however, you are going for a significant funding round, they will likely do an in depth review, so make sure you are prepared to withstand their scrutiny.
What investors don't need to see in tech startups
For startups seeking early stage funding, investors are looking for startups with a cost-effective IP strategy, not startups that are wastefully spending. Here are a few misconceptions about what VC firms want to see:
Freedom to operate
A patent search is a search to aid in determining whether an invention may be patentable. People new to the patent world incorrectly believe that a patent search lets them know whether they could be sued for infringing somebody else’s patent. Determining the likelihood of infringement is known as a freedom to operate opinion or IP clearance search and usually involves a much larger scope and cost.
Freedom to operate searches are usually not necessary to attract VC funding. VC investors don't typically expect you to know with certainty that you’ll never infringe another company’s patent. Additionally, a startup’s products and business model are likely to change and pivot over time such that a freedom to operate analysis is often worthless by the time the company starts to be profitable. Most investors want to know whether you are aware any major roadblocks that would prevent you from entering the space, that's it.
Lots of issued patents
Investors know that the patent process takes time. Most investors want to know that you have a viable, well-executed portfolio, without any of the major issues. You should have patent applications on file and issued patents, but a long list of issued patents isn’t a prerequisite for early stage funding rounds.
Big Law Firms
Many businesses assume that the more you pay for an attorney the better they are and that the best patent attorneys work at big international law firms. Big law firm patent attorneys are very expensive and can quickly drain a startup’s limited resources. Investors know that you can get high-quality patent prosecution work from smaller law firms at more affordable rates.
Most investors simply want to see that you have engaged a patent attorney that is competent in your field of technology and experienced at managing patent portfolios. Investors will usually have their own patent attorneys look at your portfolio regardless of who your patent attorney is and judge the portfolio on the quality of your patent applications, not how expensive your patent attorney is.
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