IP strategist: Strategic IP positioning for start-ups

Over 80% of a start-up’s value may be attributed to intellectual assets. This includes registered intellectual property, such as patents, designs and trademarks, as well as unregistered rights, such as trade secrets, copyright, unregistered designs, database rights and know-how. It is vital to capture, catalogue, qualify and protect these assets in order to create and sustain enterprise value.

All IP strategies begin with an analysis of the company’s short and long-term ambitions. Start-ups are companies that are designed to grow fast – as such, their primary aims are to secure investment, prepare for a product launch, increase overall attractiveness for M&A or exit, or go public with an initial public offering (IPO). Developing an IP strategy to support these goals is worth the time and investment, considering that risks faced can lead to company stagnation and eventual failure.

Seeking investment

Investors are primarily looking to invest in start-ups with great leadership, high levels of enthusiasm, a proven market and at least a proof of concept for their innovation. However, investors are now also factoring intellectual property into their investment decisions and are looking to ensure that these assets appropriately support the company – thus providing some assurance that they are buying into something protectable with real market value.

IP strategists help start-ups at the investment stage by preferentially preparing and presenting the intellectual property for investment. This involves creating collateral documentation for investors which demonstrates the intellectual property’s market relevance and the competitive position. Having a good IP story to tell to investors at this stage can help both to secure and to enhance the investment.

Product launch

A looming launch date can often mean that intellectual property is not given due consideration. The IP risks faced at this stage can be potentially damaging to the start-up’s financials and reputation. For example, the start-up may be uninformed about the perceived novelty of its core innovations, which could have already been patented by a third party. This could lead to potentially devastating IP litigation costs and a loss of reputation for innovation. Another risk is failing to take the opportunity to protect innovations by filing a patent before launching – after which it will be open to full-scale reverse engineering and copying by better-funded competitors.

Depending on the company’s goals, technology type and the size or stage of the start-up, some level of IP risk can be tolerated – although an appropriate IP strategy needs to be applied in each case. IP strategists are often engaged at this stage to:

• assess the IP landscape;
• qualify innovations coming from the R&D team;
• provide recommendations for IP protection; and
• provide specific advice on IP risk mitigation strategies

With these concerns addressed upfront, a start-up reduces its risk of market failure, keeps its reputation for innovation intact and can continue on its path towards a successful IPO or exit.

Exit or M&A

Similar to the investment stage, patents – and intellectual property in general – can help to improve a start-up’s perceived value. According to a study by Antti Saari from the Aalto University School of Economics, “Having at least one patent assigned to a company increases the deal value by $250k on average”. The study also revealed that the number of patents owned by a company is less important than the perceived value of these during an M&A transaction.

We have seen first hand the significance and value of intellectual property to a successful exit. We helped one client, which exited to Microsoft, to position itself as an attractive market leader by demonstrating the strength of its IP portfolio. In the years leading up to its exit, it outsourced its IP capture and analysis, enabling it to submit quality patent filings which showed market relevance and business alignment. The client had respect for the value of intellectual property early on, which went all the way up to the board. This perspective clearly paid off in the end, with a significant exit deal, free from IP issues.

IPO

In the run-up to an IPO, established competitors and NPEs may file patent infringement cases with the aim of disrupting the IPO process or extracting a licence fee. If the start-up has not developed a defensive portfolio in the years leading up to the IPO, it can find itself in a weak position, creating greater legal uncertainty for investors and ultimately leading to under-pricing of its shares. An example of this is Facebook’s IPO back in 2012, where it had to spend $550 million to purchase 650 AOL patents from Microsoft and 750 patents from IBM in an effort to fight off litigation from Yahoo!.

Aside from strategically presenting the start-up’s intellectual property for the IPO prospectus, IP strategists can also help before the IPO announcement by determining likely sources of IP litigation and coordinating efforts to identify suitable IP acquisition targets which read on competitors’ products or services, thus bolstering their defensive capability.

Investors and acquirers now value and assess intellectual property more than ever. If it is taken seriously from the start, a company will increase its overall enterprise value, improve its chances of a successful exit or IPO and reduce overall IP-related risks.