How do you decide whether to file a patent application?
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For startup companies, patent and trade mark filing may seem like another cost with distant, long term benefits - but, used wisely, patents and trade marks can pay their way in the short term by helping you to raise funding. A 2023 report by the European Patent Office and EU Intellectual Property Office showed that startups with patents and trade marks were 10 times more successful in raising funding than other startups. For startups, having Intellectual Property can bring in money. Why is this?
Investors' perspective
Experienced technology investors appreciate that defendable intellectual property is essential to build a successful company. They will usually have had the experience of investing in companies that were unsuccessful because of copyists. Similarly, the organisers of business competitions, business incubators and other grant-awarding bodies understand this and will normally ask detailed questions about intellectual property as part of any investment or award process. Intellectual property won't make you a business, but you might not have a business without intellectual property.
Why do investors think IP is essential?
If you have a business plan for a start-up or scale-up business, you presumably believe that you have or are developing some important commercial advantage. It may be that your advantage is based on a new technology or around product design. Unless you can stop competitors from copying your technology and design then, if you are successful, you will attract copyists. You may well find that your competitors adopt the same technology, or you could find yourself competing against manufacturers (possibly your own manufacturer), and distributors (possibly your own distributor) selling directly to customers without having had to incur the R&D and marketing costs which you have incurred. These risks will reduce or remove the business case for investing in you.
Branding is also important - for some businesses, particularly businesses which sell to consumers, branding may be their main intellectual property. If you have a brand, that brand can develop a reputation which brings in customers. You need that reputation to be vested in your brand, not just in your category of products; otherwise, your marketing may simply develop the class of products and services, not specifically your products and services. Even if your business plan is as simple as "be first to sell X", you will need defensible branding if you are going to stay first.
Intellectual Property benefits Investees and Investors
All of this is important when businesses are established and successful. For many startups, this seems like a million years in the future. But intellectual property needs to be built up before products and services are launched, often at a stage in the business lifecycle where funds are short. This is one of the reasons why businesses need investment. And it works both ways - would you rather invest £1 million in a business which is developing a product which was likely to attract low-priced copyists, or £1.1 million in a business which is developing a product and expects to be able to stop competitors from copying it closely and sell its products at a premium price?
What intellectual property do investors want to see?
For technology companies, patents are of most importance because they may offer protection of broad scope. When seeking investment in your technology company, having at least one patent application on file is very useful. This means that you have to first find the money to file a patent, but the return could be substantial in obtaining funds to develop your business. It is also helpful to have plans to file more patent applications as the business progresses. If you have the resources it can be especially helpful to have at least one patent actually granted. This can convey confidence that you will get further patents granted in time.
Investors do appreciate that startups sometimes file patent applications to give the appearance of defensible intellectual property - and sometimes having even a weak patent application will help an investee to tick a box in an investment criteria checklist, but an actually granted patent has greater weight. In the long term, investors look for enforceable IP as well as IP which could be used defensively if disputes arise.
It can also be helpful to document your ideas that might be suitable for patent protection. Although this carries less weight than having a patent application on file, it is sometimes possible to reassure early-stage investors that you have various ideas for which you intend to file patent applications, once you have the funding which they are going to provide, if these are documented and ideally have been subject to some scrutiny.
The importance of trade mark registrations (and registered designs) varies between businesses. For some high technology companies who are a long way from launching a product, they are not so high a priority, but if you have product on sale, or expect to have it on sale soon, it is important to register key trade marks in key jurisdictions. If you have invested time in developing branding and are trying to build a reputation it is important that that is defensible. For many early stage businesses, the biggest risk is of infringing trade marks belonging to others. Although registering trade marks does not in itself mean that you will not infringe any third party rights, particularly in countries like the UK which do not refuse new applications which conflict with earlier rights, instead leaving it to the owners of earlier rights to file an opposition, if they wish to do so, having your trade marks registered in key markets does provide some reassurance to investors.
If appearance is critical to your product then it is important to register the design before you publicise the product. Although some territories have a limited grace period (e.g. 1 year in the UK and EU) for registered designs, it is dangerous to rely on it and some important markets (e.g. China) have no grace period at all. Design registrations are useful intellectual property rights which can be helpful to bring in investment in some product categories.
Patent Box
The UK Government "Patent Box" scheme allows companies to pay reduced, 10%, corporation tax on profits from exploiting patented inventions which they have developed. For young businesses, making any profit is usually a higher priority than some possible future tax saving on future profits, but when it comes to calculating the value of a company to an investor, the possibility of a significant tax reduction can have a substantial effect on value. The Patent Box tax reduction applies to profits on worldwide sales but requires a patent only in the UK (or any of a number of other European countries). This is another reason why having a patent for what you sell, or a pending application which is likely to lead to grant, can make it easier to raise money.
How do you present IP to investors?
Intellectual property should feature as a section of your business plan. It is helpful to have a schedule of your intellectual property which you can update as required. You should be able to relate your IP to your current and future products. Your patent and trade mark rights will commonly be scrutinised during due diligence and it is worth maintaining a filing system of relevant documents (filing receipts, examination reports, grant certificates etc.) which you can use to populate a data room, when requested. If your IP is unpublished you may want to limit what you share with early-stage investors.
Sometimes, IP is valued as part of the investment process. Generally, early-stage investors look at companies as a whole and consider IP an important feature of a business plan rather than a discrete asset, but as companies grow, it may become possible to ascribe value to intellectual property.
Are there any pitfalls?
There are certain common problems with intellectual property which can cause problems during the investment process. If there are any reasons why it is not clear that all relevant IP is fully owned by (or exclusively licensed to) the company seeking investment, this will lead to difficulties in due diligence. If your patent applications are at an advanced stage, expect questions as to how they are progressing. Investors often ask about freedom to operate and it can be difficult for early-stage companies to address these questions because freedom to operate searching is expensive, and so is often only feasible after one or more rounds of funding.
How do the costs and timescales of obtaining IP fit with investment timescales?
When you file a patent or trade mark application, you start a process that will take time to complete (often 4 to 6 years for patents). You should ask your patent or trade mark attorneys for information as to what costs will be incurred and when, and bear this in mind when writing your business plan. Frank information as to costs will enable you to work out when investment is required and also to make sure that you obtain sufficient investment to pay the associated costs. Investors are more likely to pay for IP costs when it is clear that valuable IP will be obtained.
With patents, trade marks and registered designs, when you file a first application in a single country, you can file abroad within a defined period of time with a "priority claim" from your initial application. The period of time is a year for patents and six months for trade marks and registered designs. You may be able to time things so that you only incur the cost of filing initial applications before a key investment round and then use some of the proceeds of the investment round to pay for foreign filing, although you have to be confident of raising funding in that timescale.
Conclusion
In conclusion, by developing intellectual property, you can help your business to raise funding, whether through investment or competitive awards. When planning an intellectual property portfolio, you think about the long term, but it may have short-term benefits too.
Author: Alistair Hindle
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