The importance of IP when raising investment

Of course, the answer to all these questions is: “it depends”. But understanding why IP is important to investors will help you figure out how to satisfy them.

Top of any investor’s wish list is a business plan with potential for large returns and a team with the potential to deliver it. Assuming ticks for both of those, when assessing your business, investors will then try to identify the barriers to success and how difficult they might be to overcome (there are always barriers).

This is why IP is important to investors - because good understanding and management of IP issues can reduce those barriers and mitigate associated business risks.

Copying

Perhaps your innovative solution is genius but easily replicable. On the other hand, it might require deep expertise or extensive research that is very hard to find or replicate, even if you know how.

In the former case, a portfolio of registered IP rights like patents might be the only feasible way to minimise the risk of copying. In the latter case, confidential know-how and trade secrets might have more significant value. For nearly all businesses, protection from copying is only achieved through a combination of different rights.

The size of your IP portfolio signals to investors the level of innovative activity within your business, as well as the defences built up around your innovation. A portfolio of zero can give investors easy justification to pass on an investment.

Infringement

It is not an overstatement to say that being sued for IP infringement can be an existential threat. However, the risk here is highly dependent on the sector.

Understanding how your market operates is critical to determining the level of risk and how to reduce it. In some sectors, cross-licensing IP is common. To ensure freedom-to-operate, emphasis is often placed on developing larger portfolios to increase the prospect of cross-licensing.

In other sectors, litigation and injunctions are more common. Extensive freedom-to-operate analysis may be required at a relatively early stage to identify problematic IP that can be challenged to clear the way for your own product.

A lack of appreciation for the risks specific to your sector will surely reduce investor confidence in your ability to scale the business and realise the returns they are looking for.

Ownership and Licencing

The IP ownership situation can be particularly complex for some start-ups in view of their often-informal beginnings. If IP rights like patents are core to the business, then ensuring the ownership position is watertight is a must. Even rectifiable problems with IP ownership will eat precious resources if left for too long, and can turn off investors.

Whether an IP licence is acceptable to an investor, rather than ownership, depends greatly on the relationship with the licensor. Exclusive patent licences from universities for the purpose of forming a spin-out are generally considered low risk, particularly when academic inventors are also stakeholders in the business.

Of course, if you can’t demonstrate that you have the rights to use critical IP, let alone the formal legal rights to it, then that is a big red flag.

Operations

If IP is important to your business, then so is IP strategy and management. If IP is an afterthought, or handled reactively, then each of the risks discussed above will be magnified.

Again, the steps that you should take can be dependent on the sector in which you operate. Systems designed to capture and protect innovations in order to build a competitive portfolio are likely to be important for most businesses. Formalising your approach to freedom-to-operate at an early stage may be more critical for some sectors than others.

Even basic IP management practices, like appointing an individual or committee to take responsibility for IP within the business, will go a long way to reassuring investors that you have the management nous to develop your business into a commercial success with their money.

Conclusion

Your business plan and team will often define the maximum potential value investors put on your business in the early stages. But everything else, including your approach to IP, will work to knock that value down.

If you take the time to understand the IP within your business, the approach to IP taken in your market sector, and how IP can be leveraged to your commercial advantage, you can formulate a plan to meet the needs investors at each investment milestone. (Although, it wouldn’t be unreasonable to get some more specific guidance from an expert.)

Do that, and when you ask for investment, I can (figuratively, for the purpose of gravitas in this article, but not legally) guarantee the answer won’t be: “it depends on your IP”.