Intellectual Property Series – IP Portfolio Building Increases Chances of Investment
Technology Attorney David Benoit
presents his third post as a guest blogger on the topic of Intellectual Property for Connecticut Start-Up companies. In his third installment, he focuses on the ability for entrepreneurs to boost their companies’ valuations through the building of IP portfolios.
No. 3 - Out of Thin Air: Increasing Company Valuation Through IP Portfolio Creation.
Determining an early stage company’s worth can be one of the more difficult components of a fundraising process. While there are traditional rules of thumb, a company’s valuation is highly subjective and there is no steadfast method of calculation.
The company’s founders typically place a higher valuation on the company due to their optimistic future growth and business potential. Investors, however, often view an early-stage company as one that carries a higher risk of failure and as such, will often view its worth in a lower valuation light.
That being said, both sides of the fence generally agree that strategically-created intellectual property can have a beneficial and significant impact on a company’s overall valuation. Keeping this in mind, if a company’s founders anticipate a need to raise investment capital in the future, they should consider implementing a growth strategy that focuses on the development, management and commercialization (i.e., licensing) of Intellectual Property.
As I’ve often reiterated to fledging start-ups, there are very few investors willing to invest capital in a company that only has good ideas. Perhaps a product prototype exists, but rarely is that sufficient to address the concerns of investors, be they a seed, angel or otherwise. Furthermore, the ability to take a company to the next level and execute on a sound operating and distribution model is extremely important, but it is only one of the business areas of a start-up that investors will scrutinize.
Memorializing good ideas into semi-tangible property (i.e., patents and applications, trademarks and protectable trade secrets) is absolutely necessary to maximizing the company’s chances of success – and that is what investors want to see. Savvy investors view a strategic IP portfolio as the necessary foundation to a company’s “Four I’s” – Investment, Improvement, Innovation and Invention – none of which should be made unless a company is positioned to protect them from its competitors.
One good exercise for company management to implement is to hold semi-annual “IP Identification” whiteboard sessions with an IP attorney and incorporate similar exercises in annual strategy planning meetings. Being able to identify company assets as worthy of patent, trademark, copyright or trade secret protection, and strategically segregating them into categories of IP will help to formalize the company’s growth strategy. Additionally, it will help the company and its attorney to identify areas of vulnerability, room for improvement and possible business avenues to avoid. Most importantly, however, it will increase the overall value of the company and position it in a light that is favorable for investment.