Why patent application is a good add-on to the investment case for a start-up
“This was the most expensive paper in my life”
It is a quote from one of the inventors speaking about her patent family in two EU countries and US. As many independent start-ups she didn’t have solid backing of a large corporation and had to finance costly patent process from her own funds. The initial idea was to file for a patent and fund the patenting partly through third-party investment or partnership.
The reality check:
😗 Inventors were not impressed by the fact that we applied for the patent — “…many people file for patent…”, “have you actually done some field tests to prove that the technology really works?”, “how can we be sure that we are the first to enter this market?”
🧐 Partners are sceptical: — “Ok, we need to be sure that this technology can be incorporated in our lifecycle — the best case scenario would be to run tests for two years … and you need to provide us with all the know-how… and, well… don’t talk to our competitors…”
😪 Start-up is running out of cash — patenting is expensive. But there are other costs like marketing, product development, travelling, professional fees to different consultants, rent, equipment, etc. etc. The sad reality that the inventor faced was that the patent (or patent application) does not mean you automatically get multiple investor and customers queuing at your door wishing to get access to your fantastic technology.
Understanding patents and associated costs
A patent application is a formal confirmation of priority right. So it means that you intend to patent this technology and have officially asked the government to document the date when you apply, so the competitors who want to patent the same technology after you would be disregarded.
Not all patent applications actually become patents. When going into debris of patenting you may discover that the patent office will decide that you invention is not patentable. In fact, a large number of applications are being opposed by patent offices. This means that you will have to change the initial scope of the patent or reconsider pursuing the patent in certain jurisdictions. This translates to potentially large upfront costs associated with patent prosecution.
Patenting takes time — there are no “word patents” meaning that each respective patent office will review your application. Each office may think differently about your invention. In order to keep the prosecution going you need to hire local patent agents who know the specifics. The patent offices in many countries are overloaded. This combination of continuous communication back and forth with national patent offices, national patent agents, inventors and other stakeholders results in prolonged process for obtaining a patent. And you can’t be 100% sure during this time whether your application will be granted.
Having a patent granted does not mean this patent can be enforced. If you want to stop someone from infringing on your patent rights you need to: a) get to know that someone is infringing; b) be able to prove the infringement; c) prove that your patent should have been issued in the first place. Again it translates to costs and precious time.
Patent (or a patent application) is a significant add on to your investment case.
Regardless of what what is written above, patents make a strong case for investment. Apart from being a certificate issued by the government, patent is a form of property right to intangibles. To give an analogy, you can’t rent out a room if you don’t own it. The same applies to providing access to knowledge contained in the patent.
How to present a good investment case (with or without a patent) for a knowledge-based start-up:
- Keep an inventory of your assets. Put in other terms, present your investment case as a set of assorted valuables separated from each other and complementing each other. For example, the patent only covers technology. In order to utilise the technology one needs the access to know-how and data (secrecy covered assets). You have already some potential buyers who are aware of the product and they identify you with a certain brand (secured through trademark and domain name protection). You have established necessary relationships with partners and suppliers required for making the product (so you have necessary contacts at place).
- Strong team. It is often said that the most valuable asset in any knowledge intense project is people. Apart from demonstrating that you have a unique set of competences, backgrounds and ambitions, you need to prove that the knowledge within a team can be managed in sustainable manner. An investor needs to be assured that people won’t leave the company. Alternatively, if key people do leave, the impact on the investment would be minimal. Having established contracts and secrecy structures in place helps to regulate access to knowledge. With the help of contractual & secrecy mechanisms you can create an infrastructure where no one has access to all knowledge. At the same time with the help of non-compete and secrecy obligations you can make sure that your former employees, founders or consultants will be contractually limited in using the know-how developed within your startup.
- Ownership. Investors invest in companies. A company is a fictitious entity embodying property and association of people. To minimise the risk for the investor you have to demonstrate that your knowledge assets (like technology, know-how, data) formally belong to the company, or the company has access to these assets. There are different mechanisms to separate the people from the assets, including patent rights assignments, licenses, NDAs and other contracts.
