As a start-up one of your biggest challenges is raising capital. The reason is the high risk of failure associated with startups. But there is a way to turn your start-up from a high risk to a high return investment opportunity.
A recent study by the OECD confirmed the strong linkage between intellectual property and the success of start-ups. How important are IP assets to start-ups seeking capital? In some cases it’s critical because IP is often the only asset for financing and generating income. Especially for start-ups that are knowledge or service based and lack any tangible products.
The report confirmed that intellectual property is a signal to external investors, such as venture capital firms, and is often what attracts them. In particular the study found that start-ups with patents tended to attract VC’s faster and generally received larger amounts of capital invested.
A 2005 survey by the European Patent Office found that 40% of the small and mid-size businesses that applied for patent protection did so because it was an important factor in attracting investors or generating additional revenue through licensing. This compares to only 15% of large companies who were not as constrained for raising funds or having access to capital sources.
So why is IP so attractive to investors? Three key reasons are it provides a competitive advantage, helps define your potential future income, and is an asset with a market value.
IP gives your start-up a competitive advantage, both for your products or services and your company. It enhances your company value as well as the price/value of your products or services. It also shows investors how your management is capitalizing on its point of differentiation in the market.
Second, your intellectual property is a legally protected asset, and its value is the basis of your businesses profitability. Your IP not only generates revenue from your core products or services, it can also be leveraged in other markets or non-competitive products to generate more revenues.
Third, your IP is an asset that can be separated from your start-up and used as collateral to secure investor financing. This is attractive to investors because in the event that something happens to your start-up, the IP can be used to recover their investment.
As a start-up your biggest challenges are a lack of a track record and revenues. The result is you’re often financially constrained and always looking for money. Your IP assets are often the only thing that will attract investor capital or conventional financing. That’s why it’s so important to make managing and leveraging your IP assets a core part of your business strategy.
Keeping these three “investor attraction factors” in mind when seeking funding will help turn your start-up from a high risk to a high return investment opportunity.