If we deem investment or a successful sale as being indicative of success, it is clear that start-ups which, from an early stage, have had a clear IP strategy and that have pursued that strategy to secure a strong and relevant IP portfolio, will have a greater likelihood of success than those start-ups that lacked focus or engagement in this area. This is clearly elaborated in the article, “IP in early-stage commercial and investment success”, Joseph Hadzima, Bruce Bockmann, and Alexander Butler, Intellectual Asset Management (IAM) March/April 2010; “winners are many times more likely to hold intellectual property than losers”. Whilst the winners identified by Hadzima are the venture capital “industry”, if they win the founders are also likely to win. Other work suggests that a doubling in the patent application portfolio of a new venture is associated with a 28% increase in that venture’s valuation by investors (“Patents as Quality Signals for Entrepreneurial Ventures”, Davis Hsu, Rosemarie Ziedonis, 2006).
So why is this the case? The easy answer is to say that IP assets, and in particular registered IP assets such as patents and trade marks, have a tangible value that is added to the sum of the value of the company’s other assets. Assuming that a driven but prudent approach was taken to seeking protection, the value can and should be many multiples of the investment made to secure the IP assets.
But what about beyond the direct contribution of secured IP assets to a company’s value? What other reasons might there be behind the success of start-ups that are driven by IP? Well, a start-up that is focussed on the creation of IP assets is much more likely to innovate. Whilst there seems little benefit in innovating merely to create something that can be patented, it is surely healthy for a company to strive for innovations that clear the bar for patentability. Having a clear strategy to generate IP assets is a key component in creating an innovative culture. Innovative, rather than merely novel, products and services that address real problems, or which open up new markets, have a much greater chance of success. This is commonly reflected in governments’ policies such as the tax benefit provided by Patent Box in the UK. Such schemes reflect the view that products and services that have patent protection are likely to be more innovative, more commercially successful, and therefore more beneficial to the country in terms of employment, tax revenue etc.
Start-ups focussed on securing their own IP assets are likely to have a greater awareness of the competitive environment than those that are not. This awareness not only allows them to assess risk, but also allows them to identify the direction of travel of competitors and steer their own products and services towards a market that offers less competition and therefore higher profits. A greater knowledge of the competitors’ solutions helps to identify deficiencies with those solutions and to improve on them – a virtuous circle of generating IP – having sight of competitor’s solutions – identifying deficiencies – generating more IP.
The article by Hadzima further points to a strong IP position as building investor and partner confidence by signalling sound management. Clearly, companies that have adopted a laissez-faire attitude to their IP will not inspire much confidence. The same might be said of course for a company that has expended a great deal of time and effort on securing its IP with little to show for it. But then such a company should really not be called an IP driven start-up as their approach certainly didn’t involve prudent decisions regarding the how, what and when of protecting their IP and almost certainly didn’t involve building internal knowledge within the company. This view is reinforced by Mark A. Lemley, the William H. Neukom Professor of Law Stanford Law School, who has stated that “Venture capitalists use client patents (or more likely, patent applications) as evidence that the company is well managed, is at a certain stage in development, and has defined and carved out a market niche” (“Reconceiving Patents in the Age of Venture Capital”. Journal of Small and Emerging Business Law, 4: 137-148. M. A. Lemley).