It’s a common scenario. You’re an innovative company showing much promise and you believe you have the potential to be a very successful business.
But to grow the business you need capital. You need an investor (or two). What do you do? Locating potential investors isn’t an issue; they’re out there, openly looking for great ideas to invest in. But how do you attract an investor and secure their financial support?
Investors consider many aspects of a potential investment but one of the most important factors is your intellectual property (IP). This article explains what aspects of IP investors are interested in, particularly in an early pitch.
Importance of IP to an investor
Why is IP important? IP is a strong deterrent to keep competitors from trespassing on your territory in the first place. If they do, IP can be used as an offensive weapon, although legal action is usually only used as a last resort and often it is the threat that is more important. Generating IP is expensive, whether that is R&D spend or the cost of obtaining formal legal protection. But the intrinsic value of IP and what you can do with it, for example through licensing, is very important to an investor, especially considering that some estimates put the value of non-tangible assets at over 80% of an average business’ value, possibly 90% for start-ups.
What does an investor want to know about IP?
The basic facts about what IP rights you have will be important. What copyright, trade secrets, know-how, data and confidential information do you have? Do you have any registered IP rights like patents, trade marks, or design registration? Also, what is the status of these rights and where do they provide protection (i.e. in which countries)?
But what is most critical to an investor, is the connection between the IP and the competitive advantage it provides.
Let’s take an example. You’ve invented a new type of wheel bearing for a car. The bearing enables the wheels to go around faster, providing significant fuel savings. That’s exciting on both counts, but what protection do you have to stop others from duplicating the technology and eroding your competitiveness and prosperity? Hopefully, the technology is protected by a patent. If it is, an effective way to quickly communicate what IP you have to investors in an initial pitch is to explain the competitive advantage the IP provides. For example, stating that you have a patent that protects wheel bearing technology resulting in 2% fuel savings is more easily digestible than a technical explanation.
The technical detail can follow once you have the investor interested and they want to know more.
Assessing the value
Once you’ve provided the reassurances that you have your IP protected, investors will want to know what it’s worth. Remember, for a start-up the IP might be 90% of the value of your business. There’s no one simple formula for calculating that, but a valuation may take into account the value of the markets that you have exclusive rights to, the amount you’ve invested in research and development to generate the IP, or the licensing potential.
One aspect that mustn’t be overlooked - but is neglected surprisingly often - is the ownership of the IP. Checking that the company being invested in actually owns the IP is a key part of any due diligence process. Even the mighty make mistakes. When Volkswagen bought Rolls Royce in 1998, it failed to pick up the fact that the Rolls Royce logo was owned by a separate entity – the aircraft engine arm of the business – which meant it couldn’t brand its cars with the prestigious Rolls Royce marque.
IP ownership should be formalised in writing, via employment agreements and partnership agreements with co-developers, as early as possible.
Freedom to operate
Investors will also want to know what homework you’ve done on the competition. In the markets you’re hoping to make your fortune, do you have freedom to operate (FTO)? In China, the US or Europe are there businesses doing something similar? What checks have you done and what have you discovered?
Here you need to be careful with your message. An over-simplification like “we have worldwide FTO” is likely to be mis-leading and may make an investor nervous. On the other hand, in a first pitch to an investor it is not a good idea to get bogged down in the technical and legal detail of what you’ve found out. Keep the message simple but accurate, for example: “we have conducted patent searching in our major markets and no FTO issues have been identified”.
Know when to keep quiet
You do, however, also need to be prudent about what information you share with potential investors. Stick to what is solely necessary for their assessment of the investment opportunity, and ensure that information is covered by confidentiality agreements.
In trying to secure investment it is important to consider what aspects of your IP protection an investor is interested in when assessing whether to invest in a business, and how best to communicate that to an investor. IP can be a technically and legally complicated area but the message needs to be kept as simple as possible, particularly in an initial pitch. Explaining the competitive advantage that your IP protection provides is a great way to do this.