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AA 018: What is your opinion on intellectual property for VC valuation?

TL;DR: Learn the importance of intellectual property for VC when you are fundraising.

Welcome to the fifteenth podcast of the Ask Alex show! Today the question is on “What is your opinion on intellectual property for VC valuation on start-ups?

In this podcast, we debate the value of intellectual property:

  • How should you be allocating your resourcespitch deck
  • That you need a budget to defend intellectual property
  • Do VCs care about IP/patents?
  • Are patents useful for sales?

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Comments 4

  1. A startup has to clearly understand what their patent portfolio is going to look like as a commercial success over the next 5 years. Some early investors will want to see what your IP is to support your startup product, especially in life sciences. Forget the idea that you can litigate successfully your IP unless you have $3 million in your war chest (average price to litigate a patent). Here are some defensive positions you can take to protect whatever your IP is: investors with big names and big funds who are invested in you can tell a potential competitor who will infringe or reengineer your IP, great, steal the startup money and you steal our VC or PE money. You guys will not be on the short list when this product goes to market and is a commercial success for acquisition but your competitors will. Do put a budget amount to do a Freedom To Operate analysis to see exactly what you have claims to and not as well. A serious corporate acquisitor will do one if they seriously want to buy you or steal your product. The ultimate defense is during the seed round include your customers, especially big customers an opportunity to buy equity at the least expensive cost. If they are Key Opinion Leaders, they will not be happy and casually tell your potential competitive poacher it would probably be a better idea to acquire your company in the future than risk losing the KOL’s business on what they buy from them today. When Brand X wants to take whatever IP you have, just mention your capital structure and list of investors. They will back off real quickly. But more importantly, patents portfolios are impacting valuations less due to the importance of your trade secrets and the value of your data. If your product or service is going to generate data that creates value in your industry and insights into that data translate to value to your customers, your company valuation is increased. But it all depends on how disruptive your IP will be and how much value you create as well as who will share that value.

    1. Post
      Author

      Hi Byron – Thanks a lot for sharing!
      The $3m average price of litigation is a super interesting fact.
      I learnt a lot from this.
      Would you be interested in doing a blog around what you just wrote? You share a lot of perspectives I wouldn’t even think of so I’m sure founders would find it insightful.

  2. I would agree with your IP approach in 99% of all practical cases. You are right, the absolute majority of all filed patents are pretty much useless from business development perspective because:
    – they disclose an invention that has little commercial value (yes, you invented this, but who cares?), or
    – can be easily worked around (yep, I can get the same result in a different way!), or
    – you will never know if your competitors are using your invention (think of some smart backend algorithms that are invisible for external world that includes you and your lawyers), or
    – cannot be protected in legal debate due to lack of resources (an inventor cannot afford the legal fees that could be $XXXk or $XM).

    However, I believe that there are some rare cases when a true innovation (big or small) is on the table. Here decision making is more difficult. Think of Snapchat features such as disappearing images or Stories that their much bigger competitors such as Facebook could not copy because of a patent protection. This could be a matter of life or death for your startup.

    Also, in some cases big players (think Google, as an example) could decide that it is easier to buy your company with a desired IP rather than spend time and money in legal battles. In these cases, your critical IP could be a major factor for an acquisition which for some entrepreneurs is the best exit strategy.

    I’m interested in this discussion since I believe that my case has decent chances to be in the rare case of highly needed IP protection. Thus, I’m crying over my IP budget, but getting ready to file several patents.

    1. Post
      Author

      Hi Pavel-
      Thanks for weighing in.
      I agree with everything you are saying.
      There are of course exceptions to the rule. You just need to believe they are worth the effort. Hopefully, they are in your case 😉

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