New Study Reinforces Value of Patents in Venture Capital Investment

Patents are important to VC investment, but it takes more than just having one to succeed
Patents are important to VC investment, but it takes more than just having one to succeed

Regular readers of the IP Asset Maximizer Blog will know that I am a strong advocate of the use of IP analytics by venture capital investors, as well as others.  Clearly, VC’s need better ways to gauge the appropriateness of an investment when more than 50% of venture investment is a loss.

My point of view is based on personal experience with various clients, as well as external review of a few investments that I thought signaled that a review of the IP landscape should have been conducted prior to completing the deal.  So, I was glad to see my opinions backed up by real data.  Specifically, my friends at IP Vision, a patent landscaping and data company originally out of MIT, conducted an extensive study of 9,000 venture backed firms.  The study was done with investors, corporate executives and members of the faculty at MIT Sloan School of Management.

Joff Wild discusses provides an overview of the results on his IAM Magazine blog.  (The original article is behind a pay wall at IAM Magazine, but I will post a link to it when it available for review in the future.)  What I find interesting, is that the baseline for success of VC investment involving IP a 3 part inquirty:

  • Whether a company owns IP (which is often where the inquiry stops);
  • How the IP stacks up against other relevant IP in the marketplace; and
  • How well the company is managing its IP–that is, does the potential investment target appear to have a well-executed IP strategy?

Joff provides more detail about the IP Vision article, but this quote made me very happy, given my role as an IP Strategy “Evangelist” (emphasis mine):

[A] healthy IP position may not guarantee that a start-up technology company is going to be successful, it is going to find it a whole lot harder to succeed if it does not have one. And,crucially, it is not just ownership of IP that is important, it is understanding the IP that is key.

In my experience, most business people do not really understand how and why their companies are obtaining IP.  They say “patent pending” or “patented” with respect to their business models, and otherwise can not articulate the reasons that patent protection is important to allow them to effect their desired exit–be it by IPO or by acquisition.  The IP Vision study demonstrates that it is just not getting IP that matters to successful exit, but also knowing why the IP matters in the competitive landscape and that it is being managed well.

Those seeking to exit will be well-served by understanding that VC’s may be getting more sophisticated in the future about IP.  Put simply, if it were just about having IP, there would not be so many failed investments.  IP has value only if it is in alignment with a viable business and helps to maximize that value.  Any other IP is worthless.

Also, business people should realize that not getting a patent is a strong patent strategy if one has made the decision based upon reasons that are based on sound business reasoning.  Such an analysis is key to the third inquiry above: whether the company has a well-thought out IP strategy.  I should note that one typically will not get this advice from most IP attorneys, who get paid whether a business makes money or not.  Both entrepreneurs and VC’s need to understand the role of IP attorneys in this regard and take their advice about the value of patenting their product or business model with the proverbial grain of salt.

I strongly believe that those entrepreneurs who undertake at an early stage an assessment of whether and how IP will bring value to their business and who take active steps identify, capture and protect this value as they move forward with their business plan will be viewed as better investments by VC’s and other potential investors.  In addition, as the data show in the IP Vision study, VC’s who undertake the 3 part inquiry–as opposed to only asking whether IP exists or not and moving on–will be poised to achieve better overall investment results than the overall 50 % failure rate.

The IP Vision study does much to illuminate the value of IP in venture capital investment.  I hope it becomes widely circulated within the VC world once the paywall restrictions are lightened.

Photo: Flickr ezeiza

3 thoughts on “New Study Reinforces Value of Patents in Venture Capital Investment

  1. Jackie,

    Thanks for the excellent article. I have been preaching that companies need to understand the IP landscape of their market. However, most companies are still steeped in the idea that they should not look at patents in their space for fear of being hit with treble damages. This purposeful negligence has never been a wise strategy and should not be rewarded by our legal system.

    A review of the patent/IP landscape is good competitive intelligence and avoids costly litigation problems later. It also gives the company a better of idea of where there are gaps that they can cover with their patents.

    Your article also shows that it is important that we preserve a patent system that works for start-up companies. The present patent reform proposals and some of the changes to our patent policies in the last decade have been designed for large multinational companies, not for technology start-up companies.

    Dale B. Halling, Author of the “Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation.”

  2. Dale, I appreciate the substantive comments. Yes, I find it amazing that people still think that it is better not to know about the prior art. This is even in view of the newer case law about opinions and knowledge. Far too many patent people rely on outdated knowledge. I think that startup companies can create and maximize their own value by capitalizing on the information hiding in plain sight in the patent literature. But, they may have to find new lawyers to give them this sort of advice.

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