Startup Strategies: The Strategic and Financial Significance of Intellectual Property
Startups are often at the forefront of innovation, developing new technologies, products, and services that disrupt traditional industries and bring fresh ideas and approaches that drive technological advancements. In that regard, startups often rely heavily on their ideas, and the unauthorized replication of those ideas may result in a loss of control over the unique aspects of a startup’s offerings.
A collection of studies spanning over 20 years of data published earlier this year by the European Patent Office (EPO) and European Union Intellectual Property Office (EUIPO), (Report), examined the role of intellectual property rights in a startup’s success. To this end, the Report concludes, through a chart displaying the increase in odds of funding for startups with prior patent or trademark applications, that startups that have filed for both trademarks and patents during their early stage are 10.2 times more likely to secure funding. The Report also indicates that the filing of patent and/or trademark applications is associated with “more than twice as high likelihood of successful exit for investors.”
Below, we discuss the key findings in the EPO/EUIPO Report, and emphasize the importance for startups to prioritize intellectual property rights from the early stages of their development — a crucial step to maximize their chances of success.
Patents, Trademarks and Startup Finance – EPO/EUIPO’s October 2023 Report
Securing intellectual property rights can help a startup differentiate itself in the market, and the pursuit of IP rights warrants significant focus, serving not only as a method to harness the value inherent in these intangible assets but also as a means to effectively communicate the company’s value to investors.
Trademarks, for example, allow companies to build and protect their brand identity, while patents grant the holder exclusive rights to make, use, and sell a particular invention for a set period. This exclusivity can deter others from entering the market with similar products or services, giving the startup a competitive advantage.
According to the Report, “on average, 29% of European startups have filed for registered IP rights,” but “they increasingly make use of IP rights as they grow.” “While 10% of startups that were invested in by VCs in seed stage rounds have filed a patent application, this proportion rises to 28% in the early growth stage and 44% in the late stage rounds.”
Trademark protection, due to its relatively lower costs, is especially attractive to startups. The Report further informs that “the share of trademark users similarly increases from 28% in the seed stage rounds to 53% in the early stage rounds and 72% in the late stage rounds. . . The share of startups with a trademark that have filed for an EU trademark increases from 47% in the seed stage rounds to 81% in the late stage rounds.”
The Report mentions “recent research on U.S. startups concludes, for instance, that a patent grant generates on average 55% higher employment growth and 80% higher sales growth five years later, and that the patent owner also pursues more, and higher-quality, follow-on innovation,” citing to Farre-Mensa et al., “What is a patent worth? Evidence from the US patent ‘lottery’”. The Journal of Finance, 2020 75(2), 639-82.
Due to their streamlined organizational structure, startups are often well-positioned for enhanced creativity and business agility, making them especially conducive to innovation. They face significant hurdles, however, when seeking to translate those innovative ideas into market success. The risks for a startup are often astronomical. The Report informs that, “[a]ccording to some estimates, only one in thousand [sic] achieve successful financial exit for investors such as an initial public offering (IPO) or high-value acquisition (Catalini et al., 2019, “Passive versus active growth: Evidence from founder choices and venture capital investment”, Technical Report. National Bureau of Economic Research, 2019.), but those that do achieve such an exit have a disproportionately high impact on the economy.” Moreover, startups typically have few assets early on in their journey, apart from their foundational intellectual property.
Given these risks and probability of limited assets, startups may rely on equity finance from venture capital funds, and in order to attract VCs, a startup must secure and protect the IP assets that will no doubt serve as the cornerstones of its success.
Setting Up for Success
A well-managed intellectual property portfolio can generate an even wider range of benefits. A case study in the Report stressed the importance of a holistic approach to IP, such as setting up collaborations and licensing arrangements with third parties, securing additional investment opportunities, and facilitating mutually beneficial technology transactions to advance the company’s position and economic impact.
In some cases, a business might choose not to patent certain inventions and instead keep them as trade secrets. This strategy is famously used for the recipe for Coca Cola as well as the formula for WD-40. This strategy is most effective for processes that are generally difficult to reverse-engineer from an end product or for which infringement is difficult to detect and prove. And unlike patent protection, the benefit can last indefinitely as long as it remains secret.
Securing IP rights is crucial for startups that may also be looking to expand globally. Different countries have different IP laws, and having a robust IP strategy ensures that a company’s innovations are protected in various jurisdictions, enabling smoother international expansion.
Capitalizing on a startup’s IP assets and leveraging them effectively, however, requires a proactive approach. In order to ensure robust and prolonged protection, companies must be ready to allocate sufficient resources to construct an international IP portfolio during the early stages of their development. Failure to do so could leave the startup vulnerable, impede its potential and overall growth, and negatively impact its standing in the competitive landscape.
The insights from the EPO/EUIPO Report underscore the pivotal role of intellectual property for startups. The choices made by startup leaders in this regard carry significant weight, influencing their future in terms of both access to finance and the potential for value harvesting through successful exits.
Intellectual property and the protection of these rights emerge as vital for the success and sustainability of startup companies. Prioritizing IP rights from the early stages is not merely a protective measure but a strategic move with far-reaching impacts.
Stephanie M Smith & Milton Springut are partners at Moses & Singer LLP, a practice who believe in investing heavily in understanding their clients’ businesses and developing close working relationships with them. Stephanie focuses on trademark prosecution and agreement drafting, negotiation and enforcement. Milton focuses on intellectual property litigation and counseling. He litigates and prosecutes patents in the scientific disciplines, including electrical and electronic systems, computer hardware and software, and business systems.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.