What makes an intellectual property attractive to start-up investors?February 28, 2022 By Dinesh Parmar
Intellectual properties are significant to any business, but for start-up investors, they are the dearest things. Why?
To understand ‘why’, we have defined Intellectual Property here in simple words.
Intellectual property is defined as intangible assets created or invented by the mind. Like designs, symbols, names, images, automated processes, and literary and artistic works. There are four categories of Intellectual Property - patents, trademarks, copyrights and trade secrets. The creator of the original work is the owner of the Intellectual Property. In some cases, a creator is not the owner. For example, if the work is created for an employer, the employer is the owner of that intellectual property. The rights of the intellectual property can also be transferred to other parties. In this case, the party who fully acquires the IP rights is the owner.
Here it is important to understand that not all intangible assets are intellectual properties. Only those intangible assets are intellectual properties that get registered lawfully with the relevant body. When a monopoly right is granted to the creator or the owner lawfully, then only the value of the intellectual property can be derived or unlocked. In short, intellectual property becomes valuable only when it is protected by the owner through intellectual property laws with the help of intellectual property registration, licence acquisition, and litigation.
Let’s come back to ‘why is it important for start-ups?’ When the time comes to identify the value of any company’s total asset value, a precise valuation of the intellectual property becomes necessary. An Intellectual Property Valuation can help determine the true value of any business.
The protection of IP provides more long-term economic benefits for the start-ups by generating more growth opportunities. Some of the main reasons why IP is attractive to start-up investors are defined here.
1. IP can be more valuable than tangible assets
According to the World Intellectual Property Organisation, ‘intangible assets account for around *80% of the average firm’s value.’
The reason why IP is protected by the companies with the help of intellectual property law is that it can be of more value than any other tangible (physical assets). An IP can provide a competitive advantage to generate superior profit margins compared to competitors in the market. This competitive advantage is the strength a start-up can hold to stop its competitors from capturing the market.
2. The value of IP can increase with time
When a company is doing well or becomes famous in the market, its IP value increases. For example - Apple’s brand value is increasing day by day. According to Brand Finance Global 500 ranking, Apple is the world’s most valuable brand for 2022 with a total valuation of $355.1 billion. This increase can be attributed to Apple’s registered monopoly in the market in various segments.
Unlike most tangible assets, the value of intangible assets increases. Tangible assets are not likely to increase the value of intangible assets. Intangible assets can contribute to the increase of a company’s value.
3. IP can be leveraged in different ways to earn more
When you own the right to any Intellectual Property, you can grant the user rights to another person by licensing your IP. By licensing means you can give the right for the use of your intellectual property. You can make your own licensing agreement by giving limited or unlimited rights to the licensee. You can give the licence for a particular period, to a particular industry or for certain geographic areas. You can earn revenue like royalty in exchange for giving these rights. A certain percentage of the sales is decided as the royalty in general cases. In some situations, a lump sum amount is decided in exchange for giving IP rights. You must take the help of an IPR law firm to establish a licensing agreement because there are many conditions in the agreement which need an expert’s attention to avoid wrongful use and exercise rightful use of the IP.
Some of the best examples of IP licensing:
4. A protected IP is a guarantee for an investor
An investor is more likely to invest in a start-up that has a unique product or proposition, and this uniqueness is patented or registered lawfully. When an IP is well-protected, it can also increase the valuation of the start-up. For example, patented technology is a potential guarantee for an investor that no other market player will take advantage of that particular technology. The satisfaction of such exclusivity can motivate an investor to make an investment in the start-up.
5. An IP makes acquisition opportunities profitable
Just creating and registering an IP is not enough. It is important to maintain it by sustaining its image and renewing it from time to time. Protecting an IP helps in increasing its potentiality in the market as an appealing acquisition prospect. The main objective of a company interested in acquiring an IP is to increase its value after the acquisition or gain profits with the help of the acquired IP. An IP helps the acquiring company to grow, fulfil their objectives and achieve their targets. A good acquisition deal can be a win-win situation for everyone.
The core foundation of your business is built on the strength of your IP. If you are a start-up and your IP gets copied, you lose the possibility of making profits from your business. Protecting an IP not only protects your idea, concept or technology but also protects your other business assets by holding and increasing their value. You need to understand everything about the registration of intellectual property from an experienced IPR law firm to protect it for long-term benefits.