Executive Summary
If you want to be successful at raising money for your company, then use intellectual property. This paper outlines a strategy you can take, which has been done successfully over several decades, for many companies, in many technologies and business models for all sorts of companies.
Take Public Markets, for example. “Among the most interesting takeaways is that, upon reaching an exit, patent-seeking startups do so via the public markets an incredible 23.2% of the time. This starkly contrasts companies that have not sought patents, where only 4% of exits occur via the public listing.” [1]
In evaluating other markets, like the VC market, “Startups with patents and patent applications in progress raise larger VC rounds on average. They also raise capital at much higher valuations than startups without such protection on their ideas, especially when it comes to angel investors, and achieve higher exit values down the line.[2]
We have been pointing this trend out for twenty years and were originally the company linked to early-stage companies creating value in raising money! We have had several decades of experience working with companies raising money with the unique strategy of leveraging their IP to tell a better story to investors.
In this paper, we discuss the meaning of Intellectual Property (IP), followed by the six ways companies monetize IP as a background for setting the stage for improving the company’s value. We address in order a process to raise the value for the company before a raise, including;
- How do you determine the value of your IP?
- Why do investors consider IP to be valuable?
- In raising money from investors, why should I invest in patents?
- Assessing your current IP position
- Expanding your IP position so investors take notice.
- Knowing the “15 patent tipping point.”
- Telling your IP Story.
- What is the ROI for using and developing IP to raise Money?
Background
Over the many years, we have helped companies raise money and help investors understand their companies’ value. We have found that a cross-disciplined approach is needed to perform IP due diligence. This cross-disciplined approach is used to understand the company’s business and the link the company business has to the company’s IP. We use cross-disciplined approaches to value the IP. It may be necessary to expand an IP portfolio to create hundreds of ideas and dozens of new patents. It is also essential to have the skills to understand and develop and lock in the company’s trade secrets. Finally, knowing how to put together a compelling IP story is essential.
We routinely see that you can find the right investors with a higher interest in investing and at a higher valuation due to a good IP position. It is important to note that using IP to raise the company’s value needs to be done to talk with investors. It is challenging to change the investors’ minds once they decide on an investment and valuation decision.
Working with CEOs and investors on all sorts of deals, big and small, and across many technologies, we have seen a fantastic consistency in developing and then “pricing in” the value of your IP. The resultant methods and strategies will surely help you in your journey of raising money.
What do we mean by Intellectual Property (IP)?
By IP, we mean IP that has to do with the invention, such as (1) a list or inventory of ideas, (2) provisional applications, (3) patent applications, (4) issued patents, (5) trade secrets, and (6) enabled publications.
It may not appear evident at first blush. Still, we have found that even a list of well-sorted and organized ideas shows investors the company’s discipline and interest in IP being valuable.
Provisionals are a great inexpensive way to protect your inventions for a year. You can let the new investment pay for the subsequent patents’ filing and prosecution.
At least a few issued patents will be essential to show investors that the company’s technology is novel. This showing of novelty is based upon patent examiners allowing the issuance of the patents. The patent examiners are used as independent judges of novelty. Issued patents also provide an asset that investors will have a stake in. It is essential to recognize this. The company can move from a few issued patents to many more issued patents by using patent filing “fast track fees.” Fast-tracking allows a company to create newly issued patents in months, enhancing your company’s valuation for the raise.
Trade Secrets are almost zero cost to create and protect. Trade Secrets can add tremendous value to the investor because trade secrets allow for further protection of the company’s technology. Trade secrets show investors that the technology cannot be easily copied. Note that your trade secrets can be identified, put in a “trade secret registry,” and then your company can create a secret trade process that can provide a “showing” to investors. You should not discuss the trade secret’s content with investors at any time, but you can represent and warranty you have them. An independent patent counsel can later check the trade secrets regarding their existence and possibly their value.
Enabled publications are a low-cost way to stop others from patenting on top of your company or patent around you and protecting alternative technology. Enabled publications strategy will put you at the top of sophistication for IP Strategy.
The six ways companies monetize IP!
As discussed above, IP can impact company value in various ways. We have categorized these below, but any one of these ways could be the subject of a book! Also, several approaches can be made simultaneously or in some strategic order.
1. Litigation
The fundamental constitutional rights of using a patent are to “stop others from making, using, or selling” a product covered by your patent. This right requires you to police your patent in the industry and then, if use is found, formally engage litigation attorneys to help you take the matter to court. This path towards monetization is usually not a small company endeavor because of the enormous amount of money needed ($3-$5 Million) and the long-term focus needed (many years). The risk is high that your patents could be invalidated. There is also some risk you may have to pay the defendant’s legal fees if you lose. It is unlikely an investor would invest in your company during litigation or even know you would use litigation. Patent litigation is a drain on the CEO’s and company’s time.
2. Licensing
Licensing is a way of making money through IP, but it does require both skill and effort. There are two licensing approaches: “stick” and “carrot.” Stick licensing usually means a credible lawsuit threat but is far less costly and time-consuming than IP litigation, as described above. One must be skilled in sticking to licensing to ensure your company does not get involved in a declaratory judgment. Carrot licensing involves getting a licensee to take a licensee based on the future benefit the patents will have for the licensee. Skills and effort are required to find the licensees, make the case, and close a deal. Even if you close a carrot license deal, license fees will likely take years to become valuable.
3. Adding to gross margins.
When you have IP, you can leverage it to obtain higher gross margins. Supposing you are a supplier of components that are protected by your IP. This position means no other can supply these components; your customer should know this. This IP position also means you can likely add more profit by getting higher margins, up to a point the market will bear. Studies have shown that there is about a 34% increase in margins of products with patent protection versus those that do not have patent protection. It is easy to see that with good patent protection on a product component, it is far less likely to see that product component in the market. This unique market position allows customers to pay more for the product component because these customers have fewer options to negotiate the price.
4. Leverage in contracts and agreements
Having IP allows the company owner of the patents to get deals because no one can do the deal without infringement. Suppose you have patents on how a supplier processes components they sell to you. This IP position means that you should get a lower price for the components sold to you versus others that don’t have the patents. In essence, you could go to the supplier to negotiate a deal and use your IP-protected process to supply components. This position would also allow you to negotiate an excellent price for the components, minimizing the supplier’s ability to have higher margins.
5. Enhancing Brand
If you have patents in space, it allows your to boast inventor and innovator positioning. In marketing, this is an important message and allows the brand to be enhanced. Sometimes a large brand has the brand power to move the markets quickly, but many times smaller brands enhanced by patents can win over more prominent brands because they can be seen as the innovator of the products or services. Customers like to buy more novel products or services. In almost all markets, innovation is appreciated.
6. Enhancing Stock Price
Many times one can see a public company announce a new patented technology in the market, and the market responds with increased buying of the company’s stock and hence increase in stock prices. This possibility is undoubtedly evident in drug companies when a new drug is discovered and patented. One can also see companies that announce a new patent license or patent litigation have a related positive increase in the stock price. In essence, the patents in public companies can be leveraged by retail investors to enhance their desire to bet on the company, raising the stock price.
How do you determine the value of your IP?
An IP valuation determines the value of licensing the IP. It is too difficult to value the other ways to monetize IP (litigation, enhancing stock price, etc.) as it requires knowledge of many other factors and risks, most of which do not have data available to analyze.
Determining the licensing value of IP requires finding available data needed for valuation assessment. Valuation data is usually available on market size, growth, and top players (or licensees). Other known valuation data can be obtained regarding the royalty rates and cost of capital in the affected markets. IP Valuation analysis includes an apportionment of the patents to the market and many known ways to do this. Analyzing the patents’ risks is also required in IP licensing valuation. Patent risk assessment is done by understanding how well IP can be licensed in a market, such as how well the IP can be reverse-engineered.
Valuing IP is very useful, as this IP valuation can be shared with investors, especially those that value IP for M&A, to enhance downside protection. Finally, valuing IP is very useful for the CEO to see what impacts value. IP valuation provides information that may be helpful for the business in general. We have seen, for instance, examples where the IP valuation showed only three major companies in the market for a license. The small amount of major companies for licensing reflects the considerable risk that the company would have to win licenses, as there may only be three options for winning a license.
Do investors consider IP to be valuable?
It took decades of working with hundreds of investors who invested in small to mid-size companies for us to learn the significant variations investors have when they view the value of IP of the companies, they are considering investing in.
Raising Valuation
One can find a “group of investors” that believes in the IP value one hundred percent. This group of investors will not even invest in a company unless there is a good IP position. These types of investors believe in patents as a monetization tool. These investors believe that the company’s patents should be a critical reason the company would enhance the M&A valuation. For many of these companies, we find ourselves doing an IP Valuation to assess the value. If the IP valuation is often small, we are asked to work with the company to add more patents to enhance the valuation.
Clear Freedom to Operate
A group of investors also believe in the negative aspects of patents. They invest in a company to find out that it is defending itself against patent litigation. Once Money is invested in a company and announced to the press, potential plaintiffs seize an opportunity to get cash. So, these investors due believe in patents as a concern. These investors will often ask us for a Freedom to Operate Opinion or FTO, where we look at the company’s products and do a patent analysis to find the risk of a patent suit. Without a clear FTO opinion, investors won’t invest.
Downside protection
A group of investors considers a company’s patent position to protect the investment downside. If the company fails, the only assets they may have are the patents to sell. So, many times we are asked for a “patent sale valuation.” Some investors may invest more money to ensure enough unique patent families so the downside risk is improved. Just as an investor may ask for Keyman insurance for their CEOs, getting patents for downside protection is a reasonable expense to cover the risk.
Due Diligence for Novelty
Some investors look at a company’s patents and trade secrets to ensure that they are unique from a diligence perspective. These investors understand that the patent office is an independent judge of novelty. These investors rely on patents showing how unique the company is.
Patents are just an expense.
Some investors see patents as simply an expense. I would say that about a third of the investors we see do not consider the patent activity as valuable and as a defocus. There are many reasons behind this we have found. One reason is these investors have never been part of a company where patents made a difference. Some of these investors saw some of their invested companies have many patents, where patent fees limited their growth. In other words, these companies may have overspent on their IP. Finally, some investors believe the only way to get returns on their companies is to win in the market.
In raising money from investors, why should I invest in patents?
For CEOs who believe in IP and raising money, we have found it is best to target investors who believe in IP. This direction is more straightforward than one may think, as it is easy to filter on the front end of investor discussion about the value of IP. If the CEOs think their companies’ value is in a specific aspect, like IP, time to market, or a key customer, they need to find investors who also believe in these value drivers. The nice thing about IP is that 3rd parties can improve the IP position and value before the raise. Raising the value through enhanced IP or solid FTO clearance can be done quickly and inexpensively. Fast-tracking patent issuances is a tool we have used for enhancing the valuation. Some companies have seen filing and obtaining patent issuances in as little as three months.
Assessing your current IP position
It would be straightforward and low-cost to get an FTO opinion. If the FTO opinion is cleared, this could easily be added to the benefits of investing. A cleared FTO opinion indicates that you have lowered the risk to all investors. Investors could see an FTO as the CEO being risk-averse and mature in doing business. The positive psychology of this cleared FTO to investors should not be underrated.
If there is an FTO issue, now is the time to invent around the patents found and change the product. When done by professionals, inventing around can take a month to find the invent around and likely another month to implement the design changes. Once this is done, we are back to the positive psychology of the cleared FTO and the company’s systemic lowered risk.
As mentioned, one can evaluate the companies’ patents for two reasons. If the valuation is high, this will help a lot in getting the raise and getting a better valuation. However, the valuation is not as high as desired in many cases. In this case, the valuation can point to a low valuation. Reasons such as (1) the apportionment of the patents to the market is low, (2) the patent risks (poor patents) are high, (3) the patents have defects (e.g., easy to invent around), (4) the patents don’t read well on the companies products and (5) the portfolio doesn’t overlap the value chain well. In the case of a low valuation, the nice thing is this is all fixable through inventing improvements using techniques like Invention on Demand®. [3]
A CEO preparing to raise money takes stock of a weak IP position. We have seen many CEOs of small companies do a small friend and family round to get an immediate and improved position. This improved position is created by doing an IP extraction session, such as an ipScan®[4], followed by some low-cost Provisionals’ immediate filings. This approach then allows the investor raise to pay for the final filings as patents and lowers the risk of not getting a raise of Money from investors who believe in IP.
Expanding your IP position so investors take notice
In most cases, your company can expand the IP portfolio in the direction of investor interest. In so doing, in advance, the company (1) increases the odds of a raise happening and (2) enhances the valuation discussion.
There are numerous ways to expand the IP portfolio. We will discuss a few of these, for example.
Expanding IP in the value chain
By looking at your value chain (suppliers, partners, and customers), you will find your initial IP can be expanded. Your IP and the related product will likely change how your customers do their business. This change could be patentable. Your IP may require a change from a partner or supplier, which could be patentable.
Expanding IP in other markets
Many times IP can be related to other markets. Supposing your product was a socket wrench that had an LED light integrated. When you started to use the socket wrench, the light went on and stayed on for 15 seconds unless the accelerometer and related circuit detected motion. This market could be easily sized, but it is small compared to all the handheld tools that could be lit the same way as the socket wrench. Evaluating your IP, you might broaden the claims and provide numerous other examples, so the one patent could be valued in many other markets.
Supposing you have a patent on a camera on a security system that determines movement to alarm. The software could create alerts but likely could be used (and the patent expanded) for remote viewing by the user or to determine a day and night sensor for the automation of lights. The camera software could determine when the security alert should be started, as it may be best used when the family has retired. Each area provides new uses (and markets) for the initial IP.
Forecasting future IP positions
Understanding your IP’s future improvements is helpful as these new inventions, and subsequent patents could show the company’s future direction. It should be obvious that your current IP is an improvement to something that was a problem in the past. Using processes like Invention on Demand®, it is straightforward to create hundreds of new ideas to choose from for future patents. This strategy would be beneficial for investors to understand the future possibilities for the investment.
Knowing the “15 patent tipping point”
Plotting the value of an M&A to the number of patents the acquired company had before the acquisition has a hockey stick bend up at around 15 or so patents as the tipping point. We have seen valuations for average companies in the 1.5-2X revenues, strategic acquisitions being 5X of revenue or more. Still, we have seen valuations from 5X to 200X, where one of the only explanations is many patents.
We have wrestled with why 15 or so patents appear to be a tipping point for M&A valuations consistent among various industries. The best reason we can see from our work over decades in inventing around is that inventing around one patent is easy, but simultaneously inventing around 10,12 or even 15 patents becomes very difficult, if not impossible. During the M&A process, the acquirer who needs to act fast to buy gets an opinion from their attorneys and tech teams that the acquired company cannot be invented around. This understanding forces the company to recognize that they need to pay top dollar to buy the company rather than a competitor buying it and then locking them out of the market. On the other hand, if the acquired company is easy to invent, the valuation will be that of revenues and strategic fit.
We have seen companies like us for assistance many times to expand their patent portfolios up to this tipping point to assist in M&A valuation. One caveat to this, of course, is that the market has to be valuable enough to rationalize enhanced valuation.
Telling your IP Story
Over the years, we have worked with CEO that recognizes that their company needs to tell a better story of their IP. In raising Money, the patent analysis gets delegated to the investor’s attorneys or firms like ours to do an IP due diligence. In performing several IPs due to diligences a month over the many years, few companies ever do more than provide a list of patents to us (and many times, the list is not complete). The company does not have an “idea inventory,” doesn’t have a trade secret registry, and hasn’t related its IP to the technology. The IP does not fully connect to the technology connected to the company’s products, markets, and business needs. An IP due diligence will review the patents on their face to see if there is a clean title and if the patents are in force. Given that attorneys or firms like ours, working for investors will be conservative, and IP Due diligence usually returns minimum responses as to value.
A CEO in this position of responding to value questions for IP to an IP due diligence is left solely to an uphill defense to discuss value. This position is ashamed. Imagine trying to sell your house and showing it in the worse possible manner, not cutting the grass, painting and updating the house, and adding some low-cost highlighted features. This approach is why most real estate agents today have related services to get the house in tip-top shape before offering it for sale, as they know without these updates. The house will likely not be sold, stay on the market forever, and sell for a low value. All these results lower the net profit of the real estate agent. So, why wouldn’t a CEO want to do the best possible story for their IP? Why wouldn’t the CEO want to upgrade and put their IP in the best possible light?
The only possible answers for the lack of a great IP story before the raise (or the M&A) are (1) the CEO is far too busy or (2) the CEO is not aware of how to tell an IP Story. In a google search for “IP Story and patents,” there are almost no returns. It took ipCapital a decade to create our service, the ipStory®[5]. The IP Story needs to be well thought out. It should make sense to an investor, eliminating the need for IP Due diligence. The IP Story should put the company’s patents and trade secrets in the best possible light.
What is the ROI for using and developing IP to raise Money?
Using the IP Story as an exercise to find the value drivers and the gaps in the value drivers allows the CEO to use some of the other tools (Invention on Demand®, ipScan®, etc.) to improve the IP Story. The value of getting the raise done and getting a higher valuation in the raise using the IP story far outweighs its costs. Just as in the case of a home seller, the costs of cutting the grass, touching up paint here and there, and adding some highlights to the home is minor compared to selling the home at top market value.
[1] https://pitchbook.com/newsletter/from-ip-to-ipo-patent-data-and-vc-outcomes
[2] https://pitchbook.com/news/reports/q1-2023-pitchbook-analyst-note-introducing-pitchbook-patent-research
[3] Invention on Demand® is a service of ipCapital to create 100s of new inventions to create added new patents across the value chain and inventing around the companies patents as well as inventing in areas the patent portfolio has risks or defects. Episode 32 Invent Anything™ Podcast – ipCG | Innovation and IP Consulting
[4] ipScan® is a service of ipCapital to extract invention in a systematic way to find create 100s of existing inventions to create added new patents across the company’s products and value chain. Episode 29, in Invent Anything™ Podcast – ipCG | Innovation and IP Consulting
[5] ipStory is a service of ipCapital that links the Business Needs to the Market to the Product to the technologies directly to the companies patents and trade secrets as well as shows the difference of the companies patents to the rest of the industry. Episode 24 Invent Anything™ Podcast – ipCG | Innovation and IP Consulting
