Written by: Harry Bedford

In a recent blog summarizing an extensive study from the European Patent Office (EPO) and the European Union Intellectual Property Office (EUIPO), we discussed just how impactful intellectual property (IP) rights, such as patents and trademarks, can be in securing funding for start-ups. Although other factors undoubtedly contribute to start-up success, the study highlights clear benefits for both start-ups and investors who consider registered IP rights at an early stage.

The study involved the collection of data on patent and trade mark applications (both European and national rights) combined with data on startup financing at their seed, early (Series A or B) or late (Series C and beyond) funding stages. Here we look into the study in some more detail, particularly with respect to how IP affects start-up funding, followed by how it affects exits.

How does IP affect start-up funding?

The study outlines a compelling case for applying for, and registering IP early on in the start-up lifecycle. This is because both the likelihood of obtaining funding and the amount of funding at each stage appear to increase for start-ups with registered IP. The following figures from the study illustrate this point.

The first figure above shows that start-ups that have applied for trademarks, patents, or both, increase their chances of obtaining funding at both seed and early stage rounds. At each of these stages, start-ups are most likely to receive funding if they have both trademark and patent applications. At seed stage, such start-ups are 3.5 times more likely to receive funding whilst at early stage, start-ups are 10.2 times more likely. At face-value there is noticeable difference between seed stage and early stage here. Start-ups at the early stage (and looking to complete series A or B funding rounds) are probably more likely to have brought their product or service to the market, and have a better understanding of their place in it, along with their competitors’. Perhaps investors are more aware of the importance of IP at this stage for these reasons – or perhaps there are other factors at play.

In addition to improving the chances of securing funding, this second figure shows that having registered IP appears to correlate with increased financing obtained across the different stages of funding. At seed stage, where most of the data in the study was obtained, the median start-up with both patents and trademarks received over 3 times the financing of the median start-up without IP. At each stage in funding, the median start-up with any IP obtained more financing than the median start-up with no IP.

How does IP affect start-up exits?

The study also collected a large amount of data surrounding exits, through both acquisitions and IPOs. The data paints a similar picture to that of start-up funding as set out above. It appears that both the likelihood of a successful exit and the value associated with an exit increases when the company involved has any IP, and more so when the company owns both patents and trademarks. The following figures from the study illustrate this point.

The figure above shows that start-ups with any IP are at least twice as likely to have a successful exit than those without, and just over 3 times as likely when the start-up has both patents and trade marks. This type of distinction may be of interest to investors, looking to make a more probable return on their investment by investing in IP-rich start-ups.

As well as an increased likelihood of a successful exit, the study also shows that IP rights appear to correlate with increased exit value. The figure above, for which most data was sourced from acquisitions, shows that the median exit value at acquisition was over 6 times greater for start-ups with both patents and trademarks compared to those with no registered IP. At IPO, the story is similar.

Although other factors undoubtedly apply to the success of an exit, it is interesting to note the stark contrasts in success and value between companies with registered IP portfolios and those without. One could infer, at the very least, that the presence of a healthy IP portfolio is indicative of a company that is managed well and in a strong position in terms of navigating an exit.

In summary, it is clear that start-ups with registered IP (generally) enjoy:

  • an increased likelihood of funding at seed and early stage rounds;
  • a real increase in financing from those funding rounds;
  • an increased likelihood of a successful exit; and
  • an increased exit value.

Whilst other factors would have contributed to the successes of the start-ups surveyed by the study, the findings of the study seem too clear to be overlooked – IP is a valuable asset of start-ups at any stage, from the viewpoint of founders and investors alike. It makes sense therefore, to suggest that both founders and investors be diligent, particularly at an early stage, to ensure IP is carefully cultivated and protected, to ultimately secure the advantages set out above.

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