Can Patents Resolve the Quest for Capital?
Most people recognise the utility of patents to be the
exclusivity, albeit temporary exclusivity, they impart on their owners to
profit from an invention. Yet patents also hold real value for companies that
may not even sell a product yet: they can help in the quest for capital.
At present there is often a difference in approaches to
patents depending on the industry. For the chemical or biotechnology
industries, patents are vital intangible assets. In others though, for example
software start-ups, a patent strategy might not be so high on the list of
priorities. Yet patents ought to be important to all innovative enterprises
looking to bring something new to the market.
Once start-ups run out of friends and family to seek funds
from, they often turn to early-stage venture capital firms as a source of funds.
For example, OxFirst has helped a young innovative company in the SaaS –
Software as a Service – space access further capital. The patent valuation we
undertook helped the firm access over 25 Million UK Pounds in funding. The
patent valuation served as a substantial instrument to communicate the value
proposition of the firm to investors.
Investors looking to assess the risk/return profile of early-stage
technology often content themselves with a simple Freedom to Operate search. However,
a patent valuation goes way beyond such simple question. It allows an
assessment of potential revenues associated with the intellectual property
while at the same time supporting senior management decisions.
As this simple example illustrates, not only venture capital
firms, but also investment banks, high net worth individuals and family offices
may be prepared to finance otherwise risky technology ventures, provided the
patent valuation allows them to get a better understanding as to what they may
be getting themselves involved in.
Patents go a long way to mitigating the risk assumed by
venture capital firms, and therefore making the start-up a more appetising
investment opportunity by ensuring the future product they are investing in
cannot be copied by another and a return can be made on that investment. The
patent valuation can again help to size markets related to patents. There are
several ways a patent valuation can be undertaken. Often one turns to the
market, income or cost approach. In the case of start-ups, the early-stage
nature of the firm often requires further assumptions, quite simply because
markets are yet to be grasped. In an IP valuation this is often reflected in
the risk rate.
The same basic logic also applies to later stage venture
capital funding. A business need not have a product on the market to make
themselves appealing to investors, a patent can be enough.
Should a business choose to go public through an IPO later
in its life, knowledge that a company’s intellectual property is adequately managed
and used to maximize revenues, will be an important element in enticing
investors and driving up the potential funds from entrance to the stock market.
Further use cases of a patent valuation can be the support of licensing revenues,
technology transfer, transfer pricing and fostering a firm’s reputation.
Some estimations put 80-90% of a firm’s value in its
intangible assets, of which patents are a component. That’s potentially a lot
of money in the event of a sale. In 2021 Elon Musk’s Tesla bought Springpower
International, a small Canadian start-up working on battery manufacturing
technologies. At the time, Springpower had patents pending on core technologies
– those patents changed ownership to Tesla following the purchase. Whilst by no
means the only motivator behind the purchase, Tesla acquired Springboard’s
employees and their expertise too, it is obvious the intellectual property was
an important driver behind Tesla’s decision.
Patents, then, are crucial throughout the full business
lifecycle: from sourcing initial intuitional funding through to selling the
company. A patent valuation can help realise these opportunities and render
otherwise intangible assets into tangible business opportunities. Business
owners should take advantage of the opportunities it presents.