Studies consistently show that SMEs that protect intellectual property perform better economically. They generate more revenue per employee, hire more workers, and pay higher wages. Other studies have shown that companies that protect their trademark within the first year experience higher and faster growth than those companies that do not register their trademarks within the first year of their existence.
Equally, it has been shown that companies that protect patents and trademarks get higher venture capital funding. Patents and trademarks have a positive impact on getting funding, but the impact is further enhanced if the company has both a patent and a registered trademark. In other words, they complement each other. Having both a patent and trademark gets companies higher funding than only having a patent or a registered trademark. The lowest funding goes to companies that have not protected any intellectual property at all.
As intellectual property generally operates on a “first to file” basis, it makes sense to protect it as soon as possible. If you wait, others might beat you to it. Somebody might register a similar trademark before you do or publish an invention that wipes out the patentability of your invention. Worse yet, they might patent it themselves, leaving you scrambling for alternative solutions. To maximize your intellectual property situation, you should act as soon and as fast as possible. In most cases, your rights start from the date you submit the application.
It turns out that there is an additional benefit to being fast. In a study published in 2016, it was established that the highest benefit of intellectual property protection in terms of getting higher funding is in the first funding round. That’s when the VCs give the highest premium for intellectual property ownership. While still important in later funding rounds, its significance is reduced.
Why is this? According to the study, there is a big information asymmetry between the startup and the VC in the beginning. Startups do not yet have an established track record that can reliably be assessed. Intellectual property signals the startup’s capabilities.
Patents are an indicator of technological capabilities and innovation. Technology does not sell itself, it needs marketing efforts and branding. Trademarks signal that. Together, patents and trademarks are signals that the startup has a set of important skills and capabilities. With the passing of time, other important signals will emerge that narrow the information asymmetry, allowing VCs to base their funding decisions on a much broader set of considerations. This, in turn, decreases the relative importance of patents and trademarks in later funding decisions.
It should be noted that, according to the authors of the study, patents and trademarks do not per se lead to higher funding because they are deemed valuable assets. The positive effect is due to the fact that patents and trademark registrations signal technological and marketing capabilities. This does not mean that the IP is not valuable in its own right, but that in early-stage funding, its main importance is something else. It says that you’re a guy who knows what you’re doing, and therefore you can be entrusted with more money than the next guy.
Conclusion
To maximize your funding potential, protect your intellectual property before the first funding round. You should, in any case, do it as soon as possible, but doing so early will have the additional benefit of getting more money from the investors.
