How Important Should IP Protection Be To Investors?

By Guy Remond with Keegan Caldwell

Is IP protection a consideration for you when choosing tech opportunities to back?

Recently, on the Fast Growth Funding podcast, I spoke to Keegan Caldwell, Founder of Caldwell, a multi-disciplinary law firm serving high-growth technology and life sciences companies.

In 2016, Keegan left a much larger firm to start Caldwell, which has since expanded and ranked as America’s No.1 fastest-growing IP firm three years in a row!

In this blog, we’ll share some of Keegan’s insights on why startups need to protect their intellectual property at the very early stages and how this can help you mitigate risks, and get more value for your money as an investor.

Why is IP protection often overlooked?

There are two main reasons why many startups tend not to have an IP strategy in place. The first is a lack of finances. The second reason is that some of these startups fall under areas where IP protection isn’t necessarily the norm.

Keegan explains these two reasons in further detail.

1) Lack of finances

Keegan: “Startups generally have a finite amount of money, and they usually need to spend about five times of what they have in order to accomplish their goal. For instance, if they have £10, in reality, they may need to spend £50 in order to accomplish their goals.

So, they often have to work on a really tight budget and figure out what’s important and what’s not.”

2) Non-traditional IP sectors

Keegan: “There are certain technology areas where people haven’t always traditionally pursued IP protection. But in recent years, it has become increasingly important for founders to pursue patents in some of these less popular areas.

For instance, throughout the 90s and early 2000s, I think it was very traditional to patent hardware-related innovations and other easily protectable things. But there were so many areas where IP protection wasn’t a major consideration, such as in manufacturing technologies, FinTech, and so on.

Today, there are so many little segments within every industry where AI can now be meaningfully applied, where we can extract value and protect the technology with patents.”

Why do startups need an IP strategy?

One common misconception when it comes to patents and IP protection is that having a patent prevents companies from getting sued. But that’s not true.

A patent grants businesses exclusive rights to the technology they’re developing and aiming to protect within a specific jurisdiction for a limited period. This prevents others from copying or using the idea without permission.

But why is it so important, especially when it comes to tech?

Tech is a little bit of a gold rush at the moment. If businesses have a new piece of technology within a new area or sector and they fail to trademark it, someone else will. This can lead to significant issues, potentially resulting in a scenario where they might have to pay licensing fees to whoever trademarked the original idea.

What’s more, inadequate protection of IP can affect the long-term viability of the company and lead to a lower valuation, thus affecting your return on investment.

I often advise all the founders that I work with to have an IP strategy from the get-go. It might be limited at first, but it provides a high degree of protection. An IP strategy is just as important as the features within the product, because founders can build all the features they want, but if they haven’t protected the idea in any way and have a strategy to further protect it on an ongoing basis, they might be wasting their (and the investor’s) time and money.

Many tech companies have had to learn this the hard way – and Google certainly did.

Patent wars: Google’s $12.5 billion deal

In 2011, Google joined an auction for Nortel Networks’ wireless patents with a bid of $3.14159 billion. According to sources, “Google bid pi” and were “either supremely confident, or they were bored.”

Ultimately, they lost the bid to a group of six companies – Apple, Microsoft, RIM, EMC, Ericsson and Sony – who won the auction of 6,000 Nortel patents with a $4.5 billion bid.

This resounding loss put Google under pressure to build its patent portfolio. In 2014, it eventually had to pay $12.5 billion – which was a massive 63 per cent premium – to gain access to Motorola Mobility’s vast patent library. Owning these patents would help Google defend its Android operating system from infringement attacks.

This brings us to our original point of founders protecting their ideas and companies for the future. From an early-stage company’s perspective, investing in an IP strategy can lead to significant increases in valuation, which comes in handy during funding rounds.

If the valuations have doubled compared to what they would have been without patents, they’ll get much more bang for their buck when raising funds. This means they can either raise more money for the same level of equity, or they can reduce the equity drain, and still raise the same amount of money.

From an investor’s perspective, with this increased valuation, you may see higher returns on your investment as IP assets can lead to increased revenue streams through licensing, royalties, or being a key differentiator in the market.

What happens if startups don’t have an IP strategy?

Keegan: “Without an IP strategy, startups will probably be missing out on lots of funding and growth opportunities. In February 2023, PitchBook released a whitepaper on how patents impact startups. They discovered that patent companies raise capital at notably higher valuations than non-patent companies, with a difference of 93.2 per cent.

By stage, deal sizes for patent startups are larger by 45.4 per cent for angel, 51.5 per cent for seed, 73.2 per cent for early stage, 71.2 percent for late stage and 46.0 per cent for venture growth.”

While an IP strategy isn’t mandatory for getting funding, it certainly has its benefits. As an investor, I’m more likely to think highly of and invest in companies that understand the importance of protecting their ideas and IP.

This also mitigates some of the risks of investing because having some patents and an IP strategy from the outset means that the founder is taking proactive measures to protect the company and save money in the long term.

What’s more, companies that prioritise IP protection are often at the forefront of innovation. This positioning not only establishes them as market leaders, but also incentivises continuous innovation, which can lead to long-term growth and success. And that’s something every investor wants!

I hope you’ve found this blog helpful.

P.S: We have launched our new EIS-qualified fund for UK early-stage and growth AI investments. If you’d like to find out more, register your interest here.

Tags: AI investments, Investors

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