As a patent attorney serving startup founders, I have seen certain innovative companies elevate their patent portfolios to increase company valuations when they pitch to investors. However, many companies still treat their IP building activities as expenses rather than as investments in assets and don’t leverage the power of their IP assets when presenting to investors.
Interested for more? Read on to learn how to increase your startup valuation with patents/IP, and how you can use patents to get non-dilutive capital for your venture.
Role of Patents in Investor Presentations
Patents can help increase a startup’s valuation by providing a competitive advantage and demonstrating a commitment to innovation. Patents can also signal to investors that the startup’s technology is valuable and has the potential to generate revenue. Here are a few ways patents can help increase a startup’s valuation:
- Protecting the IP: Patents can prevent others from copying or using the startup’s technology without permission, which can help the startup maintain a competitive advantage in the market.
- Evidence of innovation: Patents demonstrate that a startup is committed to innovation and has a unique technology that sets it apart from competitors.
- Potential revenue stream: Patents can be licensed or sold, providing a potential revenue stream for the startup.
- Attracting investors: Patents can signal to investors that the startup’s technology is valuable and has the potential to generate revenue, which can increase the startup’s valuation in the eyes of investors.
When it comes to negotiating with investors, it’s important to be prepared and to have a clear understanding of the startup’s financials, including projected revenue and expenses. It’s also important to have a clear understanding of the startup’s patent portfolio, including the potential value of the patents and any associated costs.
Be transparent and honest about your startup’s strengths and weaknesses, and be prepared to answer any questions investors may have about the patents. It’s also important to be flexible and willing to compromise during the negotiation process.
Finally, it’s highly recommended to seek guidance from legal and financial professionals to help you navigate the negotiations process and to make sure that the terms of the investment are fair and favorable for your startup.
Role of Patents as collaterals with banks and lenders
Patents can be collateralized by using them as security for a loan or line of credit. This means that the lender can use the patent as collateral in case the borrower is unable to repay the loan. The lender may also have the right to use the patent if the borrower defaults on the loan. Additionally, patents can also be sold or licensed to generate revenue, which can also be used as collateral for a loan. Such loans can be creatively used as non-dilutive financing for the company.
The Investor Capital Stack
Although you can develop your own startup product on your own and do limited customer trials, to scale you need to have money for basic overheads such as domain names, hosting and communications, recruitment, insurance, legal assistance, recruiting, hiring, recruiting, marketing, tax prep and fundraising activities. We will discuss the investment capital channels next, from the easiest (with small amounts) to the hardest (with lots of dough to scale).
Friends & Family
Angel investors are often the next step after family and friends funding. This is often a part of your official seed round. These are often small checks you can pull together to get started.
Angel investors provide a unique form of funding. This is different from the funding provided by venture capital funds, private equity firms, startup accelerators, and other sources.
Many successful companies and startups started with $10,000 loans from family, friends, and other close contacts. This stage can be a great place to get capital from aunts, uncles and professors as well as family members of classmates and bosses. Some might be angel investors. Many people will only provide temporary capital. You can get a gift or a personal loan.
This could also apply to your cofounders. You may be able to get a lot of cofounders together with their own capital and talent.
Angels
Angel investors were traditionally individuals. They can have a wide range of wealth levels and investable capital. This category may also include family members and friends. Some are just amateur investors looking to diversify their portfolios and have more control over their finances while still trying to make a meaningful investment.
Professional angel investors also spend a lot of time doing this. Many of these professionals are former entrepreneurs who have experienced successful exits. These are in addition to the famous celebrity angel investors. Similar to the ones we’ve seen on TV programs like Shark Tank.
A growing number of angel groups are also available. These groups are made up of angel investors who have joined together. They are able to benefit from deal flow and have more eyes and hands to help find potential investments and vet them.
They can invest together and make more meaningful investments. This gives them more control over the outcome. They can also get better terms and reduce their risk. This allows them to diversify further. Take the time to learn how angel investor funding works for startups.
There are many places where angel investors can be found, including:
- Through your family, friends, and work contacts
- Professional networking events
- LinkedIn and Twitter
- Participating in competitions
- Crunchbase
- Angel groups
- Introductions by consultants and fundraising advisors
Angel investors have limited funds. Even the most wealthy individuals will not invest millions of dollars in one venture. Angels will typically be less demanding than institutional investors and are likely to invest based on gut feelings and how they like you rather than detailed due diligence. It makes it easier and quicker to raise capital from angels. This can be a huge advantage in the initial stages of a project, when you have limited time and tangible metrics. Angel investors can give your startup great credibility. This can serve as a validation point for future investors, customers and partners.
Incubators / Accelerators
This stage is often where startup accelerators are most active. These programs can provide funding from $10,000 to $120,000. These programs can provide guidance and a fast-paced, well-structured program that will help you reach the next stage. Y-Combinator is the most famous of these accelerators, but there are numerous other accelerators you can work with.
Venture Capitalists
The most well-known source of capital in the startup industry is VCs. These larger companies invest in startups to make a profit. Here you can start to access funding in the hundreds or thousands of millions of dollars. Venture capital funds are breaking away from their traditional mold to invest in startups sooner than ever before. They also provide funding beyond Silicon Valley and New York City.
Private Equity & Corporate
These funds are often available in the later stages. VCs often pay more attention to the financials and fitness of a company rather than the growth and traction they are looking for. This capital is often an indicator of a potential acquisition.
Another way to see this is through the lens of the various rounds you’ll likely go through.
- Pre-Seed Round
- Seed Round
- Series A
- Series B
- Series C through F
Typically, companies will either go public or get acquired after this point. There may be additional rounds between these rounds that will allow startups to reach the next milestones. This is the time to determine how investor funding can be used for startups.
Alternatives to Investor Funding
While the following has limits in terms of the amounts you can get, they are non-dilutive, meaning they don’t take shares away from the founders. Non-dilutive financing refers to any capital that a business owner receives without them having to give up equity. Non-dilutive financing is essential for many entrepreneurs to get their small business, startup, or full-fledged venture off the ground. These options include:
- Self-funding your startup’s early stages
- Instead of equity capital, you can use credit and debt facilities based on your IP assets
- Crowdfunding by the public
- Partner and customer funding
- Government grants, and competition awards
Strategizing Your Investment Round
You need to put thought and strategy into your fundraising. How angel investor funding works for startups. A long-term strategy is essential, as well as the ability and willingness to invest the money you need now.
These are the key elements:
- Knowing how long you should allow for materials preparation and relationships building
- Knowing how long it takes to pitch and deposit money in the bank
- Selecting the right investors to fund the next round of successful financing
- Ensure you have enough funding to reach your next milestones.
What Investors Really Want
Investors will evaluate the following key elements:
- Telling a compelling story about your startup’s mission, vision, participation, and how you do it.
- Your founding team’s strength, experience and charisma
- A clear problem is something you can communicate easily
- A large market will allow for substantial growth and a lot of business.
- Clear competitive advantage
- Risk Reduction for Investors Based on Your Work (proof of customers/traction and defensibility against big competitors)
You will need to convince investors to trust you. This may require time and many contacts. You can do a lot to position your startup and yourself in advance. This is still largely about the human connection. Math is often a distant second. Find out how to make connections in order to get angel investor funding for startups.
Pitching Materials
A great visual pitch deck and verbal pitch are essential for your virtual data room.
These are the keys to a great pitch deck:
- The expected flow of slides will be followed.
- A concise and clean deck with around 10 slides
- Attaining the perfect balance of substance and selling
- It is easy to share, present, and take action.
Increase Valuation and Decrease Risk for Investors with IP
App development is booming and many app developers have been working hard to build the next great app. You must protect your app idea and implement it well if you’re an entrepreneur in the mobile app industry.
The question now is how can you protect your app idea from being copied? Anyone can copy your app idea if they get a hint. These are effective ways to protect your app from being copied by pirates.
1. Create the app
To understand the traction of your idea, it should be turned into an app as quickly as possible. To prevent reverse engineering, copyright protection can be obtained once the app has been developed. Check to see that the agency or freelancer is giving you copyright assignment at the end. This means that the intellectual property belongs to you – once the bill has been paid. Otherwise you have a license to the work, but the app is the property of the app developer.
2. Non-disclosure and Non-compete agreements
A non-disclosure agreement is a crucial step that any business must take to protect their intellectual property. This is also true for mobile app development. Ask your developers and designers to sign a nondisclosure agreement when you hire them. An attorney can help you to get this done.
The non-compete agreement also serves to prevent employees from disclosing secrets about the company to other companies. This agreement prevents developers working on your project, from working with other companies. Non-compete agreements are advantageous because professionals won’t work on projects of your competitors. It is not easy to find developers willing to sign such an agreement. The best way to protect your app idea is to enter into a non-disclosure or non-compete arrangement.
3. Trademark the app’s name or logo
Another way to prevent your app idea being copied is to trademark it. This allows you to prevent other developers and entrepreneurs from using your app’s name, icons, and logo. You can also trademark the functionality and features of your app. This will prevent other apps from going down the same path. We can see that the brand recognition of top-rated apps such as Candy Crush, Instagram, and Angry Birds is amazing. You can identify these apps by the fonts and colors they are associated with.
One of the best things about trademarking an app is that other developers or competitors can’t create products with similar names or logos to trick potential customers. A trademark also provides extra protection from legal problems. A reputable lawyer can help you navigate the complexities and assist you in drafting your trademark.
4. Patent application
To protect your invention, you can apply for a patent on your app. In contrast to copyright which protects only the expression (or code/UI), you can protect the app’s functionality once you have an app patented.
One drawback to applying for a patent is the high cost. Before you file a patent application, it is important to ask yourself whether the app is patentable. Your app must be truly new and useful. You can get a provisional patent application to protect your app idea for one year and convert it to a utility patent with any improvements since the provisional filing.
In addition to protecting your Go-To-Market (GTM) strategy and reduce risks, for investors, each patent is an asset that is owed by the company. Normally, a patent application is valued around $150,000. An issued patent that protects exclusivity of business models such as Uber can be worth billions on the book. You can use these assets to argue for a higher valuation for your company.
While patent valuations are inexact science, we can look at a few examples. Kodak which invented the digital camera sold its 1,100 patent portfolio to a dozen licensees. These included Microsoft, Google, and Apple. The total amount paid was $525 million. To protect its Android mobile operating system from competitors, Google purchased Motorola Mobility for $12.5 billion. Microsoft also bought 800 patents from AOL last year for more than $1B, but then turned around and sold 70% to Facebook for $550m in cash. So you can use these numbers in your discussions with investors for issued patents.
Summary
Angel investors are a common feature of the startup and fundraising community. There are pros and cons to using angel investors to fund your startup. We have discussed how you approach investors and how to use patents to protect your business and increase your valuations, particularly when investors and suppliers will not sign confidentiality agreements with you. Control your fate and avoid what happened to Phhhoto when they got screwed by a big partner. Get your patents and IP now and then go raise money to launch your company!