VCs are a great way for an entrepreneur to raise capital, but before you start looking into the process, there are a few things you should know. As a patent attorney helping many startups, I have been asked what VCs look for. The main thing to consider is what VCs are looking for, including Feasibility, Novelty, and Technological Focus. Once you know this, you can start to get a better understanding of the process.
VCs tout founders with Patents
According to Pitchbook, for 2021, Alumni Ventures was the world’s third most active VC. Alumni Ventures has one of the largest and most rapidly growing venture portfolios in the world. Its portfolio is fueled by our network: a community of experts, innovators, and investors who come together to build great companies.
Alumni Ventures showcase their interest in founders who are patent savvy, and highlighted Bridget Hunter-Jones, Founder and CEO of Pact — an investment Alumni Venture sourced through its MIT connections.
In the interview with Bridget, Alumni Venture mentioned that Bridget received her first patent at age 16, and went on to MIT to earn a degree in Mechanical Engineering. Watch this video to learn how Bridget is now leading her startup Pact to develop innovative health and fitness solutions to improve the muscle recovery process for athletes.
the VC investment process
Venture capitalists (VCs) often place a high value on patents as they can provide a competitive advantage for the companies they invest in. Patents can protect a company’s intellectual property and give them exclusive rights to certain technologies or products. This can make it more difficult for competitors to enter the market, which can help the company generate more revenue and increase its value. Additionally, patents can also be licensed or sold, providing a potential source of additional revenue.
Bibliometrics
Bibliometrics are statistical methods that examine the quality of scientific publications. They are used for the evaluation of research output and reader usage. The methods include citation analysis, webometrics, and cyber metrics. A number of research fields use bibliometrics, including library and information science, sociology, linguistics, and descriptive linguistics.
Bibliometrics first appeared in the late 19th century. Eugene Garfield developed the Science Citation Index, which is a bibliographic database for scholarly journals. It became the standard of quantitative scientific evaluation during the mid-20th century. However, the emergence of the Web has changed the meaning of bibliometrics.
Some of the earliest bibliometric studies focused on citation rates and on the relative impact of patents on technological progress. In this study, the authors found that the average citation frequency of a patent portfolio was related to the increase in profits. They conjectured that university patents had a more fundamental and basic impact on technology than corporate patents.
The most important transformation in bibliometrics took place in the 1960s when the open science movement emerged. This movement aims to make scientific data accessible to the general public. As a result, bibliometrics tools have been incorporated into many applications, including a thesaurus, a database of science-related Web sites, and an index for scientific publications.
The simplest and most obvious bibliometric measures are the number of citations, the age of a citation, and the share of a citation. However, there are other bibliometric metrics, too. These include the Herfindahl-Hirschman Index, which focuses on the concentration of citations across a range of patent classes.
Other bibliometric measures include the citation graph, which represents a network of citing and cited patents. Although these measures are not necessarily the most accurate, they do show relationships between parties and institutions.
Novelty
The signaling effect of patents on VC funding has been studied in recent years. Most of the available research is focused on a single industrial sector. Some authors have also attempted to disentangle the signaling effects of different IP regimes.
However, there is no consensus on what factors signal the most value to VC investors. In addition, the distribution of economic value attributed to patents is skewed. This may be a factor in the relative lack of attention paid to the link between patents and VC funding.
A positive link between patents and VC funding has been reported by some researchers. For example, the size of a patent portfolio is related to VC financing, as is the number of assignees. Interestingly, however, the relationship between a patent’s novelty and VC funding has not been found.
Other than the number of assignees, VCs might also be interested in the technical merit of an invention. Specifically, the number of IPC codes and subclasses is a good measure of technological scope.
Similarly, the number of citations is an indicator of the patent’s technical novelty. Moreover, the number of assignees is a good measure of the quality of the research and development collaborations. It’s interesting that patents with more assignees tend to be more likely to result from R&D collaborations.
Although the quality of a patent’s invention isn’t directly correlated to VC funding, a patent’s overall complexity is. VCs might be more interested in patents that have a higher degree of a novelty than those with a high volume of backward citations.
VC investors have an interest in patents that are scalable, feasible, and re-deployable. Furthermore, a broader range of possible applications and the ability to mitigate risk is desirable.
Technological focus
A crucial component of VC is the technological focus. The technological focus of the VC sector is reflected in the patents and patent portfolios of the companies funded by the VC. This focus may be a sign that the industry is shifting toward operational solutions.
One of the factors driving tech trends is massively faster computation. It is an important factor in breakthroughs in health care, materials sciences, and other areas.
The US has been a leading innovator country since the early 1990s. During this period, the US hi-tech industry became a world leader. As a result, many of these companies are incorporated as Venture Capital firms or Individuals. These companies provide support to clients and lead users.
The US also has a number of innovative small and medium-sized enterprises. They are a critical source of demand for innovative high-tech. However, these companies often struggle to access the financial resources needed to expand their businesses.
Targeted policies to promote the emergence of the VC industry can take a number of forms. Some are more controversial than others. However, they all have one thing in common: they must pay attention to the context.
In order to effectively target the VC industry, governments must ensure that the structure of the industry is appropriate for the local market. Such an approach has been taken by the Israeli government.
The Israeli government’s Yozma Program was designed to re-configure Israel’s high-tech cluster. This one-shot targeted program involved $100 million in Government venture investments in 10 funds. Although the program was a failure, it did contribute to the design of the future targeted VC program.
For targeted policies to be effective, they must include an ongoing post-investment process. This process should involve the VC and company working together to understand the company’s road map, goals, and risks.
Feasibility
VCs use patents to determine the commercial potential of a startup technology. The patents provide protection against rivals and ease market entry conditions for startups. They are also useful indicators of product value. This paper investigates the influence of patents on VC financing, focusing on the relevance of patents across industries.
To examine the impact of patents on VC financing, the authors developed an empirical approach that involved a sample of VC-backed firms. These companies were split into two subgroups according to the type of IP regime.
Generally, VCs prefer to invest in patents that are novel and technologically oriented. However, there is still some uncertainty regarding the significance of the role of patents in innovation. In addition, the importance of patents will likely vary across sectors that feature different IP mechanisms.
In the first column, we examine the relationship between the size of a company’s patent portfolio and the amount of VC funding it receives. Specifically, we find that the size of the patent portfolio is negatively associated with VC funding at the seed stage, while it is not significantly related at the A-series round.
We also found a positive association between the amount of VC financing and the number of assignees of a company’s patents. It is likely that patents with more assignees represent higher levels of collaborative R&D. Furthermore, collaborations are important for subsequent stages of investment, reducing investor risk and generating more funding.
In the second column, we find that the number of jurisdictions in which patent protection is sought reflects the quality of the underlying invention. Moreover, the number of IPC subclasses represents the scope of technology.
Impact on funding decisions
The impact of VC values patents on funding decisions has been studied previously. Among the variables used as proxies are the size of a patent portfolio, the complexity of the innovative output, and the number of assignees. Although some of these variables have been correlated with VC financing, they have not been shown to be statistically significant.
To determine whether there are any empirical associations, the authors conducted regression analyses with a sample of VC-backed companies. They then broke the sample into two subgroups, based on IP regime, and analyzed the relationship between these variables. Their results indicate that there is a positive association between VC financing and the quality of a patent portfolio. Nevertheless, the magnitude of this association is smaller in industries with strong IP regimes.
While previous studies have explored the relationship between VC financing and various VC criteria, few have considered the effect of a quality attribute. Specifically, VC investors award a higher amount of financing to inventions that involve technologically advanced technologies.
These factors may be relevant to the investment decision because they represent signals to VC investors. In addition, a higher number of assignees indicates the potential for collaborative R&D. This may reduce investor risk.
Some researchers have concluded that patents do not have a significant impact on VC financing. Others have suggested that the size of a patent portfolio may be associated with the total amount of VC financing. VCs may prefer to invest in technologies that are feasible and have the potential for commercialization. However, the relative importance of each criterion can vary based on uncertainty and other environmental factors.
The size of a patent portfolio is not statistically significantly related to VC funding and is more important in industries with high patent intensity. On the other hand, the number of assignees is a positive indicator for VCs in industries with weak IP regimes.