How to Leverage Patents to Get Funding

As an entrepreneur, so many people have discredited, denigrated and denied my ideas, time and time again. Despite this, I still found a way to build three multimillion dollar businesses (and sell two of them) over the past 10 years.

Here are a few lessons I learned while trying to fund my #ideas and #patents :

Asset-Based Lenders May Collateralize Patents, but They Will Want More

Despite the insane risks, asset-based lending is sometimes the best way forward to get a business off of the ground. I myself have experienced the nearly unbearable stress of leveraging inventory, tooling and other assets to secure a double digit interest loan with a personal guarantee. I likewise have felt the glory of paying off millions in asset-based debt, only to be charged tens of thousands of dollars for the right to pay off the debt early. #startuplife

For the uninitiated, asset-based lending is a type of financing where a typically risk-averse lender loans money to a borrower based on the value of the borrower's assets, rather than merely upon the borrower's creditworthiness.

For example, let's say you have a friend who wants to start a lemonade stand. She doesn't have any money to buy the ingredients and supplies she needs, so she goes to a lender to see if she can borrow some.

The lender agrees to give her a loan, but instead of looking at her credit score or income, they look at the assets she has that they can use as collateral. In this case, the lender might look at the value of the lemonade stand itself, the ingredients and supplies she needs to make the lemonade, and any other assets she has that can be used as collateral.

If the value of these assets is enough to secure the loan, the lender will give your friend the money she needs to start her lemonade stand. In return, she'll have to pay back the loan with (usually very high - especially in the case of startups) interest, just like with any other loan.

It's important for borrowers to carefully consider their ability to pay back a loan before taking one out, as defaulting on a loan can have serious consequences. If the lemonade #entrepreneur in the above example doesn't pay back the loan, the lender has the right to seize the assets that were used as collateral. This means they can take possession of the lemonade stand, ingredients and supplies, and any other assets that were used to secure the loan.

The lender will typically try to sell these assets to recover the money they loaned out, plus any interest and fees that were agreed upon when the loan was taken out. If the sale of the assets doesn't cover the full amount of the loan, the borrower will still be responsible for paying back the remaining balance.

So how does asset-based lending apply to patents? Well, let me fill you in on a little secret: asset-based lenders are not exactly known for their love of patents.

Sure, patents can be valuable assets that give you the exclusive right to make, use, and sell certain products or processes. But they're also intangible, meaning they don't have a physical form and can be tough to value or sell. Plus, they can be complex and may require legal expertise to fully understand and evaluate. All of these factors make it difficult for lenders to determine the value of patents and how much income they might generate in the future.

So when it comes to using patents as collateral, lenders are typically going to be a little bit hesitant. They typically prefer more concrete forms of collateral, like real estate, equipment, or lemonade stands, which are easier to value and seize if a borrower defaults on a loan.

There is one notable exception - if you manage to obtain and maintain patents for a well-established product with a proven track record of generating income, you might be better able to convince a lender to take a chance on them as collateral. When I built a medical device company, this is exactly what happened. The patents ended up serving essentially as a multiplier of the value of the tangible assets that I collateralized for the lender. In general, for even the most valuable patents, lenders are going to ask for a few other forms of collateral as well.

Equity Investors are More Likely to Value Patents - or Treat Them as an Investment Prerequisite

Investors considering whether to put their money into a startup, unlike lenders, approach the funding event from a disposition of favoring risk. As a result, despite of all the uncertainties associated with the cost of enforcing a patent, the validity of the patent, and the ultimate scope of the claims once a patent becomes granted, the reward of potentially excluding competitors from a particular marketplace is often too great to ignore.

Investors recognize that these little legal documents can actually be a pretty big deal for startups.

First and foremost, most investors recognized that patents provide protection - although risky and somewhat theoretical - for the products and processes that a startup is developing. This means that if a competitor tries to copy or steal the startup's ideas, the startup can take legal action to impede their competitors. This can give the startup a competitive advantage and ultimately may allow it to charge more for its products or capture more of a particular market.

But patents can do more than just keep the competition at bay. They can also add value to a startup by making it more attractive to subsequent potential investors or acquirers. Investors love seeing a strong intellectual property portfolio. Patents can likewise signal that the startup is committed to innovation, which relatedly provides a favorable pressure on valuation. Patents may also provide a valuable innovation shortcut for larger companies considering entry into the product space, making an acquisition of the related startup more practicable than attempting to design-around the startup's patented products.

On top of all that, patents themselves can also generate some sweet, sweet revenue for a startup. The startup can license its technology to other companies or sell the patents outright, providing a valuable source of income while the startup is still getting off the ground. Larger companies that may not wish to buy a startup outright, but may still wish to incorporate the startup's ideas into its own products without the hassle of dealing with a potential infringement, might find it more appealing to pay licensing fees to the startup.

And finally, patents can form an important part of a defensive strategy for startups. By obtaining patents on not only their own technology or products, but those that are similar, startups can prevent competitors from obtaining patents on similar technologies or products. This can help the startup maintain its competitive position and prevent its competitors from using patents as a weapon against it.

Patents as a Value Proposition

When you're trying to attract financing, you want to show investors that you've got a solid, innovative business idea that's worth backing. Patents can give your venture a competitive advantage and protect your ideas from being copied or stolen by competitors. Plus, they can signal to investors that you're committed to innovation and that your startup has the potential to generate revenue through licensing or selling your patented technology.

So, if you're a startup founder looking to attract financing, don't overlook the power of patents. They may not be the sexiest part of your pitch, but they can make a big difference in convincing lenders or investors to take a chance on your startup.

Schell IP's mission is to leverage artificial intelligence in all aspects of the patenting process to create more valuable intellectual property assets. The firm is highly selective and only taking on highly promising clients with a strong alignment with our team's background and expertise. If you would like to explore working with us, feel free to?contact the Schell IP team.