How Patents Can Add Value from Startup to Exit

How important are patents and other types of intellectual property (IP) for entrepreneurs who are launching a new business? ?Will a portfolio of patents really matter to prospective investors and customers--or for a successful exit? These are critical questions for founders to consider at every stage of business growth. ?

Building a strategic IP portfolio clearly pays off for many firms. Intangible assets (including patents, trademarks, copyrights, and brand value) account for well over 90% of all US corporate value today. ?Licensing revenue from all forms of IP was estimated at $66 billion in 2023, with $15 billion of that coming from patent licenses (IBISWORLD). The Small Business Administration reports that small companies make $2.5 billion in patent licensing annually.

But these numbers don’t tell the whole story.? Filing patent applications is an expensive and lengthy process, with no guarantee that a patent will actually be granted. Entrepreneurs need a well-informed strategy to reduce the risk and get the most value from their patenting initiatives.

For a close-up look at how key stakeholders think about the strategic value of patents, I talked with Steven Fox, Co-Founder and Partner of Propeller Ventures, with Joelle Flynn and Sonia Hounsell, Co-CEOs of FunkkOFF! ?, with Carmine Denisco serial entrepreneur, inventor, and president of the United Inventors Association (UIA), and with IP attorney Cynthia Gilbert. ?

Here’s what they told me:

Investors Value Patents as a Barrier to Entry That “Demonstrates a Competitive Moat”

As Steven Fox describes the process at Propeller, which invests in #oceantech startups, “We put a lot of focus on IP in evaluating potential investments. When it comes to moving atoms instead of bits, in particular, the ability to demonstrate a real competitive moat is key. In our sector there are already a lot of competing solutions, as startups try to address ocean/climate problems from multiple angles. For an early-stage, sometimes pre-revenue company, it's really hard to prove your product market fit. We think about good IP protections as a way to provide time to build up those other elements to compete effectively."

Founders Use Patents to Attract Investors and to Differentiate and Protect Their Brand

Founder and inventor Joelle Flynn has seen that patents deliver value at every stage of company growth, “Patents definitely impress investors and they are a key part of fundraising. The FunkkOFF! patents attracted our first angel investor and I think our IP portfolio was one of the reasons why Shark Tank was interested in having us on the show.? As we develop our brand, the patents mean we actually have more of a barrier to entry. And the patents are also important when calling retail stores and getting into new sales locations.? Instead of just saying, ‘here's one more product,’ we can show that FunkkOFF! is offering a unique, multi-patented product."

Co-Founder Sonia Hounsell agrees that patents have proven their value in pitching retailers to carry FunkkOFF! products, saying “that word patent is just really telegraphic, it communicates new in a very important way.”?

Sonia adds, "Some other ways that patents and IP have been important for us include attracting design awards and protecting our brand while selling online. ?We recently had an issue where another seller was using our trademark. Thankfully, Amazon is a good partner in this regard; when we filed a complaint, they immediately took the listing down. But they wouldn't have done that if we didn't have the IP to stand behind."

Patents Are Invaluable at Every Stage of Company Growth and Exit Planning

Carmine Denisco looks at patents as an inventor and entrepreneur, as well as being President of the UIA.? In his experience, "Intellectual property, particularly patents, can be a potent tool to safeguard products and ensure brand integrity. A well-curated collection of intellectual property is not just about showing dedication to your product; it signals to investors and competitors alike that you are prepared to enforce your rights vigorously. This level of protection can be particularly attractive to investors who are considering injecting capital into a business.

Towards the end of a business cycle, a comprehensive patent portfolio can play a pivotal role in a company's successful exit strategy, whether through sale or merger. A full suite of patents provides a clear ownership structure for all innovations, thereby simplifying negotiations and due diligence processes. It ensures that any high-value products and ideas are legally protected, facilitating a smoother transaction and potentially increasing the company’s valuation."

Patent-Savvy Founders Will Get the Most Value

As an IP attorney, Cynthia Gilbert emphasizes the importance of founders making well-informed and deliberate choices about their patenting strategy,?noting, "It is never too early to start thinking about patents - but it can often be too late.? In addition to needing to budget for IP-related expenses, there are strict rules in place about when patent applications may be filed.? Founders need to balance financial constraints with filing requirements and it is always better to have the information they need to balance these tensions as soon as possible.

The importance of a portfolio can vary based on the industry and the type of problem solved by a particular invention.? What is vital, however, is that a company be able to articulate exactly why they did or did not pursue a particular patent strategy.? For founders that choose not to file applications, they will often be expected to provide a stronger answer than "we didn't think of it" or "we don't believe in patents" Conversely, founders who do file patent applications should be able to articulate the specific technical features that they decided to protect and why the patent application will help further specific business objectives."?

?Learning More About Patents

In addition to working with a patent attorney, entrepreneurs who are still evaluating the importance of patents for their new venture can find a wealth of resources and peer support through the UIA, the largest non-profit inventor group in the world.? The UIA’s mission is to support inventors and entrepreneurs through networking, resources, and guidance, and membership is free.

My thanks these patent stakeholders and experts for taking the time to share their insights:

Steven Fox , a Founding Partner at Propeller, an early-stage climate-tech venture fund that invests in and builds ocean-climate companies that use science and technology to address the climate crisis in partnership with the Woods Hole Oceanographic Institution.

Joelle Flynn the Founder & Co-CEO of FunkkOFF!? Inc. and the Inventor behind FunkkOFF! TeethRefreshers?? Joelle is the sole Inventor of 11 patents (so far!), 10 in the U.S. and 1 in China and has spearheaded the growth of her company's IP portfolio of patents, trademarks, and brand value.

Sonia Hounsell the Co-Founder and Co-CEO of FunkkOFF!? Inc. , who is leading the company’s launch of its patented TeethRefreshers? and it’s marketing as the 1st and only two-in-one toothbrush and toothpaste that’s reusable to keep your teeth white and fresh on-the-go.

Carmine Denisco , entrepreneur, inventor, and president of the United Inventors Association (UIA).

Cynthia Gilbert , a Founding Partner at Blueshift IP, focuses on strategic development, protection, and management of patent portfolios for clients in a variety of high technology areas. Cynthia was named an IP Trailblazer by The National Law Journal in 2020, putting her in an elite group of IP attorneys nationwide.

?What's your opinion about the value of patents?

• What have you learned about the value of patents in your own company, or through working with patent portfolios??
• Are you interested in trademarks, copyrights, and other types of intellectual property? ?

Please share your opinion and questions about the value of IP in the comments!