One of the fastest growing breakthrough segments in startup companies are those that focus on the nexus of health care and information; driving the effectiveness of patient care through efficiencies in hospitals and other clinical operations. As more of these businesses look for venture capital and funding; many of these companies are required to give special attention to their intellectual property (IP) as the competition is getting more sophisticated in their IP filing strategies.
Giving serious attention to IP is not easy for startups. Since startups have limited resources and are preoccupied by the herculean efforts of starting a new company, IP can be seen as a distraction. Despite this distraction, IP especially patents - have huge benefits for a startup. Here are a few reasons why startup IP is so important.
6 Patent Benefits That Drive Startup Success
1.) Organic Growth for Startups
Patents are causally linked to startup sales growth (+51%) and employment growth (+36%).
The first patent grant by a startup increases its ability to continue innovating, by increasing the number of subsequent patents filed by the startup (+49%) as well as the patents quality (+27%).
Granting of a patent application from a startup company improves the probability of an IPO (+153%) and increases the probability (+84%) of being acquired over the unconditional probability.
2.) Increased Company Sales Multiples
Patents, Trademarks and other forms of IP drive multiples growth in the sale of startups.
Generally, companies without IP do not generate significant multiples during sale of the company. This is because they do not create a protectable space in their market that a buyer can rely upon after sale.
Therefore, companies with good to great patent coverage of their marketplace generate a sales multiple in the range of 5-21X earnings.
Other studies show that doubling patent inventory has been attributed to a 24% premium in market valuation.
3.) IP promotes VC Attention
This advantage is compounded by the first grant of a patent application which improves the probability of receiving venture capital in the next 3 years by 2.3 points, a 53% increase over the unconditional probability. The effect is strongest for startups that (i) raised little or no VC funding before the USPTO’s decision, (ii) were founded by inexperienced entrepreneurs, and (iii) operate in the IT sector.
Several of the new SaaS health information companies, like Athena Healthcare, use patents to increase their EV/revenue ratios over 100%.
4.) IP is an Asset
Filing patents is a relatively easy way to create assets in your business. Few articles have dealt with the strategy of using a patent as an asset of the business. Patents are intangible assets that can be used as collateral, be depreciated and qualify for tax credits on R&D.
The average value of a patent during sales in Q3 2015 was $288,133, with a median value of $232,588.
5.) First Mover IP Advantages
First movers in an industry enjoy an added advantage when they also file patents and other IP as the IP will help preserve their market position.
Bundles of IP (Patents and Brands) tell the story of your innovation that you can utilize in your marketing and sales efforts. Even a modest filing strategy that captures the startup story will help a company establish to its investors and customers that it is a first mover in the market.
6.) Patents are used as Stock Performance Predictors
There are a number of stock-predictor algorithms for companies that display specific configurations of patenting activity.
The specific patent sequences detected correspond to predictable innovation within a company. Innovations can be converted into new products for the market that generate increased sales, resulting in the stock outperforming the competition.
Examples of IP Utilization by Successful Startups
An example of a successful healthcare startup is Kolo Medical, a healthcare technology company that held more than 40 patents prior to seed funding as it emerged from Stanford University in the 1990s. Kolo Medical provides a full suite of capacitive micro-fabricated ultrasonic transducers (CMUTs) for medical ultrasound imaging by leveraging advanced semiconductor technology and the most advanced CMUT technology.
"The combination of strong patents and supporting research lifted this startup into the big leagues."
While this project had the advantage of national grants and years of work in a university known for its incubator process, its principal investor also remained involved through the early stages of the startup, and continued playing a big role on the advisory board because of the unique technology and potential. The combination of strong patents and supporting research lifted this startup into the big leagues.
Ginko Bioworks is a biotech company out of MIT that uses IP and crowd innovation to its advantage. Ginkgo Bioworks calls itself the world’s first organism-engineering foundry and is part of a group of startups who are using an advanced IP strategy that embraces both public and proprietary innovation models. The company actively puts IP up to review to determine whether to share or patent. In this approach, they patent their advanced creations, but make some of the common innovations available to everyone. This creates intensely good press around the company as well as helping other companies that don’t directly compete to get a leg up on supporting technologies.
"By using a patent and publish strategy, a startup can make its own IP more rare while getting their innovation message out to their customer base."
This raises an interesting final point. Using IP to capture the upfront and subsequent innovation in a technology startup gives the company the high moral IP ground they can trade, open source or sell as the startup business strategy moves away from those specific assets. The startup can also advertise its technology and publish broadly after securing the patent to help destroy the ability of others to patent in the same technology arena. By using a patent and publish strategy, a startup can make its own IP more rare while getting their innovation message out to their customer base.
In closing, the choice to use IP to achieve financial and legal advantages over the competition is a critical decision for the success of a startup. The more IP that exists in the startup’s competition, the more critically the startup should view its own investment. In the IP-rich medical startup world, the benefits of investing in IP create critical advantages important for company success.
||Mark Stignani is a registered patent attorney at Schwegman Lundberg & Woessner, P.A. Mark has patent experience in various technology areas, including software, information systems, mobile devices, computer hardware and design, telecommunications, and mechanical. His practice includes prosecution, reexamination, patent and portfolio analysis, freedom to operate, patent strategy and planning and strategic counseling. Prior to joining Schwegman, Mark served as an Assistant General Counsel for Thomson Reuters for over ten years.
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