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From securing VC, to building enterprise value, to an exit event and managing risks along the way, building an Intellectual Property (IP) story can help high growth tech businesses throughout all stages of their lifecycle.
IP has often been relegated to the legal community when companies are thinking about patents, trademarks, or other registered rights such as design rights. However, when you look at IP, you need to consider the broader set of intangibles that really support value creation in your business.
Ultimately, you need an IP strategy that enables you to demonstrate your value and worth. This means you need an operating plan and you need a budget, which can be tricky for scale-ups. Especially in the early days, it’s natural that focus is on developers and headcount, getting the minimum viable product out, branding, marketing and so on. Plus, it’s no secret that patents are expensive and early stage growth companies often struggle with that level of spend.
As you get through seed and series A, you should start thinking about putting together a more formal strategy and a more definitive budget. But once your business gets to series B and beyond, your IP is a crucial part of the story, often one that will take you through to eventual exit.
So we put together this short guide on how you can begin to create your IP story and how it can help through all stages of your business’ lifecycle.
This competitive intelligence will inform the next steps.
The next big event
Naturally, step one is fundamental in building your IP story.
But what comes next is vital. When you get to certain later-stage junctures in the journey of your company (e.g. series B or C, an IPO, or a trade sale), your IP story is really tested and you need some substance behind it.
What purchasers and investors are looking for is that you’ve got a differentiated position which makes you more valuable or better performing than others. Then they want to know that you’ve got the ability to protect that for the longer term. They want to know that either there are no IP risks or that the IP risks that do exist are manageable.
Another thing that investors and buyers really care about is that what’s special about your company cannot be copied. Take the Coca-Cola formula, for example; a trade secret that’s locked in a vault in Atlanta and very few people have access to. There are specific steps that are taken to limit access to this very special formula. So whether the thing that makes you special is a set of specific flavour combinations, or an AI algorithm or a unique data set, make sure it can’t be taken by competitors and copied.
As you continue to build out and become confident that the product offering or service is likely to scale, you’ve sussed out the portfolio size of certain competitors and you’ve made a decision to build up a suite of IP assets, then you can go through what’s called an innovation capture process.
This involves systematically looking at all the inventions, breakthroughs and technical problems that you solve as you develop your offering. Then choosing the ones that are most valuable, technically strong and have a good chance of becoming a patent. These are then run through a filing program to build up a patent portfolio.
In some cases patents take a while to grant; it could take two to three years, or even longer, before it’s an enforceable patent. All the more reason to start this journey early, monitoring risk and building those assets along the way. As you get closer to selling a business or exiting, this is the time to build your IP story and really make sure that the stakeholders who will be presenting the value of the business really understand the IP position and can compellingly convey the value.
That’s the journey but there can be some serious bumps in the road along the way.
When someone is trying to acquire your company, you might experience what we call an IP diligence failure. This is when the acquirer is expecting IP to be present but, in fact, it isn’t or you don’t own it.
Software products often have a huge dependency on open source and, in many cases, businesses haven’t thought enough about how they manage that diligently and the whole IP on which the acquirer is basing the valuation is underpinned by stuff they don’t own.
We’ve seen examples of inventor disputes where a company becomes valuable and an ex-employee that was an inventor on a patent seeks value. If they weren’t a named inventor on a patent, they might claim that they co-invented the patent back in the early days and there’s their claim. Facebook and The Social Network come to mind.
Something else we see is companies getting hit with patent assertions pre-IPO, either by litigation or approaches that need to be dealt with. We’ve also seen ex-employees take IP with them when they leave to build competitive companies, either because their contracts weren’t thorough enough or their IP education wasn’t rigorous enough. The trade secret litigation between Waymo and Google in the US over the past year was founded on these kinds of issues.
Those are the horror stories. How about a success story?
When the new VP of IP was brought in at a UK tech scale-up in 2013, the business had already begun to file some patents. For a business to understand the importance of IP, and that their investors had an interest in IP, was quite rare at the time.
However, they were keen to continue to build an IP portfolio, so we worked very closely together on their IP journey and ended up with a concise database of all the intangible assets in the business. When a certain multi-billion dollar tech firm came knocking, the organisation was in a position to tell an IP story that was undeniable. All the files were in the right place, all the due diligence was done and ready. They had a positive exit experience with the investors and founders which ultimately came down not only to our IP partnership in offering ideas and solutions that could be implemented, but also to the VP’s strategic vision. He knew where he wanted to go and what would need to be achieved.
Continuing on your journey
What’s really key about your IP story is that you can actually present a robust position on each different facet to investors. Begin by methodically determining what your IP story should be. Then project forward to a point in the future at which it will matter so that when you undergo a serious raise or a potential sales process, you’ve helped build the intangible assets within the business and the processes, systems, methodologies and capabilities necessary to create an IP story of substance.
Please do get in touch with the IP team at Deloitte if you have any questions on the above, or simply to discuss your business’ IP story.
The UK Deloitte Private High Growth team is running regular webinars, for Founders and CxOs of fast growing businesses, on a variety of topics to offer practical considerations during this crisis. You can register for the webinar series here.
Jon Calvert leads the IP Advisory business within Deloitte. He has extensive experience and leadership in intellectual property strategy development and execution from his many years as a tech executive and IP consultancy business founder. As well as overseeing the Global IP Advisory capability within Deloitte, Jon leads the UK based IP team directly supporting clients across a wide range of industries and geographies looking to discover, plan, protect, manage and leverage their IP assets. Jon has broad experience in helping companies build enterprise value through IP, identify and manage IP risks, maximising efficiencies through tax planning and utilizing Innovation led government incentives and realise value through the sale and licensing of IP rights. IP Advisory supports the wide range of business services within Deloitte in which IP plays an integral role for example: Digital transformation Transfer pricing R&D tax credits & Patent box M&A (Buy & Sell Side) SME Growth and IPO planning Cyber risk and IP protection Innovation strategy He has a Masters in Engineering from Brunel University and is regularly recognised as one of the top 300 international IP strategy advisors in the world by IAM magazine.