A startup company, by definition, is an entity trying to creating a new market for its disruptive innovation. Unlike the traditional company which has a well-defined market for its product and is therefore customer-centric, a startup is idea-centric. Due to the above mentioned difference in philosophy, startups have a greater need for raising capital; capital which is required for creating the product, promoting the product and marketing the product.
Typically this requires the startup to convince potential investors about the feasibility, success rate and potential of the disruptive idea. While measuring these factors, potential investors look into various parameters associated with the startup; one such parameter being the intellectual property rights being held by the startup.
Intellectual property rights as an indicator of the technological merit:
Intellectual property rights act as an indicator of the technological merit of the idea. For example, the patent system requires inventions to be novel and non-obvious, and have industrial utility; therefore patents serve as a certification that the proposed idea has value and market potential. In a way the patent system serves as a touchstone on which the novelty and the utility of the idea are tested.
Intellectual property rights provide the potential investors with a sense of indemnification:
In addition to acting as a validation mechanism for your idea, intellectual property rights also provide the potential investors with a sense of indemnification. Since intellectual property laws have provisions which specify the inclusion of the original author or the inventor in the registration process, the potential investor will not have to worry about any liability shifting on to him. Additionally, since most patent laws require that the patent applicant mention patents which would be infringed due to the practice of the invention being patented, chances of accidental infringement by investors, who would like to practice the invention, is reduced.
Intellectual property rights are a marketable commercial asset:
Besides serving as an indemnification mechanism, acquiring intellectual property rights on your idea helps transform the idea into a marketable commercial asset without having to incur the high cost of product creation. While traditionally intellectual property rights have been thought of as a means to end (the end being monopoly over the product for a period of years), contemporary business minds have started thinking of intellectual property rights as an end by themselves. There are several non-practicing entities whose sole function is to perform research and license out the intellectual property rights arising from the research. Being an asset, its value is reflected in the company accounts and often plays a huge role in the company’s valuation.
Raising capital by using intellectual property as a tradable asset would be of extreme importance to firms that are not in a stage to release marketable product. The cost of filing a provisional application is trivial compared to product development.
Intellectual property rights can be used as security in acquiring loans or mortgages:
Since intellectual property rights are assets which can valued, they serve yet another role in raising capital. Intellectual property rights can be used as security in acquiring loans or mortgages. Being a legally recognized right, security interest can be created over intellectual property rights. This is a very important aspect which potential investors would consider, since it lets them create a charge (fixed or floating) over an asset which would have potent value even if the startup failed.
Another interesting manner in which intellectual property rights could be used to raise capital is through trading exchanges for intellectual property. These trading exchanges, although a relatively new concept, are akin to stock exchanges in the way they work. However instead of trading stocks, what is traded is actually a license in relation a patent or a patent portfolio. Instead of having to negotiate a license with every interested party, this mechanism allows the intellectual property rights holder to offer for trade a number of standard licenses to the public. Moreover these licenses can be traded again (consent of intellectual property rights holder may be needed in certain cases).