Are VCs in danger of losing asset value?

2015 saw a record £2.46bn invested in the technology scene, up a staggering 70% on 2014, however this performance has not been replicated last year. Although performance was up for the last quarter, the first two quarters of 2016 showed declines, amounting to a more cautious funding strategy across Europe which has seen $6.3bn invested in 750 deals.

This reduction in investment means that venture capitalists (VC) need to concentrate on maximising the returns on current and future investments to ensure they are accurately extracting the right value for the assets.

One area which can go unmonitored in this sector is the intellectual property assets, particularly in start-ups. For many start-ups and early-stage companies their intangible assets can account for up to 90% of the business’ value. For this reason the VC needs to ensure that the assets are secured or protected as soon as possible.

Including an Intellectual Property register, starting at due diligence and continuing through the funding phase, is one way of effectively addressing this. By understanding the current intellectual property portfolio, the VC is able to establish whether the intellectual property (IP) is sufficiently rigorous enough for the organisation and the appetite for growth.

In addition a robust IP strategy should clearly show how the IP is contributing to the funding decision and whether there are any additional opportunities for the IP to generate income, either through licences, enforcement or future product development. For the medium term funding, any threats or weaknesses which might impact the overall IP value need to identified so mitigation plans are in place.

Protecting the Intellectual Property

The types of Intellectual Property protection that can be afforded to assets are:

  • Copyright
  • Trade marks
  • Designs
  • Patents

Each of these have a different legal focus and requires a different approach.

Copyright is where an author has exclusive rights to an original piece of work. These exclusive rights allow the author to make and sell copies of the work, as well as limiting what others can do with it. To claim copyright the author or writer needs records showing the original creation of the work and should include a copyright statement that shows the author and the date.

Trade marks are a recognizable sign, design, or expression which identifies products or services of a particular organisation or product that differentiates it from those of others. There are three different types of trade marks: registered trade marks, service marks and unregistered trade marks. Registered trademarks are registered with the UK or EU trade mark office. Service marks are used for services rather than products, and are registered in a similar way to products and unregistered trademarks have some limited cover under trade secrets or “passing off”.

Designs refer to the characteristics of any shape, configuration, pattern or ornament, and registering the design is done in order to protect the external appearance of a product, package or article.

Patents, meanwhile are the exclusive right granted by a government authority or licence to have the right to manufacture, import, use or sell an invention and to exclude others from making, using or selling it.

Establishing the value of the IP of assets

Investing in an intellectual property portfolio needs to provide an adequate return on investment for it to be a viable option. Establishing the exact value of the IP, particularly with new technology, can be difficult to calculate especially if there is no existing competition or established market to monitor. However it is important that the value of the IP can be accurately identified in order to extract and commercialise it to its full extent.

Part of establishing the value of IP includes identifying risks around market, finances, management and technology.

There are also additional benefits for the VC in terms of having a value against the IP. Within the UK there are tax incentives around intellectual property, including Patent Box. This provides a reduction in the amount of payable corporation tax, generated by the value of the patented item, and is most applicable to VCs who are funding organisations with patents or patentable technology, predominantly in the engineering, automotive, pharmaceutical, chemical, manufacturing or technology sectors.

So what IP portfolio should be considered?

The key aspect of protecting intellectual property is to ensure the organisation retains its competitive advantage, has stability in the market place (without the disruption of litigation or infringement) and safeguards future revenues.

Deciding what the IP portfolio should look like will depend upon the organisation and the assets. It will also depend on the geographical markets being targeted, the income opportunities (manufacture v licence) and the physical and technological characteristics.

Afterall, not everything can be patented. Anything deemed to be contrary to the laws of state, social morality or detrimental to public interest is exempt, as are scientific discoveries, methods for mental activities, diagnosis or treatment of diseases, animal and plant varieties, and substances obtained by means of nuclear transformation.

So why is IP important?

IP is important when it comes to protecting your investment and potential return. From a VC perspective IP intensive industries tend to generate double the sales, have greater long-term growth and generate trade surpluses compared to non-IP intensive organisations. With this in mind, it is worth being diligent about intellectual property when managing your investments.

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