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Intellectual Property and Investment Mythology

15 August 2018. Posted by Jonathan Lucas.

Intellectual property (IP) is an important consideration for investors when considering whether to invest in a business. At James & Wells we work with many businesses seeking to gain investment to help commercialise their innovations and to grow. We also advise investors as part of the due diligence process when assessing a company to invest in.

During that process we have come across a number of recurring misconceptions relating to IP. These misconceptions are usually on the part of small, immature companies seeking investment but can sometimes be on the part of investors.

This article aims to dispel the myths around IP we often come across during the investment process.

Myth One: We have a trade mark and a patent. That’s all an investor is looking for.

Your IP is just one piece of a much larger puzzle. The key considerations an investor will be looking for are:

  • Your business case. How strong is your business case? Have you presented a problem to the investor that their investment can help solve? Have you justified where in your business the money will be invested to help solve the problem?
  • Opportunity. What is the market opportunity?
  • Strategy. What is your plan for the next five, 10, 15 years? Are you looking for investment as part of your exit strategy?
  • Your attributes. Are you a hands-on business owner? Do you have enough experience managing a business or in this industry sector?

In some cases, the above factors are more important to an investor than simply having IP.

Where IP is a crucial factor, it’s not the mere fact of having IP that is important. An investor will also consider if your IP protect the right aspects of your business.  IP is fundamentally concerned with competitive advantage – what sets you apart from your competitors. If your IP protection doesn’t protect your competitive advantage then it is not as valuable as if it did. The link between IP and your competitive advantage is crucial.

Myth Two: There is no point having IP protection if we can’t afford to enforce it.

This is a really bad reason for not obtaining IP protection but it is one we hear very often. Depending on your business strategy, enforcement might be the last resort.

IP protection has significant deterrent value and the window of opportunity it provides over competitors sometimes justifies the value alone.

What about licensing your technology or brand? Licensing is a way to open up a new revenue stream for very little effort, and lets you tap into a new market or industry sector.

It is also crucial to understand that IP protection provides an important asset that increases the value of your business for attracting investment or a potential sale of your business.

Finally, it is important to remember that, although at this current stage your business might not be able to afford to enforce its IP rights, this doesn’t mean your future business won’t be able to. It also doesn’t mean that another company – one with much deeper pockets – won’t be able to afford to enforce your IP if they licence or acquire it.

Myth Three: A granted patent is more valuable than a pending patent application.

Sometimes, but sometimes not. Many investors understand that a pending patent application isn’t finalised yet so, while it isn’t yet enforceable, the advantage of flexibility can override this. A pending patent application is still able to be manipulated to cover something that a competitor does, so there is value in the lack of finality.  For some investors, this may be an attractive prospect.

However, other investors prefer to see granted patents or a report from a patent office giving an application the ‘all clear’. We would always encourage these investors to understand the above-mentioned advantages of a pending application. But, in saying this you should be aware of the preferences of such investors, and ensure your IP strategy caters to them, as well as keeping your options open.

Myth Four: We need to be able to tell investors that we have worldwide freedom to operate.

This is nearly impossible to guarantee. Undertaking a worldwide freedom to operate (FTO) analysis is a huge undertaking and is most likely unnecessary. In saying this, you do need to inform an investor that you’ve conducted an FTO analysis in key markets. Ideally, you would relay that there are no issues but realistically there is likely to be some kind of IP-related obstacle to your business strategy. That doesn’t need to be the end of the road, but investors prefer to be informed of the nature of any risks that have popped up as a result of assessing FTO, and that a strategy is in place to mitigate these.

Myth Five: We cannot get a patent for software technology so there is no point applying.

This is quite a complex topic. Simply put, you cannot patent software itself, but an invention that is implemented through software can – sometimes – be patentable. This is a complex topic and an article from Senior Associate Craig Rothwell discusses the topic of software patents in a lot more detail: Software: To Patent or not to patent?

The key message to remember is that it is not as straightforward as “you can’t patent software”. It is critical to consider what forms of IP protection are available for any given idea before taking steps that might limit your ability to protect the idea later, e.g. public disclosure or commercial use of the idea.

Myth Six: We’ll just keep this great idea a trade secret.

This is a perfectly valid strategy in the right circumstances, but it’s the “just” that is the biggest part of this myth. Keeping trade secrets is difficult. It requires careful constraints to be put on the dissemination of information – both through practical and legal measures. It’s also only an option if the idea can’t be reverse engineered, or its effects can’t be replicated through enough effort, which is actually not very common.

If you need any help demystifying any of the myths that you have heard about IP, investment or the due diligence process, we would be happy to help. We can help guide you through the process to help you achieve the best result possible.   

Jonathan Lucas is a Partner with national Intellectual Property specialists James & Wells, advising on all aspects of IP protection.  A Registered Patent Attorney in New Zealand and Australia and Fellow of the New Zealand Institute of Patent Attorneys, he has extensive experience in the medical, engineering, electronics and software industries. He can be contacted on 09 914 6740 or jonathanl@jaws.co.nz