EPO and EUIPO’s new study on finance for startups
A recent study by the European Patent Office (EPO) and the European Union Intellectual Property Office (EUIPO) highlights the value of intellectual property (IP) rights for startups in Europe, in particular the important role they play in securing funding and a successful exit. Read the full study here.
Startups face specific challenges in gaining access to finance (e.g. due to riskier business models and lack of proven market success), and for high-tech startups these difficulties are often compounded by the need for intensive research and development (R&D). Although the European startup ecosystem has seen rapid growth with over a tenfold increase in venture capital deal value from 2013 to 2021, it still lags behind its US counterpart in terms of available funding.
The assets of young innovating companies are mostly intangible, but this can make it harder for potential investors to understand and value a startup. Therefore, reducing this information asymmetry and perceived risk of investment is key for securing funding, and IP rights are an effective tool for doing so.
IP rights: a recipe for success
IP rights include a variety of registered and unregistered legal rights for protecting intangible assets, including patents, trade marks, designs and copyright. The study by the EPO and EUIPO shows that registered rights such as patents and trade marks in particular can be key drivers of an entrepreneur’s success and long-term exit options.
The usage of IP rights varies dramatically between sectors – biotechnology is consistently one of the most IP-intensive sectors with “nearly half of startups using patents or registered trade marks”, with engineering, healthcare and manufacturing sectors also relying heavily on IP rights.
Nonetheless, the analysis in this study finds that across all sectors, having IP rights significantly boosts the chances of securing funding at seed and early-stage (Series A/B) rounds, and this is further improved by bundling different types of IP rights such as patents and trade marks. For example, companies with granted or pending patents are 2.9 times more likely to obtain seed funding than those without any IP rights, and are around 3.5 times more likely if they also use trade marks. For early-stage companies, the difference is even greater: companies with both patents and trade marks are over 10 times more likely to secure Series A or B funding than those without. This indicates the importance of IP rights for startups, both from the outset and as they continue to grow.
The use of IP rights has also been found to increase the amount of funding secured, with a reported median seed funding of over €900K for companies using patents and trade marks, compared to around €260K for those not using IP rights.
Beyond these rounds of funding, having a robust portfolio of IP rights was also found to improve prospects of a successful exit. The study reports that startups which successfully exit have an above-average use of IP rights, particularly those which exited via an initial public offering (IPO). Companies using both patents and trade marks were found to be 3.2 times more likely to successfully exit (via IPO or acquisition) than those without any IP rights.
The study also looked at how the geographical scope of IP rights changes during the startup lifetime – having Europe-wide coverage via European patents or EU trade marks, as opposed to national rights only, was found to improve the likelihood of successful seed and early-stage funding and exit. In particular, the benefit of Europe-wide rights over national rights is most apparent in the run up to early-stage (Series A/B) funding, with investors seemingly valuing international expansion prospects even more than at seed funding stages. It is therefore important for startups to consider the territorial coverage of their IP rights early on.
Exploiting your IP rights
The value of IP rights extends far beyond their monopoly effect – if managed correctly, IP rights can be used to generate licensing revenue streams and facilitate partnerships and can be useful negotiating levers. This can be particularly helpful for younger companies looking to develop alternative revenue streams and new partnerships, with European SMEs reportedly licensing a third of their patented inventions compared to 9% for larger companies.
Importantly, patents and trade marks both survive beyond bankruptcy, so provide further security to investors and lenders – this study reports that “startups with patent-backed loans tend to raise more equity capital than those without.” Therefore, besides having IP rights in place, maintaining appropriate control over them and understanding how they can be used to generate value is key for startups.
If you have any questions about securing IP rights for your business, please contact a member of the team at Mathys & Squire.
Written by: William Wathey