It is an obvious fact that the ability to raise capital is vital to many small (especially “high-tech”) businesses. In doing so, small business founders and other entrepreneurs spend a significant amount of time drafting a business plan and toiling with presentation slides. Those plans invariably define a market, describe the new service or product offering and detail the biographies of the management team. However, rarely do entrepreneurs think of stating their business case to potential investors in terms of the intellectual property (IP) rights (i.e., the patents, copyrights, trademarks and/or trade secrets) their new company controls or potentially can control.
Why should a small company care about IP? Well, in the last thirty years, there has been a shift from a labor economy to a knowledge economy. That is, less than 10% of Americans now work in manufacturing. Consequently, intangible assets (i.e., long-lived assets used in the production of goods and services, including IP rights, know-how, software, databases, and certain contractual rights such as broadcast licenses, governmental permits, customer and supplier agreements, etc.) have emerged as the most powerful asset class, overtaking more traditional capital assets such as real property, plant and equipment. Studies have shown that as much as 75% of the value of a U.S. publicly-traded company comes from intangible assets. This is an inversion from 30 years ago when less than 20 percent of a company’s value came from intangible assets, and is significant because the largest component (or subset) of intangibles is IP.
So again, “What does IP have to do with me the small company entrepreneur raising capital!?” Well, the lifeblood of any small, high-technology enterprise is the IP that it controls or potentially controls. In other words, the short-term salability, the long-term profitability, and the eventual ability to undertake an initial public offering of the small company all depend upon its ability to develop, acquire, protect and apply innovative ideas and concepts. The foregoing is supported by data showing that small businesses generate 13-14 times more patents per employee than large firms (and would empirically suggest that this tangible asset versus intangible asset inversion described above applies, if not more so, to smaller (and private) companies as well).
Thus, when an entrepreneur is spending a significant amount of time drafting a business plan and toiling with presentation slides in the hopes of raising capital, it would be prudent to ask: “What is my IP position and have I conveyed that in my materials such that a professional investor will understand?” In other words, as an entrepreneur, you would not have started a company if you didn’t have a great idea about making some new product, offering a new service, or making some existing product or service faster, slower, cheaper, bigger, smaller or whatever adjective applies for describing the next “cool thing” in your technology space. Well, how do you keep competitors (think bigger, more-established companies) from just copying that idea!? The answer is IP rights!
Therefore, your business plan and pitch book should address the following: What patent applications will we file? What will we keep secret? What will be open sourced? What trademark applications will we file? Have we obtained domain name registrations corresponding to the trademark applications we filed? Does our business model depend on using someone else’s materials that are protected by copyright or some other form of IP? Your plan and pitch books should address these because without any plan for establishing (or any established) IP rights, your venture essentially becomes a commodity provider attempting to compete on price – which is difficult given that you most likely won’t be able to take advantage of any economies of scale, unlike your more mature and larger competitors.
