IP Valuation: The Impact of Patents on Startup Funding
Introduction :
Many startups explain their funding needs in terms of revenue potential and how they plan to grow their customer base. However, the full funding story includes proprietary technology and intellectual property (IP).
Technology startups use IP assets to demonstrate their unique approaches to market challenges. A startup’s well-developed patent portfolio may show the ability to maintain a competitive edge through market licensing, partnerships, or investment transactions.
However, without a patent valuation, there may be no understanding of the worth or value of the technology.
According to the World Intellectual Property Organization (WIPO), valuation of intellectual property (IP) assets assists companies in making informed decisions related to intellectual property licensing, sale, joint ventures, and financing.
Startups in Banglore and beyond will be better positioned to develop funding and an IP strategy posture when they value patents and other startup IP assets in their business.
What Is Intellectual Property Valuation?
Intellectual property (IP) valuation is the estimation of the economic value of an IP asset within the context of a distinct business and market.
Typically, the IP assets of a startup include:
Grand patents
Patent applications
Trademarks
Copyrights
Registered designs
Software-related IP
Licensed IP
Technology and other intangible assets
The cost of developing IP is not the only value that can be assigned. According to WIPO, the value can be determined by the future economic gains that IP can provide due to the potential for direct use, licensing, creation of market barriers or competitive disadvantage.
Owning a patent does not automatically give startups financial value. Consider commercial relevance, enforceability, market opportunities, remaining term, and competitive factors.
Why are Patents Important For Startup Funding?
Patents Add Value For Investors
As per the Patents Act in India, a patent, when granted, gives the patentee the exclusive right to the patented technology or product, subject to the Act and the other conditions.
For investors, a documented technology can be valuable during IP due diligence.
One advantage for a tech startup over its competitors can be a legal defense for its technology, of which one of the evidences can be a patent.
Patents give many Opportunities For Businesses
One patent can provide multiple models for business. For example, the patent can be employed to conduct the business, to license the patent, for the creation of new partnerships, to transfer, or even to sell the patent.
According to WIPO, the situations that require valuation of IP are licensing, sale of IP, partnerships, joint ventures, mergers, and acquisitions.
Patents give Competitive Edge
For technology based startups, it is of interest to investors how difficult it would be for other competitors to develop the same technology.
A patent portfolio can be part of this analysis, although an individual patent can vary greatly in strength and commercial significance.
What Factors Impact Patent Valuation?
Unlike the assumption that patent valuation is based on the quantity of patents, there are many other determining factors.
When determining the value of intellectual property, one must consider many factors. These include:
- Legal Strength
The strength of a patent depends on its size, validity, ownership, enforceability, and the time it has left.
- Technology and Innovation
The technology covered by a patent can affect its value. A patent may have more or less economic worth, depending on how useful and how multilateral the technology covered by the patent is.
- Market Opportunity
An IP may have more value in a larger market which is also growing.
- Competitive Landscape
The value of an IP may be decreased by other technologies, patents, substitutes, or barriers to market entry.
- Revenue Potential
The revenue that may come from the sale of products and/or services, as well as licensing, royalties, or other markets, may give an ideal range of income that may be derived from the IP.
- Risk
Value can decrease based on economic factors, like patent validity, market uncertainty, or regulatory issues that may increase the overall risk associated with the IP.
WIPO says that when valuing intellectual property, there is no single model that may be universally applicable. The methodology that is ideal depends on the purpose and information that is available for the given situation and asset.
The market, cost, and income approaches are the three most frequently used approaches.
In the income approach, the future potential economic benefits of the intellectual property are estimated and discounted to present value.
The market approach, as the name suggests, is used when there are similar transactions involving other intellectual property for which market information is available and can be used as a basis for comparison.
The cost approach is the least preferred of the three. In this approach, it is assumed that the cost of developing the intellectual property is used as a basis to establish its value.
Cost Approach
The cost approach is based on the cost of creating or reproducing a similar asset.
It is useful in situations where the future economic benefits are difficult to determine. However, development cost does not clarify the commercial value of an innovative patent.
How Can Startups Use IP Valuation During Fundraising?
Inventors should consider how an IP valuation fits within a fundraising and IP strategy when considering how to raise capital from patents.
Step 1: Define IP Portfolio
Develop a defined inventory of patents, applications, trademarks, copyrights, software, designs, licenses, and related rights.
Step 2: Define IP Ownership
Review Assignments, Founder Agreements, Employee Agreements, Consultant Agreements, and other similar documents, to ensure the startup has the appropriate ownership of the associated IP.
Step 3: Assess Patent Strength
Review patent status, claims, geographic coverage, remaining term, relevant prior art, and potential commercial applications.
Step 4: Assess IP and Business Relationship
Assess the relationship every important patent has to the company’s product, revenue model, technology, customers, and competitive edge.
Step 5: Determine Appropriate Valuation Method
Based on the given purpose and available information, income, market, cost, or combinations of different valuation methods may need to be applied.
Step 6: IP Valuation Documentation
Organize valuation reports and related documentation in a way that illustrates to investors what IP is, who owns what IP, the scope of IP protection, and how IP may contribute to the business.
Who Needs Intellectual Property Valuation?
IP valuation would be helpful for:
Technology startups
Fundraising founders
Deep-tech companies
AI and software businesses
Research organizations
Universities and spin-offs
MSMEs
Product companies
Businesses considering licensing
Companies preparing for mergers or acquisitions
Enterprises managing technology portfolios
Innovators commercializing research
For startups in Bangalore, a structured IP review would be helpful during venture capital discussions, consideration for strategic partnerships, technology licenses, and preparations for international operations.
Key Documents and Information Required
A professional valuation may need:
Patent certificates
Details of patent applications
Specifications/claims of patents
Records of ownership and assignments
Licensing agreements
Products and/or technology
Income
Market research
Competitive intelligence
Commercialization plans
Royalties or licenses
R&D and development
Geographic coverage of patents
The details needed will depend on the reason and methodology of the valuation.
Common Mistakes Startups Should Avoid
Thinking Every Patent is Worth a Lot of Money
Owning patents is valuable from a strategical perspective, but not all patents value commercially.
Evaluating IP Based on Price of Filing
Just because it cost money to file an invention does not mean it has value to the market.
Overlooking Gaps in Ownership
Not knowing the ownership can create a problem when investors do their due diligence.
Focusing Primarily on Patent Numbers
Just because you have ten patents filed that are barely related doesn’t mean you are more commercially valuable than a concentrated patent portfolio with the company’s primary technology.
Waiting Until the Fundraiser Begins
It is easier to cross the “IP due diligence” line before an investor asks for detailed due diligence.
Benefits of Engaging a Professional IP Support Service
Professional IP support services enable customers to connect legal rights with their business objectives.
Some of these benefits include:
Detailed assessment of an IP portfolio
Review of a patent portfolio
Analysis of patentability and prior art
Review of ownership documentation
Planning for commercialization
Preparing for licensing
Evaluation for financing due diligence
Formulation of an international filing strategy
Evaluation of IP risk
Long-term planning of the IP portfolio
This level of preparation would facilitate explanation by company founders of the relationship between their technology, their IP rights, the commercial opportunity and the growth strategy to potential financing sources.
It should be emphasized that obtaining an IP valuation should not imply any assurance or guarantee regarding the financing of a venture, valuing a company, or obtaining the interest of investors. Funding decisions are the result of business, financial, market, technical, and investment considerations.
Intellectual Property for Investors: What Investors Will Analyze
When assessing intellectual property for investors, startups will need to answer the following questions:
What do you own?
Identify the patents, applications, trademarks, copyrights, and other relevant rights.
Who owns it?
Provide appropriate assignments and contracts.
What does the patent cover?
Explain the technology and the commercial relevance in simple business terms.
Where is it protected?
Explain the Indian and international filing and protection coverage.
How is it relevant to the business?
Explain the relevance of the IP to the products, customers, and potential opportunities for the business.
What are the risks?
Be open about pending applications, third party IP, potential freedom to operate, and other relevant issues.
Why Choose MakeMyPatent?
MakeMyPatent has 21 + years of experience in patent services and combines expert IP services. This service is intended for startups, innovators, researchers, MSMEs, large corporations, and technology enterprises.
The team offers services in patent filing, patent drafting, AI-assisted searches for patentability, response to objections of the Patent Office, support during patent hearings, protection for trademarks and copyrights, advice through IP legal services and strategy, and assistance for international filing of patents.
For businesses in Bangalore, throughout India, and even international markets, MakeMyPatent prioritizes simplicity and convenience via AI-powered patent flows, on time filing, expert guidance, precision, and integrated, future-proof IP intelligence.
If you are preparing for fundraising or building a tech portfolio, Schedule a Free Patent Strategy Session to understand how you can incorporate your IP into your business and explore our Services to see how we can help.
Frequently Asked Questions
- What is the purpose of intellectual property valuation?
Intellectual property valuation determines the approximate economic value of IP assets based on the expected revenue, market and legal conditions, commercial and business use, and the risk involved.
- Does having a patent impact startup valuation?
Having a patent does not adjust a startup’s valuation, nor does it guarantee funding from investors. A patent gives a startup a competitive edge in the market and adds value to the company in a variety of ways, but there are many other important factors, like the relevance, strength, and risks involved in the IP.
- Can startups use a patent while fundraising?
When a startup uses its patent in a fundraising event, it shows potential investors that not only does the company own a patent, but there is also a commodity available for market. However, it is important to note that a funding decision is based on the business as a whole, as well as the support that is required to run the investment.
- What are the most common methods of patent valuation?
The three primary methods of patent valuation are income approach, market approach, and cost approach. The method used is based on the asset being valuated, objective of valuation, available data, and other circumstances.
- Why should startups conduct an IP valuation before fundraising?
An IP valuation helps entrepreneurs determine the value of the proprietary information held by the business, helps the entrepreneurs to structure their IP, outlines the shortfalls, and aids clarity during the IP’s role during discussions regarding the investment.
Book A Free Consultation To Build Your IP Portfolio
Intellectual property values go beyond simply patenting an idea. It is concerned about the technology and the model it is embedded in, the company’s competitive edge and potential for future growth.
For innovators and startups, intellectual property valuation sets expectations for the economic impact of patents and other intangible assets.
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Disclaimer: This blog provides general educational information only and does not serve as formal legal counsel. Please address your specific invention or IP requirements directly with a registered patent professional.