30 November, 2023
In October the European Patent Office (EPO) and the European Union Intellectual Property Office (EUIPO) jointly issued a report on a series of studies which have been carried out over the past ten years, to highlight the importance of IP for the European Economy. Sofia Willquist emphasizes, ‘The report demonstrates a strong link between IP rights and company performance, as well as a higher likelihood of experiencing high growth.’ She highlights that this is particularly clear for Europe’s innovative small and medium-sized (SMEs) companies, considered by many as engines of economic growth, capable of addressing challenges in sustainability and digitalization.
The aim of the conducted studies was to focus on innovative startup companies’ ability to attract venture capital as well as how IP, specifically patents and trade marks, facilitates successful exits for those initial investors. Here is a summary conducted by Sofia Willquist.
IP Utilization in Startup Funding Stages
The report reveals intriguing patterns in the utilization of IP during different startup funding stages. In seed stages, only 10% of startups in which VC invested had filed a patent application. However, in late-stage rounds, this number had risen significantly to 44%. The same trend was observed for trade marks, increasing from 28% to an impressive 72%. This increased use of patents and trade marks by more mature companies reflects their progress in developing technology and products that qualify for IP protection.
Early-stage VC funding showed a remarkable 6.4 times higher likelihood if the startup had filed for patents. Additionally, among startups that received seed financing, those that had applied for either a trade marks or a patent prior to funding received considerably higher sums than those that had not applied for either IP right.
Success Metrics: IPOs and Time Reduction
The report also reveals that startups with prior patents and trade marks had a 3.2 times higher odds of a successful IPO. On average, either trade marks or patents were associated with twice as high a likelihood of a successful exit for investors. Moreover, patents were shown to reduce the time to IPO for startups.
As both patents and trade marks survive beyond bankruptcy, these intellectual property rights (IPRs) provide further security to investors and lenders.
Beyond Fundamental Functions: Widening Benefits of IPRs
Besides the fundamental functions of providing exclusivity on the market and freedom to operate, the report demonstrates that IPRs can generate a wider range of benefits. These include setting up collaborations and licensing arrangements, securing investment, and facilitating technology transactions.
The report underscores the importance of IPRs for “deep-tech” startups requiring significant long-term capital. IPRs play a crucial role in showcasing the value potential of intellectual assets and signaling this value to investors.
Public information available on IPRs can provide investors with valuable insights into technology development. Early investment in securing IPRs may provide a credible signal to VC investors, a value that may otherwise be difficult to observe.
Role of Patents and Trade Mark in Early Stage Financing
For early-stage investments in companies with radical innovations, patents have played a pivotal role in securing financing, especially when startups have few alternatives for demonstrating the quality of their products.
Trade mark protection, associated with lower costs, may be especially attractive to startups. It demonstrates founders’ awareness of asset protection, signals innovativeness, and reinforces benefits from other types of formal and informal IP protection.
Interplay Between trade marks and Patents: Statistics
The report also presented statistics on the interplay between the filing of trade mark and patent applications by European startups and the odds of successful exit, i.e., an IPO or acquisition, for their investors. Crunchbase data revealed higher median values for startups that own patents or trade marks prior to exit, compared to those without any IP rights.
The report concluded a positive and significant effect of IP ownership on the odds of exit, where a bundling effect, i.e., a combination of trade marks and patents, yielded the largest effect with an increase in the odds of exit by a factor of 3.156.
Conclusion: IP Registration and Financing
The report concludes that the registration of patents and trade marks by a startup increases the odds of obtaining financing. Such activity is a signal to potential financiers that the company has created intellectual assets eligible for formal IPR protection and intends to legally protect and exploit those assets in the marketplace.
The Role of Innovative European Startups in Decarbonization
The report further highlights that many innovative European startups play an important role in reaching the decarbonization goals set by 2050. To achieve this, these companies will need access to financing, and in this respect, securing IP mitigates the risks associated with investments.
Message to IP Offices: Accessibility and Awareness
The authors of the report send a strong message to IP offices – they must continue to make the IPR system more accessible to small companies and raise awareness among entrepreneurs about the important economic role played by IPRs.
Here is the full report: Patents, trade marks and startup finance
Funding and exit performance of European startups (October 2023)
