HOW IMPORTANT ARE PATENTS TO INVESTORS

A current debate on the startup ecosystem is the importance of intellectual property assets in securing venture financing, especially regarding patents.
HOW IMPORTANT ARE PATENTS TO INVESTORS

Historically, it has been argued that possessing intellectual property favours the attraction of venture capital investment. This happens mainly because of three reasons:

Patents confer monopolistic market rights and offer protection from competition, which is viewed in positive light by investors.
Patents hold informational value and can act as signals of the quality of the technology, because, although they do not relate directly to market potential, they confirm the innovative status of the invention, which can lead to commercial gains.
Patents show startup commitment, indicating that the startup has matured enough to consider commercial utilization of the technology and that it is willing to invest in the protection of its technology.

In tech startups, intellectual property rights gain an even greater importance, since they are an important objective negotiation asset in a scenario that is mainly uncertain. In fact, tech startups are difficult to evaluate: they have no track record, they are years away from revenues, possess mainly intangible assets and present a high failure rate.

In the biotechnology, medical device and IT hardware fields intellectual property rights are highly relevant. Yet, in software or internet startups intellectual property rights seem to be less relevant, because of the rapid evolution in technology. Still, this is not a consensual subject and there is fierce debate about the real value of possessing patents in software startups.

In the side tab of this article, you can find links to three texts with different views on the issue of the importance of industrial property in different types of startups.

Regardless of the different points of view, there is a solid body of empirical evidence about the relevance of industrial property in the attraction of venture capital investment, compiled by authors like David Audretsch, David Hsu and Rosemarie Ziedonis, among many others. Some of the conclusions of their work are:

patents tend to attract prominent venture capital funds
patents prompt the funds to invest faster
patents increase the amounts invested in target firms
granted patents have more value than patent applications
larger portfolios of patents are more likely to attract prominent investors
firms with strong IP receive a higher number of venture capital financing rounds
firms with strong IP  have a lower probability of bankruptcy and a higher probability of successful exit