Intellectual Property and Start-Ups
Recently on LinkedIn I answered a question of a fellow entrepreneur. His question had to do with going to a Venture Capitalist or a better established business to pitch an idea he had, but couldn’t implement on his own. His concern was on his ability to do so and protect his idea.
The Dilemma
When you’re the small start-up and you need money you’re put in a place where you don’t typically hold a lot of power. Potential investors will be completely invasive with their questioning and business reviews, at the end you’ll be lucky if they don’t know your business better than you do.
The problem this gentleman, and any small investor, faces then is how to maintain a position of strength in negotiations. VC and M&A activities are all about the big investor squeezing as much equity as he can out of the start-up. The more of a business model and plan that is replicable the more equity a VC can extract. This is counter the preference of the entrepreneur who really wants to make a deal (for as little equity), since they’ve deemed sacrificing a piece of the company a necessary process to accelerate growth or build in stability into the business.
Building in Value
Given the preferences and tactics of the buying parties in these transactions, we know its vital that a entrepreneur come in with the most attractive business plan possible. Knowing who your audience is, having achieved current run-rate business, and having a brand customers are aware of are just some of the things you can do to drive value into the bargaining table.
The element that is often over-looked and extremely valuable is Intellectual Property: the patents, copyrights, trademarks, and trade-secrets that the company holds. These intangible things represent the ability to lock in value by removing an area of the market from competitors.
By focusing the conversation onto IP, and by having a thorough understanding of IP the entrepreneur protects their value first by dictating a asset has value and asserting it most be measured into the asking price, and secondly by removing a possible exit strategy that sees the potential investor become a direct competitor.
Take-aways: Control the conversation and navigate into IP valuation. Assert and qualify the investments you’ve made in intellectual property. Explain to the potential investor how your IP makes this a unique product, one that doesn’t have many substitutes.
I really enjoy your discussions on IP because it does have a Richard Stallman feel to it. Two groups would be interested in IP; the corporation who and the individual entrepreneur who are producing new things. For the vast majority of the corporate drones out there, IP is not their concern. I worked for a software company, and came up with several revolutionary pieces of software. Everything that I did became the property of the company. They got very rich off my ideas, so where is the valuation to the individual employee?
Valuation is also a tricky business that is more art then science. How much is the next iPod upgrade worth to Apple? What if I invented an upgrade to Zune that would give it a capacity to destroy the iPod in the marketplace? Exactly how would you place a value on such an item? Everything that you invent has the potential to destroy the competition, so at best, you are simply guessing on the true value of the idea.
What about the length of a copyright or patent? There are different legal frameworks that give it the lifetime of the inventor or twenty years. What if it is for a potential cure to cancer? Should we allow a drug company to profit when it is something of worldwide significance?
The whole subject of IP is very complex, and it has numerous ethical and moral issues attached. I would propose that there is no simple answer to this question. What socio-cultural body could rule on what is fair when it comes to IP questions? If we assume our legal system, then that puts an unfair Western bias on the discussion. Maybe you could speak to these points?
I agree I could post on IP rights, concerns, and challenges every day for the rest of my life and not be bored.
It’s just such an amazing field to study.
Do you advocate greater governmental involvement in this area or less? Should we have more rules or less?
Most countries in the third world never respects intellectual property rights. piracy is so rampant in asian countries.–~
intellectual property is not really respected in most countries in asia where piracy is so rampant.`”*