Patents play a significant role in the growth and fundraising success of startups across every industry. Patents provide legal protection for these startups’ new and innovative ideas, and allow young companies to safeguard one of the only assets they have — their intellectual property.
That’s why, according to a detailed report by PitchBook, startups at every stage of growth find greater success raising capital and achieve higher valuations, simply by patenting their big idea.
In this article, we’ll take a look at how patents can impact your startup’s fundraising efforts and valuations, and how to maximize the value of your patent. Because when hundreds of startups are competing for a handful of big VCs’ attention, every competitive edge matters.
How does earning a patent impact your fundraising opportunities?
Patents show investors you’re serious about growth
While your growth trajectory and revenue will always be the most common metrics investors consider when evaluating your startup’s potential, intellectual property is an asset in itself. Investors tend to prioritize startups with patents because these companies have a competitive advantage and a protected concept.
For startups in tech-related industries where one copycat can tank their whole venture, investors are particularly interested in the ways your company can stand out and scale.
Patents suggest you’re thinking about today’s market and tomorrow’s opportunities
Patents can also signal to investors that your startup has a strong commitment to innovation, and that your technology is considered valuable enough to be an asset in itself. That builds investor confidence and boosts your chances of landing a favorable investment.
These statistics from PitchBook’s startup fundraising review reveal the difference a patent can make:
- From 2011-2020, about 58% of venture capital went to startups with patents or pending patent applications.
- In those same years, 80% of VC went to venture-growth stage startups, suggesting that the later you are in the fundraising process, the more important patents become.
- A patent isn’t just good for landing VC deals. It can impact your deal size too. On average, early-stage startups with a patent earn 73% more capital, late-stage startups earn 71% more capital, and venture-growth stage startups earn 46% more capital.
Interestingly, PitchBook’s report revealed that startups are more likely to pursue a patent the later they are in the growth and fundraising process. And the more mature the startup, the more patents it may obtain.
While only 1% of angel- and seed-stage startups in PitchBook’s study had at least 10 patents and/or patent applications, 34% of venture-growth stage startups had 10 or more.
It seems that as these companies conduct more research and development activities, they gain more IP worth protecting. Patents are a signal that the startup has developed something worthy of special protections — and valuable enough to build a business around.
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How do patents impact startup valuations?
Patents increase the average startup valuation at nearly every fundraising stage
Patents and patent applications had a significant and consistent impact on the 409A valuations of the startups included in PitchBook’s research.
Valuation involves assessing a startup’s financial performance, growth prospects, market size, and competitive landscape, among other factors. That valuation is then used to determine how much the startup is worth, and how much ownership the investor will earn in exchange for their investment. That’s why valuation plays a critical role in negotiations between investors and startup owners.
According to PitchBook’s report, across all stages, startups with a patent were able to raise capital at a much higher valuation, on average, than startups without IP protections in place. The average valuation for an angel-stage startup with a patent was a full 93% higher, while valuations for late-stage startups with a patent was 51% higher.
That’s a significant benefit for these startups because they earn more cash during the main stages of fundraising and give up less ownership in the process.
Patents increase valuation for two key reasons
The wide discrepancies between patent valuations and non-patent valuations suggest that investors are more confident in startups that have protections in place to maintain their moat and fend off competition. As these startups mature and have as many as 100 or more patents and applications in place, they slowly create an entire innovation ecosystem which is not easily duplicated by any other company. The patents protect the IP, and the great investment of capital and R&D makes it difficult for other companies to compete with the growing startup.
Another reason patents may improve a startup’s valuation is because they imply a startup staff that’s forward-thinking, organized, professional and aligned. Applying for a patent is a complicated process that requires considerable paperwork, documentation and attention to detail. Startups that have dozens or 100+ patents in place must have a high-performance staff in order to complete those applications. And investors are always on the hunt for startups with a good idea and a great team to see it through.
Key takeaway
Patents and patent applications keep startups’ intellectual property secure. The effort and organization required to successfully apply for and receive patents also signals to investors that the startup is serious about growth. As a result, these startups earn a higher valuation and more capital throughout the fundraising cycle, putting them in position for even greater success as they move from startup to mature venture.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.
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