In later rounds of funding, investors will closely review how well your intellectual property can support your future growth and how vulnerable it might become to attack. Following an investment, as you gain a higher profile and make more of an impact, your portfolio and your fortitude will be tested not just by your competitors, but by a variety of non-practising entities (NPEs) who own the IP without offering any products or services.
As a start-up, your challenge was to build a decent portfolio of IP in the first place. Once growth is established, you can lose sight of your IP strategy in the long term. As a scale-up, you may focus on maximising the potential of what you already have. The motivation and resources for making constant adjustments to your IP strategy are more limited. As a result, your IP might be coming to the end of its life, giving competitors a chance to enter the market.
It’s a scenario to which investors are particularly sensitive. They will expect to see an active strategy in place for securing future revenues. They will also be looking at your ability to defend yourself.
A convincing strategy will depend on your appreciation of the distinctive nature of the protection that IP gives you. You only have a negative right of prohibition, ie, as the owner, you can stop others using your creation, such as a patented invention. However, you do not have a positive right to use it.
So if a product infringes someone else’s patents, your marketing can be prohibited, even by someone who isn’t an active competitor in your market, so jeopardising an entire investment. So, even if you have a sizeable portfolio, you are not insulated from attacks on your IP.
Investors realise that you can’t just map an IP portfolio to your own products and services. It will fall too short in properly accounting for the IP risks. Instead, they will take a close look at the competing IP that surrounds you, as well as identifying others with a stake in technology. Only then, can they take a view of how well you can defend yourself and how prone your industry is to litigation.
So what IP will it take to complete a second funding round? Typically, you will know what could threaten you; you will know the value of your IP to your competitors; and you can anticipate where future competition might lie.
Know what IP is out there
Irrespective of what kind of attack scenario the company might be facing, an obvious prerequisite to a sensible IP risk assessment strategy is to obtain comprehensive knowledge about the IP rights that exist and could potentially represent a risk for your future commercial activities. In the field of patents this knowledge is typically obtained by running a database search that provides information about existing patent applications and granted patents. The hits provided according to the search profile chosen then have to be assessed for their relevance to your current and future products and services.
Such a database search is only a snapshot of the situation at the time it was made and has a blind spot of about 18 months due to the delayed publication of patent applications after filing. Hence, running the search again towards the end of the process is recommended to catch more recently published patents and applications.
The risk assessment itself may become rapidly outdated, as it is based on assumptions about a company’s commercial activities, which can rapidly change, particularly once an investment has been made. So, investors will expect an IP strategy to run a search process and profile, typically as continuous monitoring and risk assessment, where new hits are identified and assessed for their relevance to your current and future business.
Know your defensive value
A further element that investors explore when assessing the IP-related risk of an investment is evaluating the company’s resilience against attacks by competitors. Checks are made about whether or not the your IP portfolio covers aspects of the technology which are or will be attractive to competitors in the market. If such a position has been achieved or is even within reach, any competitor risking infringing the company’s patents will think twice before attacking for infringement of their patents. A prerequisite to this preventive effect is of course that a competitor holding critical patents is itself interested in using the technology covered by the company’s patents and is therefore willing to enter negotiations. Hence, under this defensive aspect, the relevance of the company’s patents to their own products
is less important. Rather, the primary value of your IP portfolio lies in its relevance to existing and future products of the competition.
Technological development and progress in many cases is key to a successful product or service and should be closely covered by your IP portfolio. Nevertheless, a crucial question to be asked when it comes to sensible IP coverage is what will actually sell the product or service. This may not always be the technologically most advanced feature, but might be a side aspect instead, often adding other technologies. Well-known current examples are connectivity features and data collection or processing features that secure or even open new revenue streams. Trying to achieve IP protection covering the selling point or the revenue stream of a product or service may often be way more valuable than protecting the technologically most advanced solution. Such an approach may, of course, significantly increase the defensive value of an IP portfolio.
This strategy may even help revitalise or maintain a dominant IP position that is at risk due to the expiry of the IP covering the basic technology. The combination of an existing technology, for example, a medical device for treating a specific condition with other technologies, such as connectivity, data collecting and processing or data security may provide a competitive advantage that considerably prolongs the success of an existing product. While such approaches are, of course, ubiquitous and become harder to be protected, trying to obtain such protection may be well worth the effort.
Investors expect an IP strategy to set up a filing and prosecution strategy that does not only focus on its own products but keeps the defensive value of patents in mind. Optimally, your company already has a corresponding charting process in place which analyses competitor products against the company’s patents and its applications.
Your future competitors
Investors further appreciate finding that a company has implemented an active approach to mitigate IP risks associated with competitor patents, for example, by trying to prevent potentially critical competitor patents from being granted or by attacking such a granted patent.
In essence, most of the existing national or regional patent systems provide two ways of attacking patent applications and patents. Depending on the respective national or regional provisions, an attempt to prevent a patent from being granted can be made by submitting a third-party observation or, where applicable, by filing a pre-grant opposition. Challenging a granted patent can either be achieved by filing a post-grant opposition or by other invalidation attacks, such as nullity actions.
It should be noted that, in certain fields of technology or markets, it is customary preventive practice to file such attacks against competitor patents using typically fairly inexpensive opposition procedures, even without the relevant patent being an immediate commercial threat. Such an approach can show considerable commercial foresight.
In the case of NPEs, the only way to offset risks from them is to attack their patents, as they are not susceptible to infringement counterclaims. Some NPEs, rather than developing their own patents, successively acquire interesting patent applications or patents from practising entities to enforce them. It often happens where operators pull out of a field of technology and monetise their related IP by selling it or spinning it off into a licensing entity. Hence, what may once have been the patent of a competitor perceived as less aggressive in the market may well end up in the hands of a considerably more aggressive NPE, the business model of which is to license and, if need be, enforce their patents. For investors, your strategy should take this risk into account.
Licensing agreements with IP holders are another form of risk management. A special licensing scenario may arise with patent pools, where owners combine to license their pooled patents together. Such a scenario is often encountered in the context of standard essential patents which are inevitably infringed if a certain industry standard is to be met. Such SEPs cannot be freely enforced by their owners but are subject to a licensing offer under Frand conditions (fair, reasonable and non-discriminatory). Enforcement is only available if the potential licensee refuses to take a license under these Frand terms. While these patents can be attacked in the same way, the sheer number of them does not lend itself to such an approach. If you have established your exposure and identified the licences you require, investors will take it as a sign that you have a reasonably sophisticated IP strategy.
In summary, as assessing the IP-related risks in a technology company is a comprehensive task for the investor, a company seeking new funding should be prepared to answer a series of questions that provide the investor with a good initial idea of these IP-related risks involved with the investment, as well as if and how these have been approached by the company in the past. If you have replies to these questions to hand, it can greatly simplify the IP-risk assessment process and negotiations with investors.
This article was first published in March 2025 in: Winning with IP - Managing Intellectual Property Today - Novaro Publishing
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