Introduction

Intellectual property is a valuable fiscal and legal asset for businesses, especially start-ups and SMEs. It is widely accepted that intellectual property accounts for more than 80% of a company’s worth[1]. As a result, having “clean” possession of any intellectual property (IP) that is vital to the functioning and profitability of the firm is critical. It is commonly understood that the process of valuing a company takes into consideration the firm’s intellectual property resources. Start-ups and SMEs with legitimate intellectual property rights are significantly more appealing to investors and more particularly to venture capitalists and to angel investors, than those without.

In today’s market, intellectual property assets frequently generate present and future earnings, therefore Investors like to see that entrepreneurs have integrated IP rights into their business plans. It is frequently the value of intellectual property (IP) assets that an investor funds, a business partner depends on, or a buyer pays a high price for. Many start-ups and SMEs do recognise that intellectual property is an assets and it may raise an organisational value and boost the likelihood of a commercial exit, but only few realize the importance of protecting, securing and commercializing IP. The reason behind is the poor understanding of IP rights and a misconception that IP protection is expensive. This failure of Start-ups and SMEs may come up at huge cost. Companies having a strong intellectual property portfolio are appealing more investment possibilities for investors.[2] This article aims to highlight the importance of Intellectual Property Rights for Start-ups and SMEs as well as discuss the key considerations for Investors while analysing the risk and challenges faced by them.

The Interface between Intellectual Property and SMEs & Start-ups

The fuel that runs the start-ups or SMEs is a novel and innovative idea. Implementing that novel and innovative idea successfully is what transforms small start-ups and SMEs into multifunctional corporate. The very purpose of the Intellectual Property Law is the recognition and protection of that very novel and innovative idea that triggered the business models of the start-up and SMEs. A major part of competitive advantage and attractiveness to investors is how well defined and well protected IP portfolio of a start-up is.

Companies are willing to invest in startups and SMEs with distinctive rights since it provides them with access to the technology underlying the IP rights, if not absolute control of the rights themselves. As a result, acquiring intellectual property is one of the most reliable methods for a business to encourage investment. With a single relevant IP, a startup may obtain many more quickly making it more lucrative to investors.

1. Cost Effectiveness– It is critical for start-ups and SMEs to recognize that IP expenses should be assessed in relation to the possible economic value of the final product/service, such as prospective product/service earnings, royalties earned, and licensing advantages realized, and so on. As a result, rather than the original investment, appropriate consideration ought to be given to the potential profits that the intellectual property would generate. Furthermore, because many start-ups may necessitate third-party finance, having a recognized intellectual property may increase the legitimacy of their inventions while pursuing funding.
   
2. Adds value to the company– With a registered IP in hand, the IP holder has numerous options for recouping R&D expenditures and earning a Return on Investment[3]. In addition, the protected IP can be licenced in exchange for royalties or a fixed settlement. Furthermore, a start-up or SME may gain from licencing its proprietary technology since it will result in a rise in market dominance. IP is seen as a symbol of quality as well as an assurance of original invention, which is why it attracts finance. Because start-ups rely largely on funding, holding a Registered IP might give a stronger negotiating position or better terms for contracts, licensing-in, cross-licensing, collaborative activities, and so on.
   
   
3. Helps in deterring competition– The limited right to utilize protected IP information includes the right to prevent opponents from encroaching on it. Furthermore, the award of a IP guarantees the IP holder’s market position may result in a hegemonic customer base.

Key Considerations for Investors and Importance of Due diligence

From the standpoint of an investor, intellectual property security is crucial. Schmooklerdiscovered a cordial affiliation between patens and investment and concluded that more investment creates demand for new technologies, which propels new inventive discoveries.

An investor should ensure that the start-up or SME controls the intellectual property for their concept, free of intrusion or hindrance from a prior workplace, organization, financier, or other workers. There must be a rigorous due diligence procedure in place. They may urge that the new company conduct prior-art searches[4] on key suggested notions as part of the due diligence process, to ensure that the similar concepts are not used elsewhere.

Investors will want to ensure that intellectual property rights have been correctly allocated to the business for exclusive usage. They will also go over all published materials to verify that public remarks haven’t hampered the company’s potential to seek patents on its innovations and works. After signing a non-disclosure agreement, investors will study the intellectual property concepts. This is especially critical for early-stage enterprises when applications are still to be filed. They will seek to ensure that all innovations, ideas and other advances imagined or produced by an employee while working for the company are held by the company. IP audits may be beneficial as a standard housekeeping practise as well as for more particular goals such as understanding the state of one’s intellectual property assets

1. Challenges/Pitfalls

The challenge for start-ups and SMEs is that resources (both financial and human) are often scarce, necessitating difficult choices on how to distribute them. This makes it even more crucial for them to consider their IP strategy soon and be as cost-effective as possible.

Most start-ups and SMEs will not have the benefit of applying for and protecting all of their possibly registrable intellectual property rights from the beginning. Due to financial limits, difficult judgments about which IP property or rights to prioritise will be required. As every problem has solution so as this. The Government of India has launched and are working continuously to bring forward schemes supporting start-ups and SMEs to aid them in protecting their IP.

In a crowded economy, preserving intellectual property rights is all about limiting the danger of being sued for infringement.

Conclusion and Suggestions

The intellectual property (IP) framework is critical in assisting enterprises. Startups and SMEs should take benefit of government incentives to use intellectual property rights. The Indian government has launched various efforts to encourage and foster development and entrepreneurship, including the Start-up India Scheme, IPR Awareness Creative India, and Innovative India Scheme. The aforementioned programmes should be used to promote the establishment of incubation centres, offer tax deduction for start-ups, offer up to an 80% discount on patent application fees, allow for easier exits for start-ups, relax expenses for female inventors, and so on.

According to Indian Patent office records there has been a notable increase in the IP being filed by the startups and SMEs with about 46% of Trademark applications being filed and registered.by startups. This has contributed significantly on the growth ratio of the IP as well As Startup and SME building a win win Ecosystem. Startups and SMEs must consider how they will strategize their intellectual property assets and increase market share.

It is well settled that a strong IP portfolio attracts more investors. Creative property rights enable innovators and producers to convert their intellectual outputs into tradable economic assets. Evidence of a persuasive strategy to intellectual property would indicate that corporations are closely connected with investors on the pressing question as to how to sell the company for profits one day. Start-ups and SMEs must determine whether IP rights are important to their business and when to secure their IP assets in order to develop a suitable exit plan. Investors want to see that a firm has obtained intellectual property rights for all key assets and that its IP portfolio management is completely aligned with its aims and operations.

The blog has been written by Shiva Mehta (Assisted by Isha Lodha – Intern).

[1] Final Report from the Expert Group on Intellectual Property Valuation, EUROPEAN COMMISSION, 29 November 2013, https://effas.net/pdf/setter/Expert_Group_Report_on_Intellectual_Property_Valuation_IP_web_2.pdf   (Accessed on 10 November 2021).