09/11/2023
A new joint study by the European Patent Office (EPO) and European Union Intellectual Property Office (EUIPO) shows that start-ups which file applications for registered Intellectual Property Rights (IPR) – including patents, trademarks, and designs – demonstrate a higher likelihood of securing funding from Venture Capital firms (VCs) and achieving favourable exit outcomes for their investors.
With both the number of VC deals and total VC investment volume falling by half over the past year or so, competition for VC funding has become fiercer. Therefore, start-ups should use any advantage they can in the competition for VC funding, which includes ensuring that their Intellectual Property is in good shape.
Sector dependence of IPR filings
According to the study, Biotech start-ups are the most likely to file for registered IPRs, with 47% of biotech start-ups filing trademark applications and 48% filing patent applications. In other highly innovative sectors, such as Science and engineering, Manufacturing, and Health care, over 20% of start-ups file patent applications, and over 35% file trademark applications.
In sectors such as Software, Data and analytics, and Financial services, trademark uptake (about 30%) is much higher than for patents (less than 10%). This is perhaps not surprising given the challenges of patenting software and business models at the EPO – notably, however, the Artificial Intelligence (AI) sector appears to be an outlier, with 12% of start-ups in the AI sector filing patent applications. This is consistent with our report earlier this year which found that the number of AI-related European patent applications has increased rapidly.
Correlation between IPRs and startup financing/successful exits
According to the EPO/EUIPO study, start-ups which entered the seed stage with patent or trademark applications significantly increased the likelihood of receiving funding. In particular, start-ups which had filed patent applications before seed stage had a nearly 3 times higher likelihood of funding (see Figure 1), which rose to a 6.4 times higher likelihood of receiving early stage funding (Series A and Series B). Trademark applications had a similar, but smaller effect on funding (2.5 and 4.3 times higher likelihood, respectively, at seed stage and early stage).
The greatest impact, however, was found for start-ups which had filed both patent applications and trademark applications – with an increase in likelihood of 3.5 and 10.2, respectively, at seed stage and early stage.
Figure 1 (data from report) – Increase in likelihood of securing funding, or successful exit, for start-ups which file trademark and/or patent applications
Are UK start-ups missing out on IPR protection, and thus VC funding?
According to the study, the share of start-ups filing for registers IPRs differs significantly between countries. While some of the differences may be explained by differences in the underlying data, including the proportion of start-ups in different sectors in different countries, there are some clear trends:
Start-ups from Scandinavian countries (Finland, Norway, and Sweden) are much more likely to file IPR applications than those in the UK. Figure 2 below shows that while 15% of Finnish start-ups were found to have filed patent applications, that share stood at only 5% in the UK. Similarly, only about 25% of start-ups in the UK had filed for trademark protection, while the equivalent proportion was 37% in Germany, and 40% in France.
Figure 2 (data from report) – Percentage of start-ups in various countries which have applied for registered IPR.
The UK is not unique – for example, surprisingly, only 8% of German start-ups were found to have filed patent applications, and in Spain an even lower percentage of start-ups filed for IPRs (any IPR, any TM, and any patent) than in the UK. It is nevertheless notable that a smaller share of start-ups in the UK apply for any kind of IPR, any TM, and any patent than in comparable European economies, and a much smaller share than in the Scandinavian countries.
In light of the link between funding, and successful exits, and registered IPRs (in particular patents), one may wonder if UK (and to a lesser extent, German), start-ups are missing opportunities.
Summary
The joint EPO/EUIPO study finds a clear correlation between startups filing for IPRs, and success in securing funding and exiting.
The main function of IPRs such as registered TMs, patents, and designs is to provide a monopoly right to the proprietor, thus raising the barrier of entry for competitors and protecting innovation. However, there are other potential benefits which may also go some way to explaining why start-ups which file for registered IPRs are more attractive to VCs. For example, registered IPRs may demonstrate a proactive approach to IP, showcasing a start-ups thoughtful consideration and grasp of IP strategy. Registered IPRs such as patents may also allow for increased profits, by reducing taxes through schemes such as Patent Box.
While start-ups often have to make hard decisions when it comes to allocating available funds, as this study shows, spending some of their funds on registering IPRs may ultimately help to secure further funding and a successful exit. On the other side of the coin, VCs should, and do, consider not just whether a start-up has applied for registered IPRs, but the strength of any rights.
At Reddie & Grose, our experts specialise in protecting the full range of registered IP rights, including patents, trademarks, and designs. If you are a start-up and would like to find out more about how protecting your IP may give you an advantage over competitors, or a VC looking to invest in start-ups with or without IPRs, please do get in touch to discuss how we can help.
This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice. Please contact Reddie & Grose LLP for advice before taking any action in reliance on it.
