An IP Primer for Business Angels and Private Equity Investors
|Inaugural Conference of World Business Angel Association in Beijing 2009|
In IP's not just for Big Brands and High Tech Businesses 27 Aug 2016 I wrote:
"In my career at the Bar I have known far more businesses that have failed from having too much IP than too little. Some of those failures had been caused by patents that cost many thousands of pounds to obtain but could never be worked. Others by disputes that were abandoned because the rights owner (who in many cases had a strong claim) simply ran out of money."In many instances, such patents and other IP rights were sought to attract, or to fulfil a condition for, investment. While it is understandable that an angel or private equity investor should desire the most extensive legal protection possible for his or her investment a patent for an invention that may never be worked or any IP right that the business cannot afford to enforce would tend to make his or her investment less rather than more secure because the prosecution, maintenance and enforcement costs would affect the viability of the business.
I have written this primer in the hope that a better understanding of IP and how it works by angel, private equity and other investors might lead to fewer bad decisions on IP and hence less waste of resources for all concerned. I believe that it is a theme that needs to be developed. I shall certainly discuss this topic in future publications. If there is sufficient interest among investors I shall arrange, promote, chair and speak at, conferences, seminars and workshops on the topic.
The first point to grasp is that there is a distinction between intellectual property ("IP") and intellectual assets. The two are used interchangeably even by many IP professionals but I think that is a mistake because it leads to muddled thinking. Essentially intellectual assets are the artwork, books, brands, broadcasts, computer programs, concerts, databases, designs, films. inventions, musical scores, performances, plays, websites and other assets that give one business a competitive advantage over all others. Intellectual property (that is to say patents, trade marks, copyrights and so on) is the collective name for the bundle of laws that protect investments in creating intellectual assets (see What is Intellectual Property 7 Aug 2016).
The purpose of IP law is to incentivize the creation of intellectual assets while at the same time safeguarding so far as possible consumer choice and freedom to trade. It is very important to appreciate that IP laws exist not exclusively for the benefit of the creators of intellectual assets (that is to say artists, designers, inventors and so forth) or those who claim title to or invest in them. Those laws also serve their competitors and the general public. IP laws are intended to strike a balance between the competing public interests that I mentioned in the first sentence of this paragraph.
How to use IP
Businesses and individuals create intellectual assets in order to generate revenue and it is the protection of those revenues that should be uppermost in an investor's mind when considering the optimum legal protection for a business's intellectual assets.
The starting point should be the enterprise's business plan (see Why every business plan should take account of intellectual property 3 April 2016). Referring to that business plan and all other materials and information available to him or her, the savvy investor should try to identify the main sources of revenue for that enterprise over the business planning period. They may or may not include the most advanced product that the techies are developing.
Next, he or she should consider potential threats to those income streams most of which are likely to be commercial such as new products or changing market conditions rather than legal, As most of the threats are likely to be commercial so, too, are most of the likely responses. Reducing prices or developing new products or upgrades are more likely to be effective than litigation. However, there are always some instances such as the development of a new medicine or smart phone technology where only a patent or some other IP right will do. Often there is more than one way of protecting an intellectual asset (see Patent or No Patent 28 Aug 2016 NIPC Inventors Club).
The legal protection for a business's intellectual assets should be tailored to provide the most cost-effective cover in the markets that matter. For instance. the canny investor should consider whether a patent is required or whether some other right such as unregistered design right will be enough. If a patent is required make he or she should make sure that the company targets the countries where there is a market for the product or where there is a competitor.
Finally, make sure that the business has the means to enforce its rights. In many cases, that may mean taking specialist IP insurance cover.
I appreciate that this is a very simple example and that in the real world many other considerations such as personalities, prejudices and vested interests all come into play. Nevertheless, they can all be reduced to a model and a strategy to obtain the optimum solution for the company with minimum waste. Anyone who wishes to discuss this article or these ideas should call me during office hours on +44 (0)20 7404 5252 or send me a message through my contact form.