Turning intellectual property into basis for investment

The harsh reality is this; a new and relatively small seed enterprise cannot normally afford litigation against a larger well funded outfit.

While venture capitalists might be the answer for small startups seeking funding to see smart ideas turn into reality, weak intellectual property rights and the prospect of long expensive law suits blunt the enthusiasm to financially nurture startups. One of the major problems faced by new technology seed and start-up enterprises is access to the first round of funding.

But should an idea be leaked out to a larger competitor for instance, the threat of an expensive lawsuit dragging on for years, may be sufficient to reduce the probability of venture capital financing.

In a paper published by the World Intellectual Property Organisation (WIPO) on intellectual property and the basis of venture capital investment, author Mario Cardullo stresses that use of the intellectual property system is a powerful tool for competition, stability and mitigation of risks on capital investments.

Mr Cardullo argues that reinforcing and broadening the rights provided to holders of intellectual property have resulted in increasing their value to enterprises.

“This, in turn, has helped venture capitalists to see potential returns for their investments that in turn lead to more innovations and growth in markets,” says Mr Cadullo.

Venture capitalists want to know where an invention or innovation fits in the marketplace with reference to existing and potential competitors. The potential investors also want to know if the invention or innovation offers a dramatic and sustained advantage, and whether there is compelling evidence to warrant building a business based on the invention or innovation.

Weak laws
“But with weak laws in place, venture capitalists find it hard to invest,” says Mr Cardullo They seek to evaluate both the strength of an innovation and the ability of the entrepreneur to motivate commercialization.

At the heart of every venture capitalist’s strategy is to maximise returns and minimise risks. The risks they must consider in reference to the intellectual property include: market, financial, management and technological.

A way of reducing intellectual property risks is through signing a non-disclosure agreement (NDA). Sometimes called a confidentiality agreement and NDA allows a company to share its IP with others, whose input it needs, without unduly jeopardizing that information.

Venture capital in Taiwan funded young entrepreneurial firms is a casing point for successful small start up funding. Starting in the mid 80s, it took just over a decade for the Taiwanese VC market to make IT exports account for half of the island’s total exports with over $20 billion in output.

Currently, Taiwan ranks ahead of all the G7 nations except the US and Japan in patents per capita and has an economy which is not globally marginalised, dependent on a few commodity prices, but globally competitive with highly diversified, cutting edge products.

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Turning intellectual property into basis for investment