Seeking patent protection can offer a substantial competitive advantage to startups looking to raise capital, especially during a venture capital downturn. Besides the protection patents can provide against intellectual property theft, they are also assets that can translate into expansion opportunities and additional revenue streams. These factors are important to institutions and individuals that invest in startups, as they may reduce downside risks to their investments and help outline a growth trajectory.
As Kathi Vidal, under secretary of commerce for intellectual property and director of the U.S. Patent and Trademark Office, said during a speech last year, “having a [patent] pending application helps secure funding, and it keeps potential competitors out of your space.”
The experience of Austin-based VoChill, a startup that created a new line of personal wine chillers, offers a case study of how filing for patent protection as early as possible can set up any startup for success, not only when seeking to raise capital, but also when working to expand its commercial relationships and distribution channels.
Filing for patents quickly gave VoChill’s founders a competitive advantage when approaching potential investors, as it demonstrated the management team’s high level of preparedness and business acumen. For investors who eventually committed capital to the startup, the filings signaled a safer bet on investing in VoChill.
There is plenty of evidence indicating that patents help attract capital and generate growth opportunities. A study conducted by professors from Harvard Business School and New York University’s Stern School of Business found that patent protection increased startups’ odds of receiving venture capital funding by 59 percent.
PitchBook data shows that startups seeking patents raise more capital than their non-patent-seeking peers. About 58 percent of venture capital went to startups with patents or with patent applications from 2011 to 2020, the research firm notes.
Patents can also help drive a startup’s expansion and grow sales. According to the National Bureau of Economic Research, or NBER, the approval of a startup’s first patent application increases its employee growth by 36 percent over the following five years. After five years, a new company with a patent increases its sales by a cumulative 80 percent more than companies that do not have a patent.
Patents can also increase a startup’s chances of obtaining distribution deals or, in the case of consumer products, partnerships with retailers. In VoChill’s experience, patent protection is a recurring theme in conversations not only with investors but also distributors and retailers.
Patents offer startups the possibility to pursue a licensing model as well. Licensing or selling the rights to a patent so that others may produce products or processes based on that patent can bring in ongoing revenue streams.
Down the line, having patent protection can lead to better exit opportunities, be it by going public or via a private divestiture.
According to the NBER, having patents more than doubles the probability that a startup is eventually listed on a stock exchange.
PitchBook data, meanwhile, shows that patent-seeking companies go public at a rate more than five times higher than non-patent-seeking companies (23.2 percent versus 4 percent).
In the case of exits via a sale of the startup, the median exit value for patent-holding companies is 154.9 percent higher than it is for companies without patents per year on average, according to PitchBook.
While the business case for seeking patent protection is clear, startups should keep a few considerations in mind when seeking to do so. Understanding time bars is crucial; for example, the United States generally allows only one year to file a patent application after an invention is publicly written about, shown, used, or otherwise disclosed, and overseas often no one-year “grace period exists.”
Still, other important predicates are finding out whether the innovation is truly new, identifying the most crucial components of a product or system, and thinking about what aspects competitors are likely to discover and copy.
Chris Palermo is partner at Baker Botts where he specializes in intellectual property development. Lisa Pawlik is CEO of VoChill, a company that creates individual wine glass chillers.