Why Patents Are Worth $1 Million to VCs [The Answer May Surprise You]
VC investment and patents go hand in hand!
Here’s another fact that may surprise you: successful startups use patents to increase their startups’ valuation. It has been estimated that patents increase the valuation of a startup by $1 million!
For these reasons, VC consider patents as strong assets. Let’s get down to the nitty gritty number crunching and find out what makes a patent valuable to a VC – and of course how VCs determine that value.
The most valuable patents for VCs do two things: first they protect your startup’s core business – the heart of your startup, your secret sauce. This is the part of your startup that, if you were to lose it, your startup would fail.
Second, really valuable patents also protect your startup’s market space from competitors. After all, you don’t want to do all of the work to develop your startup’s market, just to let all of your competitors in? Without a patent, you might as well invite your competitors into your startup’s market space.
VC’s will absolutely not put a lot of investment into your startup, only to have someone else copy your startup’s ideas and succeed in your market.
Of course, this points out another, more delicate point. Your competitors, especially the big ones, have no interest in being nice to your startup or even in playing fair. If they can steal – ahem, borrow – your startup’s ideas without having to pay for them, they’ll do it in a heartbeat.
After all, the great Steve Jobs himself said “We have always been shameless about stealing great ideas.” And while it might be flattering to have a real genius of the caliber of Steve Jobs steal your startup’s ideas, I don’t think you want that to happen.
Patents block your big competitors from stealing your startup’s ideas – and give you a weapon to fight back if they do. There are ways for even the smallest startups to succeed in a patent battle with big competitors. Just ask Microsoft, which has had to pay out a lot of money over the years to small startups because it kept on stealing their ideas. But many of these small startups had patents, so they could fight back- and win!
So how much is a patent worth to a VC?
Well, startups with at least one patent tend to have a valuation that is at least $1 million higher than without the patent. Indeed, each additional patent can also add $1 million to a startup’s valuation all by itself. So, $1 million is one way to measure how VCs value patents.
But if your startup gets funding because it has a patent – and your rival startup in the same technical field and market area doesn’t get funded because it doesn’t have a patent – then the value of a patent to the VC is 100%. Of course, the patent is then worth everything to your startup.
But the market should be the judge of patents, you say? No problem – at the time of IPO, the vast majority of software startups – and nearly 100% of hardware startups – had US patents. In fact Facebook didn’t have enough patents before its IPO and had to quickly run around to try and scrounge some patents together. Fortunately for Facebook it was able to buy the patents of an extinct tech dinosaur called AOL – but that’s a risky strategy.
Furthermore, a majority of startups get the most value from patents in earlier stages of funding, when patents can be worth even more than $1 million – increasing the value of a startup by as much as 30%!!!
So patents increase your startup’s valuation, especially in early stages – when they may be the only real asset that your startup has (no, the ping-pong table does not count!). If something goes wrong, the VC can sell the patents to get some of the investment back. That is why patents are so important to your startup and why VCs value them so highly as assets.
Want more information on how patents are assets? At kisspatent.com, we have guides and information to help you Launch Your Patent. Get started now – download our free guide on how to increase your startup’s valuation with a patent.
That’s it for now! If you have any questions, please leave your comments below or email us at firstname.lastname@example.org.