How software businesses can use IP to maximise their valuation
Has there ever been a better illustration of how hi-tech SMEs bounce off the IP services sector than software business? For too long they have been told that IP doesn’t really work for them. That they can’t get patents so that’s that. And so many of these businesses (businesses that are highly innovative) are forced to get on with life without any sort of protection or risk management of their IP position. Inevitably, this affects their valuation when they’re looking for investment or exit.
The advice these businesses are getting is wrong. There are things they can do. There are a lot of things they can do.
Lately in this blog I’ve made a habit of this, but let’s start with a made-up scenario…
eWallit — a great software business
A software business, let’s call it eWallit, has a really innovative idea for a software product that allows its customers to manage their money electronically in a new and efficient way. It allows customers to pay for things securely, pass money to friends and family and always make sure they have the best exchange rates and interest rates.
eWallit plans to go through a seed round to raise capital to develop the software and build an app so they can start to get the first few users signed up. As they begin to talk investment, investors begin to ask whether the idea is ‘protected’. Do they have a patent?
So the founders of eWallit schedule a meeting with a local office of a national patent attorney firm. The patent attorney listens patiently while they talk her through their idea and business plan. And then she breaks the bad news that eWallit can’t get a patent. She sympathises — it’s a good idea, no doubt about it — but ”it’s just not considered ‘technical’ I’m afraid” and so she’s convinced the patent office will not grant a patent. The best she can offer is that they file a patent application anyway, even though it will not be granted so that they pull the wool over their investor’s eyes. (To be absolutely clear, this is a terrible idea in my view.)
And that’s it.
The founders are left a little shell-shocked, a bit confused, but they go about their business. If they can’t use IP then they can’t use IP.
So when it comes to their raise, the investors ask if they have a patent and the founders say “no, we can’t get them.” And so the investors chip away at their valuation. The investors ask what would stop someone else copying their app and the founders look a bit nervous and shift uncomfortably in their seats. And so the investors chip away at their valuation a bit more. The investors ask whether they’re infringing anyone else’s IP and the founders say “oh, we’re not sure.” And so the investors chip away at their valuation a bit more.
You get the picture.
There’s another way
The story above is not uncommon and that’s a real shame because there is actually a lot that eWallit could have done. Okay, patents might not be an option, but patents are not the only show in town. Far from it.
eWallit is, without a shadow of a doubt, generating very valuable IP that can be protected. They are also exposed to risks around their IP that can be mitigated or even offset completely. They can and should take steps to prepare a credible IP strategy and then implement that strategy so it can be presented to investors when the time comes.
So what can eWallit (or you) do? At Matter IP, we help businesses like eWallit put in place an impressive IP strategy and IP management process so they can confidently bat away questions from investors and look like a tech business worth investing in.
Our methodology splits IP strategy into 3 elements: IP Protection, IP Risk and IP Commercialisation — shown in the drawing below.
No matter whether you file patents or not, protecting your IP starts with understanding what you have. We call this know-how and it’s what sits in the heads of your engineers and other staff. The first thing you need to do is extract it from their heads and get it on a piece of paper. You can do this with meetings and interviews asking them how they do what they do and how they managed to get things to work — what problems did they overcome?
Once you have that recorded then you can assess the commercial value of all the know-how you have and decide what to do with it. That can mean filing patents, making use of confidential information and trade secrets, registering designs, registering trademarks etc.
There are broadly two types of IP risk: internal IP risks and external IP risks.
Internal IP risks usually relate to contracts and agreements. That can mean employee contracts, consultant contracts, supplier agreements, joint ventures. These should be reviewed and shored up so that ownership of your IP is with you and that it stays that way. It’s also a good idea to run an IP education program for your people so they know how important IP is and what they’re expected (and sometimes required) to do.
External IP risks typically relate to whether you are or are not infringing someone else’s IP. This is called freedom to operate (or FTO) and involves searching for existing IP in your field and then assessing whether or not you risk infringing it. You’ll need expert support for this and I’ve covered it in other blogs here and here.
Broadly, we think of IP commercialisation as how you intend to make money from your IP. In many early-stage businesses and those looking for a fairly rapid exit, IP commercialisation is a less significant issue than IP Protection and IP Risk. Having said that, it can be very useful to describe to investors how your IP secures a commercial advantage. It can be a technology licensing strategy, a market monopoly strategy or something else but it’s good to draw the link for investors.
For businesses looking for an exit, it can be especially useful to explain to investors how your IP position will support their own exit from your business. For example, having your know-how recorded and protected can make your business easily scalable because anyone, not just you, can do what you do if they have the know-how. Understanding this can help investors understand how they will get their return.
Re-telling the story
Now, let’s imagine if the answers to the investor questions had gone differently.
When the investors ask if they have a patent, the founders say “no, we can’t get patents because we’re a software business and the law won’t allow it. Instead, we extract all of the knowledge and know-how from the heads of our engineers through regular meetings and interviews and then we assess the commercial value of it. We make sure everyone in the business understands what our most important information is and that we don’t want getting into the public domain. They know it’s confidential. The really important information we protect as trade secrets.”
When the investors ask what would stop someone else copying their app, the founders say “if a competitor wants to build the same software solution as us then they could probably do that with some elements, but they’ll have to start from scratch. Our engineers have worked hard over the years to smooth everything out and implement our original idea, solving lots of problems along the way. We’ve recorded all that know-how and put protection around it. It stays within our business because we have tight agreements around IP and all of our staff know its importance because we educate them on it regularly. Someone could try to recreate the idea, but it would be a long journey and they would have to learn everything we’ve learnt already.”
When the investors ask whether they’re infringing anyone else’s IP, the founders say “We’re very confident that we’re not. We’ve had freedom to operate searches and analysis undertaken throughout our R&D process and we’ve steered things so we remained in clear water all the way. The reports are in the data room. We’re really confident that we know what’s out there and that we’re well clear of it.”
A bit better, I think you’ll agree.