Pitfalls To Watch For When Securing Funding for IP-Backed Startups

What are the common pitfalls to watch for when securing funding for IP-backed startups? Technology and the internet have led to the business landscape evolving drastically. Entrepreneurs now have formal and informal intangible assets to base their ventures on.

These intangible assets or Intellectual Property (IP) arising from innovation add to the startup’s value. Their industry-disruptive concepts and technology ultimately lead to robust business models and saleable products. This is why IP is of specific interest to investors.

With entire startups built using Intellectual Property as cornerstone assets, securing them is super critical for the businesses’ survival. Without the ability to efficiently manage IP issues, you risk losing your rights on the intangible assets and expensive litigation.

Founders must also secure appropriate legal protection for their IP to ensure streamlined business transactions and effective seed funding drives. When you’re ready to exit from the venture, IP assets should enhance its value and status as an attractive acquisition target.

Getting into strategic partnerships to scale your company quickly is also easily done. Especially when you bring secured intangible assets to the negotiation table.

As of August 2023, the US had more than 1400 intangible-intensive unicorns, with companies like Red Point, Fracttal, Questel, and Tiko occupying the top positions. In 2022, the global IP industry was valued at $4533.36M. Experts estimate the sector to grow by a CAGR of 58.38% to reach $71552.09M by 2028.

Investors are keen on backing IP-driven ventures that have the potential to earn them rich returns. This is the ideal time for you to pitch for funding and launch your company on its growth trajectory.

Before you do that, check out the typical pitfalls to watch for when securing funding for IP-backed startups. Make sure you understand how to avoid them.

Understanding Intellectual Property Assets

The terms Intellectual Property (IP) or Intangible Assets (IA) encompass ideas, innovations, and creations of the human mind. If these assets have economic value, founders can acquire legal rights to safeguard them and claim them as exclusive property.

You’ll apply for and acquire patents, copyrights, and trademarks to secure your competitive advantage and the right to monetize them. Aside from standard patents, you should also look into non-patent IP assets and describe them in detail in your portfolio. Trade secrets and service marks are also forms of IA that you should get legal protection for.

Let’s dive into the potential pitfalls you could face when fundraising and how to avoid them.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Not Having a Detailed Intellectual Property Plan and Management Strategy

Entrepreneurs developing Intellectual Property that they intend to monetize should start by creating a detailed IP plan. This plan is similar to a standard business plan since it determines how IA drives the company. Prioritize this step right up there with other strategies like recruiting top talent, advertising, search engine optimization, and more.

A well-structured IP strategy identifies the assets that back their business model even before the company launches. This move is critical when the upcoming venture only has Intellectual Property as its cornerstone asset.

Accordingly, you’ll work out effective strategies for maintaining and protecting not just your current IA. But also any future concepts your company develops. Next, you’ll establish a budget and capital allocation for managing and supporting these intangible assets.

Most importantly, you’ll integrate regular freedom-to-operate (FTO) searches to evaluate the patent landscape for technology with legal protection.

Ensuring that your inventions don’t infringe on existing patents helps you avoid litigation. Any future business and product development you initiate should reference this information to secure the IP assets you ideate.

Founders should set up in-house procedures for protecting any intangible assets and trade secrets the company owns. These may include storage in secure facilities or limited-access data rooms or restricting unauthorized access to the assets.

Check-in and check-out procedures and watermarks on documents are other effective strategies. Having separate networks exclusively for managing IP assets also works.

Your IP strategy will include protocols for reviewing the contracts and agreements your company enters into. These contracts can be with employees, developers, consultants, and freelance techs you hire. Ensure that the documents include well-enforced NDAs and other legal safeguards.

How This Influences Funding

As your company scales and evolves, review the IP strategy and plan and revise as needed. A good time to do that would be when you’re formulating the next fundraising initiative. You’ll want to include an updated IP plan in the pitch deck to demonstrate complete IP security to investors.

Investors conducting their due diligence are likely to review your business and IP plan carefully. Every aspect indicates the venture’s stability and ability to generate returns and profits. Above all, an ideal IP plan demonstrates the risk mitigation steps you’re taking to ensure the long-term sustainability of the company.

Not having a robust IP plan in your pitch deck is a setback. It’s one of the most important pitfalls to watch for when securing funding for IP-backed startups.

Not Having the Proper Documentation

When it comes to securing your IA, having the right documentation complete with legal terminology is critical. You would want to hire expert legal counsel and advisors to review the forms and paperwork you receive or dispatch.

Incurring the costs of retaining professional services is preferable, even if the startup has limited funding. Or it is bootstrapping its initial setup.

A good starting point is NDAs or non-disclosure agreements. Entering into pro-forma agreements can be a dangerous mistake. Such forms include only standardized terms and conditions and may fail to include specifics pertinent to the company’s intellectual property.

To get appropriate legal protection, your agreements and contracts should define the confidential information’s complete scope. You’ll also clearly outline what the agreement excludes and the tenure for which it is enforceable or its duration.

Expect to create new NDAs for every project and include provisions and conditions to limit the use of the IP you’re sharing. Also, talk about any “implied licensing” you disallow. And how the assets will be returned to the company or destroyed after use.

The tenure for which the IP can be legally used by the recipient is yet another important clause. Be very cautious about the assets you share with contractors. For instance, you might share technology or cloud applications that need debugging or upgrading.

In that case, your NDA will include provisions to own the enhanced product. And prevent contractors from using or replicating the IP in part or full.

Startups may choose to license their IA in part or full to monetize them for revenues that can fuel growth. Draft any agreements carefully so you have complete control over how third parties develop and commercialize the IP. Adding termination clauses is also effective for maintaining ownership.

How This Influences Funding

The security culture you institute in the company will also extend to the virtual data rooms you create to share information with investors. Having them sign NDAs before revealing business and IP plans indicates that you’re on top of the relevant legal implications.

However, expect that some investors may not be open to signing NDAs since they work with multiple startups. Such agreements could limit their ability to enter into funding deals with other companies.

You can get around this problem by filing for provisional patents that award you the same rights. But protect the IA you might accidentally discuss during negotiations.

Not taking steps like these may result in investors doubting your dedication to securing your assets. Or your capability of understanding the value of your assets. These pitfalls could get in the way of securing funding.

Not Establishing Clear IP Ownership Rights

If your startup is entirely dependent on the Intellectual Property you’ve ideated, securing ownership rights is a critical first step. Make sure you apply for patents, copyrights, and trademarks with the United States Patent & Trademark Office.

Acquiring patents and trademarks can involve significant expenses. Entrepreneurs should prepare to make this investment in terms of money and time to secure their claim on the intangible assets.

Follow the procedures for registering the patents as soon as you develop the idea. Provisional patents allow you to secure the idea even before you develop the Minimum Viable Product (MVP). Or, formally incorporate the company.

In this way, you’ll also prevent competitors from catching on to the idea and releasing products. Or acquire their patents and market products before yours. Establishing exclusive ownership rights restricts others from using the idea or its variants.

Investors are likely to evaluate the startup’s IP portfolio during the due diligence process, and their focus is on clear ownership titles. They’ll need assurance that any returns on their investment won’t be hampered by IP-related conflicts and legal issues.

Exclusive ownership also adds to the valuation of the startup and the funding amount you can raise. Not projecting the company’s assets effectively can influence negotiations and the investment terms and conditions you’re offered.

Even as you’re reading up on the typical pitfalls of funding IP startups, take a look at this video. I have described the most common mistakes entrepreneurs make when fundraising. You’ll find it helpful.

Not Maintaining Confidentiality of the IP Assets

Entrepreneurs need to be extremely cautious about revealing confidential and sensitive IP data before they are ready with legal protection. Refrain from talking about your intangible assets publicly, like at investor networking events, trade shows, social media sites, and press releases.

Develop pitch decks for funding and official websites to create your startup’s digital storefront with caution to avoid IP leaks. Disclosing any trade secrets and information can hamper your ability to acquire patents for them later.

Before giving rights to third-party publications to publish materials about your startup, request to review the information. This step will help you prevent disclosing information before time.

Hiring third-party developers and independent contractors to ideate Intellectual Property is standard industry practice. If this is your business strategy, you’ll need to enter into well-crafted agreements that prevent them from revealing the information.

Have them sign confidentiality and invention assignment agreements where they transfer all their rights on the IP to you. Get your legal counsel to draft clauses around employee obligations and IP transfer.

Also, add non-compete declarations to prevent them from creating similar IPs for other companies or clients they may work for in the future.

Not Following Standard IP Protection Protocols Before Marketing

The tech industry and cloud applications development is a rapidly evolving vertical. Understandably, founders want to push for developing time-sensitive products and releasing them before competing startups catch on. Not taking the necessary steps can be an expensive trade-off against the profits you could make.

Before commercializing your products in the US, you must take physical and technical measures to protect the IP behind them. Also, remember to obtain foreign patent rights on the invention in case you want to expand to off-shore markets in the future.

Applying for trademarks typically involves checking for similar or confusing marks that are already in use in the market. Eliminating this step can result in limited rights on the IP. Or worse, infringement that you absolutely don’t want to risk.

Not identifying and securing your IP assets beforehand is one of the pitfalls to watch for when securing funding for IP-backed startups. That’s because accredited investors want assurance that you have followed the mandatory protocols and have legitimate rights on the IPs.

Pratices like these indicate good business acumen. Presenting these measures in the pitch deck indicates that founders are also committed to due diligence with their assets.

In Conclusion

Entrepreneurs developing intangible-intensive startups focusing on innovative new products tend to overlook the necessary steps to secure their IP. Without well-crafted protection strategies, they may fail to effectively monetize their assets and the products they create from IP.

You may also fail to build value for the startup, long-term revenues, and profitability. Most importantly, acquiring funding for the startup can get super challenging without protecting confidential and sensitive IA.

Understanding the typical pitfalls to watch for when securing funding for IP-backed startups can help you develop effective workarounds. Develop a robust IP-protection strategy and business plan to demonstrate to investors that you’re on top of the legal implications.

Acquire funding and set the startup on its growth trajectory.

You may find interesting as well our free library of business templates. There, you will find every single template you will need when building and scaling your business completely for free. See it here.