By Fuchsia Curry, AngelNews
During Spring 2011 AngelNews, with the support of MunichRe, undertook a research project into the views and perceptions of 154 early stage investors, entrepreneurs and advisers in the area of IP protection, and spoke to 14 VC Fund Managers. The aim was to understand the importance these groups placed on IP in the fast growing businesses with which they are involved, and also their opinion on IP insurance and what constitutes a “good” policy.
How important is IP?
Clearly, IP is very important for both investors and entrepreneurs, with 64% of investors stating that over half of their IP rich investments are “totally dependent” on their IP for success. The worth of IP is measured more in terms of what it enables the company to do, as opposed to an intrinsic monetary value.
When asked to place a value on IP as a percentage of the total value of the business, versus a monetary value – investors, at early stage, stated 25%, with a value of less than £2m – with both figures increasing in line with growth of the company. Entrepreneurs, putting a slightly higher monetary value on IP, agreed it would increase with company growth.
Both groups see the benefit in holding IP for a long period of time, with 44% of entrepreneurs believing after 5 years they could command a premium of between 25% and 100% over their competitors.
Interestingly the VC’s implied the primary reason for infringement challenges was as a tactical move from a third party to initiate a deal, be it commercial, i.e. a licensing agreement, or to generate a trade sale/acquisition.
The threat of attack is very prominent, with 46% of investors saying 26-50% of their investees had faced serious threats. Notably, they also expressed doubt in their investees IP, believing that one or more may be infringing a third party’s IP in the UK. And this isn’t unfounded, as our survey revealed that 1/3 of entrepreneurs were unaware of whether they were infringing or not, despite having monitoring systems in place! Many entrepreneurs (29%) stated they had seen or expected a challenge – perhaps more crucially, 25% said they had insufficient budget to fight it. This assertion may explain why our responding advisers seem somewhat in the dark of the extent of the threat, claiming only 10% of their clients had faced serious threats; but perhaps entrepreneurs, knowing they can’t afford it, don’t even bother going to them for help.
The general consensus was that primary responsibility of the safety of IP lay in the hands of the management team, in particular the CEO. And most investors believed the companies have internal monitoring systems in place, and “good advisers” keeping check.
Advice, who needs it?
Although advisers have a slightly different stance to investors and entrepreneurs, they are a very important informal channel for education and advice, especially for CEO’s, in directing them towards specialist expertise. In the question of IP insurance, although it’s not a typical thing for this group to advise on, they certainly saw the potential power of it, and would advise purchasing it, if a good policy was available.
There is a clear motive for advisers to recommend IP insurance, in that it will pay their fees when an allegation is made. In addition, they also believe it will add value to the business.
Therefore, in the eyes of an insurance broker, advisers are an important group to win over. However, as the survey exposes, 37% of entrepreneurs revealed they’d initially consult their patent attorney (37%) when considering insurance; alternatively 33% said they wouldn’t turn to any of their advisers, suggesting investors and informal advisers will play a considerable role in the decision-making.
The general opinion on current IP insurance policies are that it is too expensive; claims wouldn’t necessarily be covered by underwriters, or it doesn’t do the job it should. However, the demand for a good policy most certainly exists. Several respondents stated they can see the potential power of it but know nothing about it, reiterating the need for education. In reference to the costs of IP insurance, virtually everybody in our survey believed it should be covered in the investor’s funds.
Investors gave a resounding vote that IP insurance would help their portfolio companies do more business, achieve better prices and raise capital; the VC’s generally agreed, but saw insurance as a means to protect value rather than increase it. This difference may be due to VC’s incorporating information they gathered from ‘freedom to operate’ searches, into their valuation. Of the advisers, 88% believed insurance would help achieve a trade sale or merger, corroborating the view of investors that many IP disputes are resolved that way.
But what makes a good insurance policy? 36% of investors, 77% of entrepreneurs and 94% of advisers believed it must cover legal costs to defend an allegation – advisers get paid, entrepreneurs concern over legal costs is negated, whereas investors tackle it on a case by case basis. Yet, in response to covering work in assessing third party IP, only 43% of entrepreneurs agreed, whilst 60% of investors said it should, probably because they understand why most allegations arise, hence can see the benefit in knowing the oppositions IP position!
Dealing with infringement challenges
The biggest challenge in understanding IP infringement is in finding the statistics, as the majority of cases never make it to court.
Entrepreneurs and investors understandably differ in their approach to an attack. Entrepreneurs firmly believe the IP is theirs, choosing to hire a legal adviser to defend their position, whereas investors, albeit initially robust, if this proves unfeasible, they will try to create an exit opportunity by selling or licensing the contentious technology, often leading to a sale. This is a double blessing for investors as the problem disappears and gives them an exit.
Fighting allegations is hugely expensive and time consuming; all respondents acknowledged management distraction could be very costly. Alongside this concern, entrepreneurs were particularly perceptive to negative/positive publicity in light of an allegation, much more so than investors. VC’s saw both angles – showing strength against a claim could put off other challenges; but potential business could be deferred until the case was settled.
Not surprisingly each type of respondent thought their role was more important than the others felt it was, and interestingly advisers felt that investors wouldn’t be involved at all once a claim had been filed.
The survey has clearly shown IP as an important topic of debate amongst SME management teams and their investors, as the importance of IP stretches way beyond the easily listed patents and trademarks, not to mention the potential future value - of which there are opposing opinions.
Typically IP management is seen as management responsibility, investors like to be kept in the loop but don’t tend to interfere, and accept that the cost of monitoring it, and IP insurance, should be included in their funding of the business.
Historically IP insurance policies seem to have fallen short in many areas, so most businesses have previously not purchased insurance. However, the threat of infringement attacks is a major concern, specifically in the cost and amount of time spent in fighting the allegation, which will demand in the efforts of all parties. So the threat of infringement cannot and must not be ignored, especially as the costs can run into the £millions!
MunichRe and Oxygen Insurance Brokers have formed a partnership to develop an exclusive Intellectual Property product to tackle the key issues identified in the survey. If you would like to find out more, please contact:
Leah Smithers at Oxygen Insurance Brokers
Tel: 020 3178 8218
Or Email: firstname.lastname@example.org
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