All investors have questions when meeting with startup founders. How scalable is your business model? How fast are your revenues growing? How experienced is your team?
And, although they may not seem like it at first, many of these questions have an IP component. What investors really want to know is whether or not your organization is building something that’s strong enough and differentiated enough to eventually exit. With that in mind, it can be easier to address some of the more common questions that potential investors are likely to ask when meeting with founders.
#1 What is your IP strategy?
A lot of startup companies hate this question, because they don’t really know what to say. Often, early-stage companies just don’t think much about patents or trademarks because they haven’t needed to yet. They’re just heads down on the product.
The good news is that investors are not asking about your IP counsel plan or how much you’ve spent on your IP already when they ask this question. They’re trying to understand whether or not you have thought about IP at all, because that does impact your long-term growth potential, and if you understand what you’ll need to do to protect your own competitive advantage.
#2 Does your company have any IP?
First of all, the answer is yes, and it almost doesn’t matter what kind of company you are building or what type of product you’re creating. Business by definition requires intellectual property that protects your competitive advantage, whether by patents, trademarks, copyrights, or trade secrets.
Again, though, investors aren’t wondering how many patent applications you have filed or anything like that. What they really want to understand is how you are protecting the assets that make you unique? Do you know what makes your company better than your competitors? And can you keep it that way?
#3 Do your competitors have IP?
They’re not trying to find out whether or not you’ve spent money on a patent search. What they really want to know is whether you understand how IP savvy your competitors are. Are you in a litigious marketplace? Are you going to get sued as soon as you start sending out your product because you’re going to be stepping on other people’s IP?
#4 Have you filed for IP in the past?
It’s not about whether you personally or even your company has filed for IP before, but do you as an innovator currently have IP that’s owned by other people? Are you obligated to assign your IP to another entity that’s not your own company?
It’s not as uncommon a situation as it sounds. Often in technology, really accomplished developers will work on multiple projects at the same time – they love the hustle. But typically everything you do during the time you’re on your day job gets assigned to whoever is paying you. Coding that side hustle on company times means the company owns that IP. Don’t forget that.
#5 Who else have you talked to about your idea?
They’re not trying to find out what other investors you’ve talked with or how good your networking skills are. What they really want to know is under what context have you been talking about your idea? Do you use an NDA on a regular basis? Have you disclosed your idea publicly before seeking IP protection?
That’s a big one, especially in hardware companies where it’s not uncommon to start offering product demos before a patent filing is in place. For example, if you were to go to a trade show and show your prototype before you filed a patent application on it, that event is effectively a public forum. By opening up your idea to the world like that you can potentially limit your options when it comes time to protecting your idea. That’s why investors really want to know if you’ve disclosed your secret sauce to anyone outside of your company.
#6 Do you have any strategic partnerships?
This one doesn’t sound like an IP question but it is, referring to how your intellectual property is being created. Are you hiring other people? Are you contracting with a product design company to help you develop your prototypes? If you are, that will lead to questions related to the ownership of your IP. Even if you’re hiring offshore developers you need to make sure you spell out in your contract with them that all the code they develop is assigned to your company so there is no question about IP ownership later on.
#7 Have you ever received government funding?
Government funding can be a great resource for early-stage startups, but for investors it can be a red flag because it implies that the government might have rights to your IP on some level. Does the government have any rights? That depends, but it’s a good way to scare away potential investors.
A special case is if your innovation came out of university research. While universities can be great incubators for new ideas, the terms of a licensing agreement negotiated with a university can become the 500-pound gorilla at the negotiating table with potential commercial partners.
#8 How will you manufacture your product again?
This does not sound like an IP question either, but it is because what they really want to know is whether or not you’re working with reputable people on the manufacturing side. The kind of people who are not going to steal your IP.
The infamous example of this concern in action is when a company chooses to outsource production to an offshore company. That company has their first shift manufacturing your product and delivering it to you as per your contract. But they also have a second shift that comes in and runs the same lines, makes the same product and sells it on the black market. If you’ve ever seen fake Oakleys, fake Nikes or fake Pinarellos for sale, you know it happens.
Investors will want to know that you are savvy to that risk and that you are putting practices in place to prevent that sort of IP theft from happening.
#9 Do you use open source code?
It’s not about how savvy your developers are, but instead the fact that the use of a lot of open source code in your product has licensing implications that will impact your IP. For example, if there are certain types of open source licenses, where if you were to incorporate a piece of that code into your original code then you are obligated to publish your code publicly as well. That can be very scary for investors, and it’s the kind of thing that often comes up during investor due diligence, especially for tech companies.
#10 Do you use employment or consulting agreements?
Legally, everyone who works with your company needs to have the correct paperwork in place, but the IP consideration here relates to the chain of ownership for your intellectual property. If someone generates intellectual property for your company or otherwise innovates on behalf of your company – as an employee or a contractor – can you show that ownership of that IP is transferred to the company? What about if that employee or contractor leaves your company? It’s another risk that often comes up in due diligence.
The true intent of what investors are getting at by asking some of these common questions is whether or not you’re able to mitigate the IP risks your company will eventually face. If you can, you’re in stronger position toward building a sustainable, growing company. If not, there is still time to address those risk factors before they spiral out of control.