Over the course of my 25 year career in venture capital, I’ve met countless businesses with truly innovative ideas. But when it comes to looking at a prospective business to back, great ideas and impressive prototypes are table stakes for VCs. To convince us that you have an idea that can scale into a viable business, we’re looking for something more than ambition and a slide deck.

Strong IP is becoming more and more important to investors. It tells us that you’ve taken the necessary legal and strategic steps to build long-term value – and shows an ability to scale the business.  When evaluating potential deals, we ask a simple question early on: “What’s stopping someone else from doing this?”

Without the protection of IP – by which we mean patents, trademarks, copyrights – your cutting-edge technology, brand identity, or business model can be copied, diluted, or outright stolen. But paperwork alone isn’t enough – investors are looking for you to demonstrate how your IP protects your business and how it adds value to your business strategy.

When it comes to IP, these are the top four questions businesses need to ask themselves:

1. Can you show that you’re generating revenue from your IP?

For most businesses IP does not offer inherent value. While there are some exceptions – namely pharmaceutical businesses – most investors need to see that your product or service is already generating income and ultimately profit and therefore adding to shareholder value. No matter how innovative your idea is, if there isn’t a viable business with paying clients, then your IP probably isn’t defensible and investors won’t see the value in your business. Companies can use patents to offer some protection for their IP, however defending a patent is expensive and does not necessarily offer total protection. The best way to protect and get value from IP is to provide a valuable product or service to your customers.

2. Can you explain the value of your IP?

Being the first in your market or category does not necessarily equal success, even with IP in place. Facebook wasn’t the first social media platform, it was the first to have a service offering, features and attractiveness to consumers that led to it growing much more quickly than competitors such as MySpace. Make sure you can explain the value of your IP to investors – why it’s differentiated, why clients are going to want it or need it, and why that will drive significant and outsized growth for your company. When Daily Dose, a premium cold-pressed juice and functional drinks business, came to us, they weren’t the first premium juice company – but they already had IP in their business model, brand and processes that meant they were growing extremely quickly.

3. How will you ‘cross the chasm’?

So you’ve identified your IP, you have your defensible patent in place, you’re turning a profit and you know your innovation has huge market potential. As Geoffrey A Moore explores in his seminal book ‘Crossing the Chasm’, if you are the first in your category, the critical next step is to understand how to supercharge demand for your product or service when your future customers don’t yet know they need you. Magic AI, one of our portfolio companies, has done this very successfully, by targeting a specific market segment of people who can’t access, or do not wish to pay the high fees associated with, regular personal trainers.

4. How does your IP strengthen your exit strategy?

Core IP should add value to your exit strategy. For technology companies, IP means investors are reassured that your company can scale quickly – you ‘write once, you sell many times’. IP correlates with growth potential, growth equals strength in your market position and an increase in shareholder value which can make the company an attractive acquisition target or a candidate for an IPO. Often this owned IP can then be capitalised upon significantly once it is owned by a larger company with a bigger resources and an existing customer base. Make sure you can articulate this in your next pitch.

For startups looking to attract investment, a strong IP foundation does more than protect an invention – it validates it. In the eyes of investors, it turns a pitch into a promise, and a concept into a company. But communicating the value of your IP is critical. Before your next pitch, ask yourself the questions above to ensure you’re thinking like an investor.

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