Investing in emerging technologies: the IP safety net

Emerging technologies, such as artificial intelligence (AI) and biotechnology, hold the promise of market disruption and have the potential for large growth, making them an attractive choice for many venture capital (VC) funds. Yet, various factors, such as future adoption of alternative technologies, fierce market competition and regulatory considerations, leave investments in emerging tech with a correspondingly high degree of risk. In the face of all of these uncertainties, there is one certainty – a strong intellectual property (IP) portfolio can safeguard investments in emerging tech in several ways. Therefore, to offset the higher levels of risk associated with these more speculative investments, VCs should identify companies which secure and leverage a strong IP portfolio to not only enhance their position in the market, but also to act as a safety net for if things go wrong.

As in any advancing industry, ongoing innovation by start-ups as well as established companies poses challenges when it comes to predicting the success of these companies and the technologies they develop. The constant churn of market entrants and leavers can make it almost impossible to identify those companies capable of maintaining a competitive edge in such dynamic environments. Yet, in the struggle to pick early market winners, a competitive advantage can be identified in companies leveraging a patent portfolio which adequately protects their current and future developments. A strong family of patents can deter competitors from operating in similar spaces, thereby affording companies an increased chance of becoming market leaders. Therefore, VCs can consider undertaking due diligence, where appropriate, to evaluate the protection secured by a company for any technologies they may seek to advance. The topic of due diligence is discussed in more detail in our earlier article.

Another issue is that rapidly advancing technologies can quickly become outdated when there are numerous other companies vying for market leadership in the same space. Therefore, who we might consider to be an early market winner now could quickly fall out of the race. The problem of technological obsolescence can never be fully addressed, but ensuring patent protection for core inventions can, within limits, allow a company to gain market exclusivity for the fundamental parts of its technology, regardless of various improvements which may change over time. For example, if a company has developed a new AI-driven medical imaging system, but over time, new and increasingly advanced AI algorithms emerge which render certain components of the original system obsolete, protection of the core AI technology, such as unique architectures or core deep learning algorithms, can mean that the company nonetheless retains exclusive rights to the foundational technology. A company’s IP portfolio should therefore be scrutinised to ensure that its key inventions are adequately protected and are not unduly limited by the addition of unnecessary features which leave the patent commercially irrelevant.

Another uncertainty is presented by regulatory hurdles playing catch up with these advancements. New medical technologies require long development cycles and clinical testing before they can be marketed – but how is the risk of any given technology failing at one of several steps in the regulatory process to be mitigated? The process of obtaining regulatory approval can be lengthy, thereby eating into the 20-year lifespan of a patent. However, a robust patent portfolio covering a potential pharmaceutical can help to mitigate the risk of third parties carrying out their own clinical research while regulatory approval is sought. Further, for pharmaceutical or plant protection products, additional forms of protection such as supplementary protection certificates (SPCs) and plant variety rights (PVRs) are available to compensate for a certain amount of regulatory delay. VCs should look out for companies which go the extra mile to protect their innovations and secure a significant post-approval edge.

On top of all this, of course, is the volatility of consumer preferences and trends, which can dictate the direction of a market alongside the success or failure of particular technologies. IP assets have significant monetisation potential, and a strong IP portfolio can enhance a company’s value by supporting its market advantage and future growth. Companies with a strong IP portfolio can monetise their innovations by licensing their technology to other companies. Licensing opportunities can represent important revenue generation streams, offset R&D costs, and facilitate market expansion by accelerating adoption of the technology across various applications, industries and regions. As well as boosting a company’s overall chances of success in a crowded market, leveraging IP can be a cornerstone for creating a viable and lucrative exit strategy.

If all else fails (as is frequently the case for new companies in fast emerging markets) IP assets can be sold to cover potential losses in an investment. Intangible assets such as an IP portfolio can be sold to competitors who may be willing to pay a premium for those patents which have prevented them from advancing in a particular direction. Evidently, as well as fostering future growth and enabling market dominance of a company, an IP portfolio can act as a safety net for VCs wanting a return on their investments.

In summary, IP can support early-stage companies in several ways by reducing the risks and uncertainties associated with investments in speculative technologies, and can enable investors to respond effectively to the dynamic nature of emerging markets. If the company succeeds, the IP can be monetised to boost returns. If the company fails, the IP can be sold or secured against as a form of insurance for the VC. In this way, IP is a failsafe asset for VCs to look to as a safety net which mitigates the elevated levels of risk associated with emerging technologies.