If you’re running an early-stage tech company, you’re probably thinking about how you’re going to raise funding.

But it can be very difficult to attract venture capital (VC) funding because sophisticated investors simply don’t invest unless they see a uniquely valuable opportunity.

All serious VC firms understand the importance of IP in valuing a business. Indeed, businesses with the appropriate IP protections in place are more likely to maintain a sustainable competitive advantage, mitigate financial risks, and raise outside funding.

At Henry Patent Law Firm, we frequently work with high-tech startups in a number of different fields, and we’ve also worked with many tech investors. From those experiences, we’ve noticed that there are a few things that VC firms typically want to see in the IP strategy of an early-stage company.

Here’s what you need to prepare ahead of your discussions with sophisticated investors.

Crafting an IP strategy tailored to early funding rounds

The list below is mainly applicable to early funding rounds (Angel, “Series A”, “Series B”). As you move toward later rounds of funding, the emphasis will be different. For example, if you’re beyond the Series B funding round, investors will probably want to see a more mature portfolio that includes issued patents with meaningful scope.

And of course, every investor is different and every deal is different. So you’ll likely encounter investors who have other priorities from the ones we’ve outlined here.

What investors often want to see in high-tech startups

One one level, investors are often looking for unique innovations that can be protected and monetized by a proven business model. From our experience, they typically assess a startup’s IP using the following criteria:

1. You have a sound IP strategy

Investors want to see that you know what IP your company needs to protect, and how to protect that IP.

At the most basic level, a solid IP strategy that’s aligned with your business goals should include a forward-looking plan for capturing valuable IP in your industry. You should be able to explain how your IP fits into your overall business strategy, and how it will be monetized.

For example, will you be able to develop a market for your product, thwart copyists, and own the market? Or will you develop strategic partnerships and license your IP to other companies?

You can offer investors added peace of mind by engaging capable, reputable IP counsel to help execute your strategy. Investors know that a competently drafted patent application is more likely to hold up to scrutiny in a litigation context or IPR proceedings.

Finally, you’ll want to show that you have thought about international rights. If your invention is potentially relevant in foreign markets, you’ll need to plan ahead — you face a limited timeline for pursuing patent protection outside of the United States. For more information, check out our blog post about developing a global IP strategy.

2. You know your competition

Investors want to know where your invention fits into the market relative to existing and potential competitors. Pursuing IP protection demonstrates that you’ve thought about whether your product is viable in the market — and better yet, that your product may be superior to its competition.

Your IP assets will be valuable independent of your business operations, meaning that they might be working for you even when you don’t know it. For one, they may reduce or deter industry competition: Potential competitors will have to make an expensive and difficult decision about whether they want to risk infringing your IP by entering the market.

Conversely, if a competitor accuses you of patent infringement, you can use your IP as leverage in resolving the issue. For example, instead of engaging in costly litigation, you could cross-license to gain access to your competitor’s technology.

Many investors will want to know that you’ve thought through these scenarios, and how you plan to leverage your IP in the face of competition.

3. You own your IP

To attract VC funding, it’s critical for you to own the IP for your technology. You should not have obligations to competing businesses, previous employers, estranged inventors, or other third parties.

As such, it’s important for you to document ownership of your patent applications and issued patents. To do this, you’ll want to introduce strong record-keeping policies like employment agreements and invention disclosure records (IDRs).

Additionally, you should refrain from signing any ill-advised agreements that could compromise your IP ownership, such as agreements granting broad licenses to your collaborators.

Want to show investors that you really have your act together? Show them a catalog of documents that establish ownership of all your company’s critical intellectual property.

4. Your existing IP is viable

Perhaps above all, investors are interested in the strength and value of your IP. To offer you meaningful protection, your patent applications must be able to hold up under close scrutiny.

Are there any glaring issues with the applications you’ve filed? For example, if your patent claims are too broad, your application could be vulnerable to irrelevant prior art. But if your patent claims are too narrow, your competitors could easily “design around” your patent.

How successful have your applications been? Investors might be wary of businesses that have been forced to drop one too many applications — it suggests that the business’s IP may not actually be enforceable.

Sometimes, investors will have their own law firm perform an independent review of your IP portfolio. It could just be a simple “kicking the tires” process to make sure there are no major issues. But for significant funding rounds, the review can get quite detailed.

We’ve been on both the investor and startup sides of the “due diligence” process, and our best advice is to establish good procedures early on to ensure the viability of your IP portfolio.

What investors don’t need to see in high-tech startups

At the early funding stages, sophisticated investors are looking for startups with a cost-effective IP strategy — not startups that are spending beyond their means! Here are the top three misconceptions about what VC firms want to see:

1. Comprehensive “freedom to operate”

A typical patent search establishes only whether an invention could be patentable.

However, many people incorrectly believe that a patent search also tells them whether they could be sued for infringing somebody else’s patent, should they move forward with their business. This type of analysis search is known as a “freedom to operate” or “IP clearance” search, and usually involves a much larger scope and cost.

In any case, freedom to operate searches are usually not necessary for attracting VC funding. It’s just not realistic to expect you to know with certainty that you’ll never infringe another company’s patent. And a startup’s products and business model are likely to change so dramatically that a freedom to operate analysis is often worthless by the time the company starts to be profitable.

Instead, most investors want to know that you’re not aware of any major roadblocks that would prevent you from entering the space.

2. Lots of issued patents

As a startup with limited capital, you need to rely on a cost-effective strategy to secure patents that will actually serve your business goals. Smart investors know that the patent process takes time, and that there’s value in patent applications beyond the patent itself.

Consequently, most investors want to know that you have a viable, well-executed portfolio, without any of the major “warts” that we’ve discussed in the previous section. You should definitely have patent applications on file, and it doesn’t hurt if you have some issued patents to show as well — but a long list of issued patents isn’t a prerequisite for early stage funding rounds.

3. Major law firm (“BigLaw”) patent counsel

Many business owners assume that the best patent attorneys are the ones working at the big international law firms. These “BigLaw” patent attorneys are very expensive, and can quickly drain a startup’s limited resources.

But smart investors know that you can get high-quality patent prosecution work from smaller law firms — and at more affordable rates.

Indeed, most investors simply want to see that you have engaged a patent professional who is competent in your field of technology and experienced at managing patent portfolios.

At any rate, investors will usually have their own patent attorneys look at your portfolio — regardless of who your patent counsel actually is. So either way, they’ll get an independent evaluation of the quality of your patent portfolio.

Are you ready to pursue startup funding?

When raising money for your startup, you want to set appropriate goals to ensure that you receive adequate funding. For obvious reasons, being underfunded isn’t ideal — but being overfunded can artificially inflate your startup’s valuation, and expose you to more due diligence.

The cost of executing your IP strategy is a key factor in determining your startup’s overall funding needs. Our free infographic, “The Cost of the Patent Process,” can help you estimate the costs you’ll incur each time you file a patent application. Download it now!