How to Assess a Startup’s IP

Intellectual property (IP) can be among a startup’s most valuable assets. A strong IP portfolio not only helps secure exclusive rights in unique products and services but also reduces encroachment from competitors and enhances investment returns. But when the time comes to move beyond the pitch deck, investors need an understanding of how IP assets can separate winners from losers.

When evaluating the strength of a startup’s IP assets, ask the following questions:

Covering the basics

What to ask:

• “What forms of IP protection do you have for your products and services?
  Startups should be able to quickly identify the types of IP that cover their products and services, including patents, trademarks, copyrights, and trade secrets. Inquire about specifics such as patent numbers, trademark registrations, and details of proprietary technology.
• “Do you have any pending patent applications?” 
  Pending patent applications can indicate early technological innovation. Ask about where their applications are pending, the timeframe of their patent prosecution process, and how the applications fit into their overall patent strategy.

What to look for:

A solid grasp of their IP assets, including both granted patents and pending patent applications, shows that the company is serious about securing their position in the market. Inability to clearly articulate their IP portfolio and goals can be a red flag.

Assessing the scope and quality of their patents 

What to ask: 

• “What problem does your patented technology solve, and how does it differ from existing market solutions?”
  A well-protected innovation should uniquely solve a definable problem. The company’s ability to differentiate its inventions from existing technologies (i.e., the “state of the art”) shows that its IP is both valuable and defensible. 
• “How broad are your patent claims, and did you encounter any significant challenges during prosecution?” 
  Strong patents should include both broad and narrow claims to ensure maximum coverage and defensibility. A patent’s prosecution history, including the nature of the patent examiner’s rejections, can indicate how strong the patent is and how well it will stand up against invalidity challenges in litigation.

What to look for: 

The company should be able to offer specifics on the status of their IP. Be wary of anyone who can speak only to general concepts rather than the details that differentiate their IP from what came before it. The strongest patents have claims broad enough to carve out a valuable market niche, but not so broad that they’re easily invalidated. In-depth knowledge of their patents’ prosecution histories shows that the company takes a hands-on approach to IP strategy. 

Understanding geographic coverage and strategy

What to ask: 

• “In which countries do you hold IP rights, and why did you choose those?” 
  Patent rights are territorial, extending only as far as the borders of the jurisdictions that granted them. Savvy startups will have prioritized key markets (e.g., the U.S., the European Union, and Asia) based on manufacturing capacity, sales projections, and competitor activity. 
• “Do you have a plan for expanding IP coverage as you enter new markets?” 
  As companies grow and expand, they will need to secure patent protection to remain competitive in new markets. A forward-looking strategy shows that the company has incorporated IP considerations into its scaling strategy.

What to look for: 

A well-thought-out international patent filing strategy signals long-term vision and an understanding of where future value lies. 

Clarifying ownership and chain of title

What to ask: 

• “Who is listed as the inventor or owner of your patents, and are they still at the company?” 
  Inventors who are no longer at the company can indicate potential internal turmoil and may create problems if there are gaps in the patent’s chain of title.  
• “Do you have clear assignment documentation?”  
  Even the strongest patents can lose their value if they were improperly assigned from the inventor(s) to the company. Clear chain of title and uncontested ownership is essential for enforceability.  

What to look for: 

Startups should have formal IP assignment policies in place and follow them rigorously. They should be able to explain why any inventors listed on their patents have left the company and how the company secured their IP rights.

Ensuring freedom to operate

What to ask: 

• “Have you conducted a freedom-to-operate (FTO) analysis?” 
  An FTO analysis can identify the presence of potentially blocking patents and reduce the risk of future patent infringement claims. Failure to conduct an FTO can expose the company to costly legal challenges in the future. 
• “Who conducted the FTO analysis, and do you plan to update it regularly?”
  FTO analyses should be conducted by experienced patent attorneys. Moreover, FTOs are merely snapshots of risks at a given time. The startup should have a plan in place to update their FTO as time passes and product plans change.

What to look for: 

An FTO analysis shows that the startup has done their due diligence and that they are not building on shaky legal ground. A startup spending time on diligence indicates a company that is disciplined and prepared for challenges ahead. 

Playing defense and offense

What to ask:

• “If you are hit with an IP-related lawsuit, do you have a strategy and budget allocated for defense?”
  Defending your IP rights in infringement actions and invalidity challenges can be expensive. Forward-thinking startups will have considered how to respond if a competitor challenges the validity of their patents or accuses their products of patent infringement.
• “Do you monitor your competitors’ IP filings or enforce your IP rights proactively?” 
  Patents give their owners the right to exclude others from the inventions claimed in them, which requires patent owners to monitor the landscape for potential encroachment by competitors. Startups that view IP as a living, strategic asset — not just as proof of ownership — tend to be better-positioned for success. 

What to look for: 

Startups should have procedures in place for monitoring technological developments in their industry and a plan for responding to potential threats. Wielding patents both defensively and offensively indicates that the company is prepared for competition.

Aligning IP strategy with business goals 

What to ask: 

• “How does your IP support your current and future business model?” 
  IP should not exist in a vacuum; it must align with and seek to advance product roadmaps, commercialization plans, and exit strategies. 
• “How do you see your IP contributing to your valuation as you seek future funding or potential acquisition opportunities?” 
  A startup’s plans for leveraging its IP, whether in licensing deals, strategic partnerships, or M&A negotiations, reflects the management’s business acumen. 

What to look for: 

Strong IP portfolios can provide a competitive advantage in the business world. When founders tie IP to their long-term business plans, it typically signals that they view IP as a strategic asset.

---

Bottom line 

In a field full of enthusiastic innovators, IP can be the critical differentiator that sets certain startups apart. By asking the right questions and knowing what to look for in the answers, you can quickly gauge the strength and value of a startup’s IP portfolio. Pre-investment IP diligence can help to ensure that you’re supporting sustainable, defensible, and competitive innovation.