When you invest in a startup, you’re probably investing in a company that hasn’t yet become profitable.
I don’t mean they have no revenue – in fact, I almost never invest in a startup that doesn’t.
But a startup in its early stages has one primary focus: growth. Growth costs money, whether for product manufacturing, software development, making key hires, expanding office space, or any number of other things a business may need to make more money.
A startup in the red may seem like a bad investment. But, actually, a company can be worth money in many different ways.
Some angel investors think revenue is the only important metric. Others focus on the technology. In my opinion, the best angel investors consider a long list of factors before they invest.
But there’s one thing I always look for that’s too often overlooked: intellectual property.
I get it. IP isn’t as glamorous a subject as, say, how much cash a startup has on hand, or whether the founders have made their investors millionaires before.
It’s a dry subject, to be sure. But it is incredibly important to a startup’s ability to take off.
Here’s what makes IP – patents, trademarks, and so on – so critical: many startups exist in the first place to develop and sell a product that never existed before.
And when that product solves a big problem in a big market, you’d better believe that competitors and other big players will be paying close attention.
Say that you have a stake in a company that’s invented a new type of phone battery. It lasts longer and charges faster than anything else on the market. That would be a massive breakthrough – worth billions of dollars, for sure.
With no patent in place, how long do you think it would take for the world’s industry leaders to swoop in and steal the idea?
Even in “stealth mode” – a method that involves operating a startup in secret – a startup with revolutionary tech is vulnerable to moles, hackers, and all manner of methods a competitor with billions of dollars to spare might employ.
That’s why there’s more upside to a startup that has its intellectual property legally protected. An idea that can’t be copied by one of the giants may well be acquired by them instead for a healthy profit.
Think of it this way: would you put your money in a bank with no lock on the door?
I didn’t think so. Neither would I. That’s why I always suggest that you check (and double-check) that any startup you’re considering for investment has done the legwork to protect its proprietary tech.
Until next time,