A study done by Shikar Ghosh, a Harvard researcher, indicated that 75% of start-up businesses fail. Why is the failure rate so high and what sets the remaining successful 25% apart?
In the majority of cases, it simply boils down to money — having adequate financing available. Any business requires the necessary finances to initiate, maintain, develop and subsequently expand their business.
What your investor could be looking for
When a business is seeking outside financing from a third party, such as an investor, the third party is likely to look at the expected rates of return of the business, its existing commercialisation activities, its assets vs liabilities, the existing and target users, market potential and its current and expected turnover rate and profit margins.
However, the average start-up has not been trading for a sufficient amount of time to have the level of financial data needed for an investor to value the company adequately in this manner. How can a realistic value then be placed on a start-up?
The role of intellectual property
Unlike valuing companies with revenues, assets and longer track records, there are no agreed upon standards for start-ups. As it is unlikely that a start-up would possess any tangible assets, it is paramount to focus on the intangible assets such as ideas and the intellectual property protecting the ideas such as patents, trademarks, copyright and registered design rights.
Although it may be challenging for a start-up to spend money in order to obtain such intellectual property rights, it should be kept in mind that intellectual property rights are recognised as property and assets. Intellectual property rights may also be ‘the shiny object’ that attracts potential investors.
What intellectual property is telling your potential investors
Intellectual property is also indicative of a sustainable competitive advantage, a well-managed company, good growth prospects and a niche market. As such, it provides a means of setting the start-up apart from other players in the industry.
A significant amount of money is spent on getting the start-up off the ground in terms of advertising, research and development, development of prototypes and the like.
These ‘negative’ but realistic expenses may be equalised or outweighed by intellectual property rights, as once an intellectual property right is applied for, it becomes an enforceable right that is not easily taken away and may also attract a stable and predictable financial income if licensed, by providing royalties to the owner.
Intellectual property may assist a company if troubled by risk or bankruptcy as it may be assigned, and thereby transferred from one owner to another owner, or licensed — for income.
The commercial potential of intellectual property
Start-ups in a quest for capital have two options: Equity financing or debt financing. Equity financing may be advantageous if the start-up’s revenue is limited. In terms of debt financing a start-up may be required to pledge their intellectual property, which could be the only and/or the most valuable asset they have.
The intellectual property may then serve as security, however, it is arguable and also dependent on the start-up what the financial value would be. Such security is more beneficial as it is not debt per se but rather a predictable income.
Intellectual property as an asset
The value of intellectual property as an asset is dependent on economic, market, technical and legal factors. A start-up that creates intellectual property with commercial potential already has a foot in the door, as this creates confidence in both the founder of the start-up and potential investors.
Being realistic, it is entirely dependent on the type of start-up as intellectual property is not always an option or possibility. Should intellectual property not be a viable option, it is recommended that start-ups emphasise their future promise and also rely on evidence demonstrating growth, drive, engagement, talent, execution and worthiness. The key is to create excitement amongst investors.
As an end note to the founders of start-ups, keep Colin Powell’s quote in mind: “There are no secrets to success. It is the result of preparation, hard work, and learning from failure,” and to investors, keep Peter Drucker’s quote in mind: “Whenever you see a successful business, someone once made a courageous decision.”