Is it advantageous for raising funds? Three benefits for IT startups to apply for patents early

"We're busy with development costs and personnel costs. We can't afford to spend money on patents."

"Maybe we should think about it after the service has grown bigger."

I talk to many IT startup managers every day, and I often hear these kinds of honest thoughts during the startup period. It is true that the cost of filing a patent application is not cheap.

However, from my perspective as a patent attorney who specializes in the IT and software fields, The truth is that you should file a patent application when you don't have the funds.

This is because for IT startups, patents are not just a "defense" right, but A powerful "investment product" that can increase a company's valuation and advance funding and M&A advantageously.

This time, we will explain three benefits of early patent filing that IT startup managers who want to accelerate their business should know.

Advantage 1: Improves the company's ``valuation''

When investors (VCs and angels) invest in startups, the most important things they focus on are "future potential" and "competitive advantage." Patents are the most powerful tool to prove this objectively.

Patents are "intangible assets" that are not listed on the balance sheet

In the case of IT services, especially SaaS and app businesses, there are few visible assets such as factories and inventory. Therefore, even if you explain to investors that this technology has value, the reality is that it is difficult to prove it objectively.

However, if you have obtained (or are applying for) a patent, it becomes a clear asset, an "exclusive monopoly right" recognized by the government.

It proves that your company has a technological barrier (MOAT: economic moat) that other companies cannot easily imitate, and it directly leads to improving your company's valuation.

Gaining trust through due diligence (asset assessment)

Due diligence (company research before investment) conducted by VCs strictly checks legal risks.

There is always the question of whether the technology of your company's services infringes on the patents of other companies, but if you file your own patent application, it will be easier to assert the uniqueness of your technology.

In addition, a high level of awareness of intellectual property leads to a sense of trust in ``a solid management system with effective governance'', which contributes to speeding up investment decisions.

Advantage 2: Preventing “imitation” and “hijacking” by major companies

In the IT industry, technology changes quickly and reverse engineering is easy, so even great ideas run the risk of being imitated quickly.

The IT industry is “easy to be stolen”

Some engineers think that "source code is protected by copyright, so it's okay," but this is a dangerous misconception. Copyright protects the expression of code (how it is written), not the idea or function itself.

In other words, if the same functionality is implemented using completely different code, copyright cannot be used against it.

What would happen if a major company with financial resources looked at your service, decided that it would sell, and started offering similar services on a large scale?

If you have patent rights, you can legally prevent major companies from entering your business or charge licensing fees.

Cross license negotiation card

Even if you are sued for patent infringement by another company (especially a major company), the situation will change if your company has strong patents.

By proposing a cross-license agreement that says, ``In exchange for letting me use your patent, I would like you to let me use your patent as well (without suing each other)'', you can open the way to a settlement. Patents can be both an ``offensive sword'' and a ``defensive shield.''

Advantage 3: Essential for future M&A and IPO (EXIT strategy)

Patents also play a decisive role in M&A and IPO, which are startup exit strategies (EXIT).

Factors that raise prices during M&A (buyout)

When big tech companies such as Google and Apple acquire startups, they often do so for "acquisition of talent" and "patent portfolio".

Companies that hold unique technology patents are attractive to acquirers, and the acquisition price (transfer amount) tends to be high. On the other hand, if you have a great technology but it is not covered by a patent, you may decide that you don't have to buy the company and just copy the technology.

Intellectual property compliance in listing examination

When aiming for an IPO (stock listing) in the future, the "intellectual property management system" and "risk of infringement of other companies' rights" will be strictly examined during the listing examination.

There are many cases where it is too late even if you rush to take action right before listing, so collaborating with a patent attorney from an early stage and building an intellectual property network is the shortcut to a smooth listing.

[Note] “Loss of novelty” that IT startups tend to do

Finally, I would like to tell you one very important point.

That is the basic principle that "a patent cannot be obtained after a service is released to the world" (loss of novelty).

• Published beta app to store

• Presented technical details at pitch contest

• The mechanism was illustrated in the press release

• I posted it on my personal technical blog or SNS

If you do these things before filing a patent application, the technology becomes "publicly known" (everyone knows about it) and, in principle, cannot be patented.

(*Although there is a remedy called the "Exception for Loss of Novelty," it is dangerous to rely on it too much as the requirements are strict and it will put you at a disadvantage when expanding overseas.)

Summary: Patents are not a cost but a “management strategy”

For IT startups, filing a patent application is more than just a legal procedure.

This is the most cost-effective "management investment" to successfully raise funds, prevent large-scale entry, and increase future exit value.

That idea that makes you wonder if it's too early may decide the fate of your company in the future.

• Can your company's business model be patented?

• Which technology should be prioritized?

• What will be the cost-effectiveness?

Once released, it may be too late. First, please consult with a patent attorney who is familiar with intellectual property strategies in the IT field.

🏢 Complete intellectual property strategy support for IT companies

Patents, trademarks, copyrights, trade secrets --- One-stop support for the intellectual property necessary for IT business.
From startups to listed companies, we will propose the optimal intellectual property strategy tailored to your business phase.

View IT intellectual property portal (general information) →