Start-up to scale-up: does IP hold the key?

The UK Government’s enthusiasm for technology as evidenced by the recent Autumn Statement and the AI Safety Summit is positive and recognizes the fantastic scientific resources we have in the UK (including our universities, scientists, angels, VCs, IP lawyers, and accountants). However, as we look at the Government’s initiatives in prioritizing tech investment, it’s apparent there’s still a way to go to improve how great ideas can be turned into great companies.

In the UK, there are a lot of good start-ups but we seem to find it difficult to move start-ups to the next stage. The tax breaks and extra funding are clearly helpful but one of the biggest problems start-ups face is the difficulty that investors have in valuing their technology and the efficacy of the rights that protect it.

IP rights (registered and unregistered) are likely to be the most valuable assets of fledgling technology companies and key to investment decisions, so we need to consider how IP law, as well as government policy and spending, can be leveraged to encourage companies to develop their portfolio of rights in the best way to protect their technology and attract investment.

But first, let’s look at some of the recent government initiatives to help develop the tech sector:

• Building on the success of the supercomputing centers in Edinburgh and Bristol, a further £500 million will be invested over the next two years in innovation centers to “help make us an AI powerhouse.”
• The Chancellor extended the tax break known as “full expensing” through to 2028-29. This will result in an £11 billion-a-year tax break for companies that invest in new equipment and technology.
• The Government will also reduce the rate at which loss-making companies are taxed within the merge scheme from 25% to 19% and lower the threshold for the additional support for R&D-intensive loss-making SMEs announced in the spring to 30%, benefiting a further 5,000 SMEs.
• The Government will provide £4.5 billion of extra funding over the next five years to boost investment in key manufacturing sectors, including support for the automotive sector, aerospace, clean energies, and life sciences.
• The Government will extend the current EIS and VCT schemes to support start-ups and SMEs with funding until 2035 — allowing early-stage equity investment into smaller businesses in the UK.
• The Government wants to reform pension fund rules to increase the flow of capital and “unlock investment into high growth sectors and generate increased returns for savers.”

Can IP help?

These initiatives are helpful and should produce technical innovation resulting in the creation of many start-ups aiming to exploit the developments. For these start-ups to “scale-up” they will need investment. Investors will need to see assets and expectations of revenue. The company’s intellectual property will probably be its most important asset, becoming the main reason for investment or purchase, but to cement its status its technology must be properly established and safeguarded. 

However, this can be expensive, and using these rights to protect the business is even more expensive — often coming with limited expectations of success. Further, many start-ups find that investors do not value their rights enough — placing greater importance on revenue. These factors make it difficult for a company to move to the scale-up stage. 

This is partly due to inconsistent and overly complex valuation methodologies and partly due to the complexity of the patenting system and the risks and costs endemic in the court system. Despite a patent having gone through an exhaustive examination process by the time it is granted, many patents are found invalid by the courts. There is no magic bullet to resolve these concerns, but the Government needs to look at easing the patenting process and the funding of IP proceedings. The recent decision of the Supreme Court in the PACCAR case rendering many litigation funding agreements unenforceable has not helped. 

On the other hand, the recent High Court decision in the Emotional Perception AI case that an invention relating to an artificial neural network (ANN) was eligible for patent protection — overturning the UK IPO ruling that the claims to the invention were, in fact, claims to a computer program (and therefore excluded from being eligible) — improves the patentability of AI inventions in the UK. This should lead to greater investment as the more IP is understood by investors (including pension funds) as being an asset on which substantial value can be placed, the easier it will be for companies to get the investment they need.

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