Trademarks and Venture Capital Investments

Trade marks can be registered for a company’s name, slogan or logo. The main aim of a trade mark is to distinguish the products and service of one brand from that of another. Once a trade mark is registered, no-one else would be able to use that particular trade or one that is confusingly similar. If they do, the trade mark owner will have the right to take legal action against the unauthorised user.

However, a trade mark can only be protected if it has been formally registered with the trade marks office in a particular country, or multiple countries. Once a trade mark registration certificate is received, the trade mark owner would have exclusive rights to that particular trade mark. Another great thing about registering the trade mark is the fact that the trade mark owners would then be able to turn their business into a franchise. Franchisees would pay a certain amount to be added as registered users of the trade mark.

Additionally, a trade mark owner can also stop the import of any trade mark infringing products by completing the relevant forms with customs. This is another way of protecting a brand.

Talking about venture capital investments, venture capital funds invest in high-risk projects characterized by volatile industries and young companies. Generally, for the investment in risky projects the fund expects high rewards making it crucial for the VC to pick the most promising projects out of the vast pool of available ventures. Each potential project goes through a thorough due diligence process to depict the best candidates. During the course of such due diligence process, certain characteristics of start-ups are more valued than others, including, but not limited to, the background of the entrepreneur, the novelty of the idea, the industry and intellectual property.

Consequently, presence of a trademark has a positive and significant effect on the amount invested by venture capitalists in all three models. The higher the number of trademarks, the higher is the total amount invested by venture capitalists. In past, multiple studies have proven that venture capitalists perceive the presence of patents as a positive signal, because of their ability to reduce the degree of information asymmetry (Lerner, 1994; Hsu and Ziedonis, 2007). Patents represent and protect the technological know-how of a company whereas a trademark stands for the incurred marketing expenses. Consequently, both variations of intellectual property are a measure to protect and appropriate returns. Moreover, the registration at the Patent and Trademark Office adds credibility to a start-up’s position (MacMillan, 1985, Heil and Robertson 1991; Aaker, 2004). The idea behind trademarks is to be able to track the source of a good and to ensure a consistent quality level for the consumer, which decreases the likelihood of opportunistic behaviour by the producer and also competitors (Landes and Posner, 1987; Besen and Raskind, 1991). A venture capital fund seeks high return projects that are usually associated with a high level of uncertainty. The VC is therefore inclined to reduce the level of unsystematic risk and pursues a thorough and detailed assessment of each potential project.

As it is well known, Intellectual property is one of the characteristics that is interpreted positively during an evaluation (Wells, 1974; MacMillan et al. 1985, 1987; Hayes, 1999; Lemley, 2000; Hsu and Ziedonis, 2008). Baum and Silverman (2004) suggest that in the race for capital, startups capable of attracting alliance partners, creating intellectual property, and possessing capable management will outperform comparable start-ups that lack such capabilities. Concluding, as supported by the results in the three models, trademarks have a positive influence on the total amount invested by VCs and the higher the number of trademarks the better for the receiving start-up.

To read our previous post on “Patents & Venture Capital Investments”, click here.

For more details on seeking investments by exploiting trade marks, please feel free to contact us at rahul.d@techcorplegal.com.

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