IP protection: a valuable tool for SMEs’ economic upscale

Small and medium-sized enterprises (SMEs) are the lifeblood of any growth-driven economy. They play a huge role in job creation and economic development. SMEs constitute about 90% of the world’s businesses and generate up to 40% of national income in emerging economies. Despite their enormous contributions to the economy, SMEs are plagued with several issues and access to finance sits at the top of the lists of challenges facing SMEs. SMEs are less likely to obtain loans from the bank than their larger counterparts as they may lack collateral to access such credit facilities. In the face of a global pandemic, the situation is worse for SMEs. While SMEs are fraught with their challenges, the situation is not entirely hopeless. Many entrepreneurs fail to harness a vital aspect of their business that can solve some of the challenges they encounter. This vital aspect is intellectual property. SMEs and Intellectual Property Intellectual property (IP) is an aspect of a business that every entrepreneur must consider from the very onset of the business as it is one of the most valuable assets for any business. Many entrepreneurs make the mistake of believing that since their business is just kicking off or is small, they do not have to worry much about protecting their IP. Some others are ignorant of the fact that their businesses have assets worthy of IP protection. Another reason entrepreneurs do not consider IP from the onset is that "IP is too expensive" or that IP protection can be considered some other day. The below quote although said in respect to trademarks describes the disposition of many SMEs’ owners: "We hear this from business owners all the time: 'Oh, we're too small. It's too early. We're still thinking. We'll think about trademarking once we grow bigger...' Let me be blunt with you, this is utter nonsense on so many levels. You must not make trademarking decisions based on where your business is today. You must make these decisions based on where your business will be if it's as successful as you hope it might become''. (The Ultimate Insider’s Guide to Intellectual Property) Beyond being a legal right, IP is a business asset and tool for organizational and commercial advancement. SMEs ought to prioritize securing their IP rights and regarding IP as a tool for making more money. According to Julian Crump, President of the International Federation of Intellectual Property Attorneys (FICPI), "SMEs that apply for patents, trademarks or designs are more likely to grow quickly and succeed than those that do not." Using IP as a money-making tool is achievable when an organization takes IP seriously and includes it in its overall business strategy. Identifying your Intellectual Property IP extends to several intellectual/intangible assets of a business. These may include literary, musical, and artistic elements of a business that are protectable by copyrights such as client lists, customer databases, manuals, brochures, magazines, and explanatory materials for customers’ benefit. The brand identity (logos, slogans, etc) and goodwill of the business are protectable by trademarks. Other aspects of IP that affect SMEs include designs, patents, trade secrets, etc, and are so valuable that when converted to financial terms are capable of raking in capital for the business. If you have difficulty in identifying your IP, seek an expert legal opinion. Protecting your Intellectual Property

Integrating IP into your SME’s overall business strategy. This motivates the business owner or entrepreneur to manage their IP with the same seriousness as they would handle funding, infrastructure, etc, and actively take steps to protect and maximize their IP.

Register your IP with the relevant agencies. IP such as patents, trademarks, and industrial designs in most jurisdictions require registration for protection to avail. For copyrights, depending on the jurisdiction, registration may not be necessary. Using the Copyright © symbol on your copyrightable works is enough protection.

Take stock of your IP portfolio by conducting an IP audit. Doing this would help you determine aspects of your business that require IP protection. This will also keep you informed as to what IP to commercially exploit.

Be sure that you own the IP in your business. This is achieved by conducting an IP audit. One area small business owners overlook is the aspect of website development. There is the misconceived notion that since they have paid for the web design, they own all the intellectual property rights to that website. However, that is not the case as the general rule is that rights in works contracted to independent contractors are owned by the contractors unless the parties agree otherwise by a written agreement. Also, you want to be sure that none of your materials including your website are infringing on the IP rights of others.

Seek expert legal help as it may save you from more costs in the future. Getting sound legal opinion or assistance from the onset of your business is very necessary as this would help you understand the appropriate IP protection measures for your business and its commercial potential concerning IP.

Use non-disclosure agreements (NDAs) to protect your IP when dealing with others, including in your employment contracts clauses that prevent your employees from disclosing salient aspects of your business, and protect your IP during a pitch.

Keep your idea a secret until you have had it protected. A secret shared is no longer a secret. Where your business relies on or has trade secrets, take adequate measures to maintain secrecy.

Failure to consider IP early leaves room for rivals to infringe on IP which may be inimical to the progress of your business. Taking your ideas to the market While it is highly recommended and commendable that SMEs protect their intellectual property, it is also very important that they maximize the commercial potentials of their IP. Intangible assets of a business, IP being one of such, make up about 30-40% of the profit margin of most businesses today. Also, IP “should be seen as a power[ful] tool for economic growth instead of an obscure legal concept.” Competitive advantage and larger opportunity in the marketplace A foremost way of benefiting commercially from an SME’s IP is protecting the IP. A lot about protecting IP has been advocated in the earlier part of this article. Trademarks are one of the most important intellectual property rights for SMEs. Protecting your trademark helps to preserve your brand image, as your consumers/customers are not confused when they encounter your goods or services in the marketplace. Also, by registering your trademark, you reduce the risk of another business hijacking your brand prestige. By preserving your trade secrets, you can continuously derive economic benefits from the exploration of such secrets, as competitors are not privy to what makes your business tick. Assignment Assignment simply means the sale or transfer of one’s rights or interest in a thing. An SME’s owner can make a profit from their IP by assigning their IP rights in a particular creation, brand, or invention in return for revenue. In 2005, Chad Hurley, Steve Chen, and Jawed Karim created the video-sharing platform YouTube. In 2006, Google purchased YouTube for US$1.65 billion and now earns the same amount in monthly revenue. Licensing Licensing of IP allows IP rights holders to license out their IP based on agreed terms in exchange for revenue. Licensing may also provide the business owner access to new markets and increase consumer awareness of their goods and services. Licensing may take the form of exclusive, non-exclusive, and sole licensing. Franchising Franchising is particularly very attractive in the aspect of trademarks. Here, the franchisor whose brand has gained prominence or reputation among consumers grants the franchisee rights to market their products or services using the franchisor's brand. A franchise agreement would spell out the terms of the contract. It's a win-win for the franchisor as they acquire revenue just by letting another use their brand. Access to funds Leveraging IP to access venture capital and other financing sources is a viable option for SMEs' owners to profit from their IP. Having a viable IP portfolio attracts and boosts investors' confidence to invest in your business. Conclusion SMEs play a huge role in the economic development of nations. However, financing is a major challenge plaguing SMEs, with many of them not surviving the first five years of operation. Harnessing IP for business advancement should not be overlooked by entrepreneurs and business owners. The benefits are enormous. Seek expert legal opinion on how to benefit from your IP rights. Disclaimer: This article is for educational purposes only, and should not be construed as legal advice. Please consult a lawyer for tailored legal advice.

Venture Capital Funding in Blockchain and Crypto Projects

Image Source: Stevepb from Pixabay [lwptoc]

Introduction

Capital is key for any business to take off, be it a traditional form of business or businesses built on emerging technologies. Blockchain and crypto startups have available several fundraising methods ranging from traditional Venture Capital funding to the decentralized model of fundraising such as Initial Coin Offering (ICOs), Security Token Offerings (STOs), Initial Exchange Offerings (IEOs), Initial DEX Offerings (IDOs), etc. ICO is the most common fundraising method in the blockchain space. With about 875 projects raising approximately US$6.3 billion in the year 2017, while $19.2 billion was raised in 2018. Despite the huge success of ICOs in 2017 and the early part of 2018, this mode of fundraising faced a downward slide in the later part of 2018 because of fraudulent activities, which the crypto community now refers to as crypto winter. The need to regulate ICOs and protect investors who want to invest in crypto-based projects from fraudsters in the blockchain space saw the birth of STOs. STO is a more regulated process of raising funds in the blockchain space and it also created awareness to the public on ICOs and its shortcomings. An ICO is essentially an unregulated tool used to raise funds for blockchain or crypto-based projects. The shortcomings of ICOs had given rise to STOs and IEOs. IEOs are ICOs with a new layer of intervention and regulation that attempts to ensure value and mitigate risks for participants. STOs, on the other hand, have such a high barrier (must be accredited by Security Exchange Commission) for investors to participate in that they are not a viable option for fundraising.

What is Venture Capital?

Venture capital is a form of private equity financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from wealthy investors, investment institutions such as investment banks or other financial institutions. This type of funding does not always take monetary form, it can also be provided in the form of technical or managerial expertise. Venture capital is provided in the interest of generating a return on investment (ROI) through an eventual exit such as a Merger and Acquisition (M&A), or Initial Public Offering (IPO) of the company.

Origin of Venture Capital

The origin of Venture capital can be traced back to the 19th century, Venture Capital only developed as an industry after the Second World War ( WWII). Georges Doriot is considered the "Father of Venture Capital". In 1946 he founded American Research and Development Corporation (ARDC) he raised a $3.5 million fund to invest in companies that commercialized technologies developed during WWII. ARDC's first investment was in a company that had ambitions to use X-ray technology for cancer treatment. The $200,000 that Doriot invested turned into $1.8 million at the exit stage when the company went public in 1955.

How it Works

Start-up seeking to raise venture capital is required to make a research for VCs after which they submit a business plan. The business plan does not necessarily need to be bulky but should be clear about the business. If interested, the VC or angel investor also performs due diligence, which includes;

a thorough background check of the company's business model,
products,
management (team)
operating history etc

After due diligence by the VC, parties (investor and entrepreneur/founder) then negotiate the investment deal.

Venture Capital in Blockchain and Crypto Projects

Venture capital financing is not limited to traditional businesses. The rise of awareness in crypto-assets has given many VCs a new opportunity to reinvent VC financing by leveraging the ICO fundraising model and incorporating it into traditional VC models of financing.

Types of Venture Capital Funds in Blockchain and Crypto Projects

The rapid growth of the crypto market has awakened the interest of Venture Capitalists in blockchain and crypto projects. The new opportunities opened with significant liquidity and financial flexibility offered by crypto-assets. Venture Capitalists (VCs) are gradually diversifying their portfolios by creating hybrid funding models or launching crypto-centric funds to directly invest in blockchain start-ups, crypto projects etc. These new hybrid funding models are;

Crypto-Funds
Crypto Fund of Funds (FOFs)
Tokenized Venture Funds
Reversed ICOs

Crypto Fund

VCs raise a pool of capital from investors and establish a separate fund (crypto fund) to invest in a blockchain start-up’s equity and, or crypto-assets. These investments may include:

Crypto-assets purchased on a secondary market,
Crypto-assets purchased in a pre-sale or ICO sale and,
Blockchain tech start-up equity.

The crypto fund can invest in one or more of the above-mentioned projects. This investment process involves setting up a separate fund or raising capital from investors which included accredited investors, fund of funds or other investors who are comfortable with investing in the crypto space.

Tokenized Venture Fund

A tokenized venture fund is also known as a ‘tokenized fund’.This is a newly-created funding structure that takes the ICO model and applies it to the ownership structure of the fund. It enables the venture capital fund to launch its own tokenized securities offering to raise funds from a larger pool of investors and investors in the fund in return can trade their equity tokens of the fund on a crypto-exchange as soon as the tokens are listed. The rationale behind a tokenized fund is to provide liquidity for investors and eliminate long-term capital commitments.

Reverse ICOs

VCs also exploit the liquidity of cryptocurrencies as a means of exit for venture capital investments that is rather than waiting for the start-up to mature to the stage that it can go public through an IPO (Initial Public Offering) or other conventional exit strategies, VCs may engage in ‘reverse ICOs’ to help them get a faster return, and the funds can be reinvested into another crypto project. An example of a VC that has explored this method is KiK.

Fund of Funds

This type of financing, a venture capital fund sets up a crypto-fund to invest in other crypto-specific funds. This allows for greater diversification of risk by investing in multiple funds simultaneously an example is the Union Square Ventures (USV) that has invested in six crypto funds. Although some VC firms have taken illiquid assets and issued tradable crypto-assets that give investors rights in these assets (“asset-backed tokens”), others have raised capital for tokens which provide its investors with rights to a portfolio of VC backed companies or real estate while some crypto firms have started venture capital arms, focusing mainly on projects relating to blockchain technology and crypto-assets.

What VCs Look out for in Blockchain and Crypto Startups Before They Consider Funding

VCs lookout for the following in blockchain or crypto projects before funding. Blockchain startups and/or entrepreneurs are encouraged to work on these points before pitching VCs

Solutions: VCs look at the real-life problem the project intends to solve, not an imaginary one.
Team: They look at the key team members background, experience and reputation. They would want to find out if the team was formed a few months ago without any relevant experience to the blockchain or project or have they been working on the project for a long time and have relevant experience?
Community and Institutional Support: VCs check out the crypto community such as Github, BitcoinTalk, Telegram, etc to see whether the project is supported or criticized by the community. If the project’s community on Telegram or Github is showing no development progress, dead or closed, the blockchain project most likely has failed or will to do so within a short while. If the project is designed to create solutions for example, in the power sector, VCs will look out for institutions in the power sector that are in support of the project.
The Technology and Project: It is highly recommended that startups understand the technology behind the project. How feasible it is. If it is innovative? Is blockchain necessary for the project? There are many projects in the market that try to solve a problem where blockchain is not needed. VC investment in such projects may not happen. VCS may also ask if the team already have a minimum viable product and what stage is the development of the product?
Investors and Network Investors would want to know Who is backing the project? If they are Friends, family, institutions? Do the founders or entrepreneurs have their own money in there? Who’s talking about this project, and where? Telegram, LinkedIn, Facebook, press and news sources, etc.
Viability of The Business: is the business viable? Is it capable of meeting their expected Return of Investment (ROI)?
Market Opportunities: The size of the market, the number of customers willing to use the product and also pay for it.
Market Strategy and Cost: How the entrepreneurs intend to break into the market and the cost implication of entering the market.

These and many more are what the VCs look out for before they stake their funds.

CONCLUSION

Although fundraising is a necessity for blockchain and crypto startups, the channel employed by the entrepreneur or founder determines the sustainability and success of the business. ICOs may be a faster way of raising funds, but does not guarantee the sustainable growth of a blockchain project while VC process of raising fund may be slow because of what the VCs need to investigate before they commence the funding deal, it provides long term investment and success in the growth of the project. Here is a list of blockchain VC firms that may interest you. Feel free to check up on us in our Telegram Group or our Telegram Channel if you have questions. We look forward to engaging you. You're also welcome to interact directly with the FINT Team. Join our Telegram Group: https://t.me/FINTConsulting or our Telegram Channel: https://t.me/FINTChannel. See you there. DISCLAIMER: This article is written for educational purposes only and should not be construed as legal advice. Consult a lawyer for tailored legal advice.