Startups have an awful lot on their plate as they attempt to scale their business, so taking care of intellectual property issues may not be at the top of their agenda. New research from Lehigh University suggests this might be a big mistake. Indeed, they argue that the trademark portfolio held by a startup is actually an important factor in their eventual success.
“We hypothesized that trademarks play two important roles: a protective role, leading to better product market performance; and an informational role, signaling higher firm quality to investors,” the researchers say.
Trademarks differ from patents in that whereas patents capture technological innovation, trademarks allow companies to differentiate themselves in their advertising. They can often be costly to acquire and maintain, so can also provide a real signal of intent about a firm and its products to investors.
Trademark to success
The researchers examined the link between the number of trademarks a company held, and the venture capital they received from investors. They also explored how successful the firms were at exiting, and the subsequent market value of the firms that floated. In total, they assessed over 55,000 trademarks registered by firms that had received backing from VCs between 1985-2015.
“We find that the number of trademarks held by an entrepreneurial firm is associated with a greater VC investment amount spread over a smaller number of financing rounds, a greater probability of successful exit, higher IPO and secondary market valuations, greater institutional investor IPO participation, smaller post-IPO equity market information asymmetry, and better post-IPO operating performance,” the researchers explain.
The data showed that trademarks often helped obtain better terms when raising finance, and were generally a good predictor of future success, both as a private firm and later on when they go public. Trademarks act as a strong signal to investors while also enabling firms to market their products more effectively and therefore achieve better financial results.
“Our findings highlight the importance of the value of trademarks for entrepreneurial firms and therefore generate important implications for entrepreneurs, venture capitalists in private equity and public investors,” the researchers conclude.
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