Using Medical Device IP Rights to Get Funding

Undercapitalization is one of the biggest killers of small medical device companies – but this does not have to happen to your business. One of the most valuable business assets that a medical device company can have is intellectual property rights. Not only do IP rights generate value as a barrier to entry for competitors trying to launch a similar product in the relevant field, but IP assets can also be used as a tool to secure funding and financing in a number of different ways.

Examples Of How To Monetize Medical Device IP Rights

Some medical device companies are surprised to learn that intellectual property assets can be used to obtain funding for further development projects. There are several different ways that IP rights can be monetized.

• IP portfolios attract investors. A common source of funding for startups and early stage medical device companies is funding from angel and venture capital investors. Angel and VC investors are often attracted to investment opportunities in small to mid-sized medical device companies where the company seeking funding has a comprehensive IP portfolio behind their innovative products. A well-planned IP portfolio demonstrates to investors how serious the company is about growing the business and succeeding, which makes investors view the company as a good investment opportunity.
• Using IP as collateral for a loan. IP assets can be treated just like physical assets of the company, and they can be put up as collateral for a loan. Certain banks and funding groups will negotiate loans or convertible notes if the company seeking funding can back the debt vehicle with IP assets, such as patents and registered trademarks. The company’s IP assets will need to be valuated by a professional valuation assessment firm so that you can gauge how much leverage the IP assets are worth.
• IP assets can be licensed in exchange for royalty payments. Another way that medical device IP can be monetized is through licensing agreements, where the licensee pays royalties in exchange for use of the IP rights. Medical device companies that want to monetize their IP through licensing agreements need to ensure that the licensing agreement allows them to continue to use the IP rights themselves. Also, a medical device company looking to monetize IP rights through licensing needs to carefully consider whether entering into an exclusive licensing agreement is a good idea. An exclusive license means that the licensee has the exclusive right to use the IP, and no one else can be authorized to use it. For the right price, an exclusive license might be worthwhile to the company/licensor, but oftentimes the company/licensor may be able to make more money from its IP licensing if the IP can be licensed to multiple parties through non-exclusive licensing agreements.

How IP Assets Can Help Med Device Startups Raise VC Funding

Investors want to know what stops a competitor from copying your device. Startups with patents, pending patent applications or registered trademarks covering their core product are more likely to attract angel and venture capital funding, and strong IP gives founders more leverage on the size and terms of a round.

Shark Tank and Dragons’ Den investors routinely ask whether a company has a patent, and research backs up that instinct. A 2020 study in the Journal of Finance found that startups whose first patent application was approved were more likely to raise early-round venture capital, and grew faster, than similar startups whose first application was rejected.

You do not need an issued patent to pitch. A provisional patent application lets you claim patent pending status and gives you 12 months to file the full application, often the window in which a startup raises its first money.

Is IP Worth the Cost for an Early-Stage Med Device Startup?

Early funds are tight, so money spent on IP has to earn a return. USPTO filing, search and examination fees for one utility patent application total $2,000 for a large entity ($800 for a small entity, $400 for a micro entity) before attorney and issue fees. That cost is why investors notice when founders pay to protect their invention: it shows they believe in it. The return comes from investor interest, licensing income and a defensible place in the market.

What Investors Look for in a Medical Device Startup’s IP

Quality matters more than volume. Investors focus on IP that covers the core features of your device and creates a barrier to entry for competitors, a strong defensive position or a source of licensing revenue. By a Series A round in medtech, expect due diligence on whether the company (not a founder or contractor) owns the IP, what the patent claims cover and whether your device could infringe someone else’s patents. A market clearance search before you raise helps you answer that last question.

If you need assistance obtaining comprehensive intellectual property rights for your medical device innovations, please reach out to The Rapacke Law Group. We can schedule a free initial consultation with you to discuss your IP needs.