European IP Helpdesk

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Bulletin No. 2 Go-to-Market

Given the growing importance of the intangible economy, there is a strong demand for new IP strategies and cultures. The European Union’s proposals to generate, promote and develop European talent, show that the European Commission aims to strengthen its position in a global market vis-à-vis other economic powers such as China and the US.

With small and medium-sized enterprises (SMEs) and start-ups as central economic drivers and engines for creativity and innovation, the European Commission is concerned about the fact that the overall amount of venture capital and the average size of funds in the EU are too small to allow European start-ups and small

enterprises to grow into larger companies according to the renewed Agenda for Research and Innovation. We must remember that the EU is home to only 26 unicorn start-upsˮ (start-ups valued over $1 billion) compared to 109 in the US and 59 in China.

With initiatives such as the European Innovation Council (EIC) launching more powerful financing instruments such as the EIC Accelerator, the strategic commitment of the European Commission for scaling up European SMEs becomes clear. However powerful these instruments could be; their eventual success will also depend on strategic actions on the SMEs’ end.

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The EIC Accelerator

Since 2019, European SMEs have become familiar with a new EU financial instrument named the EIC Accelerator. It has replaced the former SME Instrument, a well-known initiative aimed to help innovative SMEs to prototype their ideas in Phase I (50,000€ lump sum), and to consolidate their projects and commercialise their solutions worldwide in Phase II (an amount between 500,000 and 2.5 million €).

Nevertheless, the change of denomination is not the most relevant change in this tool, according to the Enhanced European Innovation Council (EIC) pilot, but the introduction of a new way of financing, i.e. the possibility of up to €15 million equity per company.

From 5 June 2019, the applicants (SMEs established in an EU member state or a Horizon 2020-associated country) can decide whether they would like to apply for a grant-only support or blended finance (combining grant and equity).

The EIC Fund will put its resources at work in order to connect the potential investee company, with its consent, to the EIC Fund investor community ecosystem to propose co-investment opportunities by interested investors. If the company agrees, due diligence and negotiations will be performed by the co-investors.

In knowledge-driven economies, those SMEs that strategically align their business, technology and IP, will be the ones to lead the technological development, be able to bring disruptive innovations to the market, and thus gain global competitive advantage.

European SMEs need to be aware of the importance of their IP assets for serving the strategic objectives of the company, and of the fact that a sound IP strategy can have a fundamental impact on its future growth and the market success of their innovations. Moreover, a solid IP strategy plays a central role in securing venture capital in order to further expand and sustain their business.

So, what might be the challenges SMEs are facing when approaching potential investors? And what do investors pay attention to before deciding to invest in an SME looking for additional funds? The present article will take a look at key requirements of IP due diligence a set of investigations revealing the entire value of a company or business.

Due diligence in the context of the EIC accelerator

According to the Investment Guidelines for the EIC Accelerator Fund, the due diligence process will focus on the following aspects contributing to the detailed risk assessment of the potential investment:

Governance and quality of the company’s management

Capital structure and financial planning

Business strategy

Competition

Market assessment

Alternative sources of financing

Value creation

Legal form and jurisdictions

It is noteworthy that the guidelines dedicate a special section to IP by stating that the investing party and co-investors should be given maximum autonomy regarding IP management, to the best interests of the company’s development, so as to attract further investments to scale-up and allow for an effective exit

strategy. But, are SMEs aware of the role of IP in due diligence? Do applicants know what IP due diligence is?

IP Due Diligence

IP due diligence consists in understanding what the IP assets are, knowing their legal status and strength as well as potential IP-related risks and the economic value of them. Tasks which can be challenging since intangible assets often go unnoticed by companies or are simply not detected as easily as tangible assets. Furthermore, SMEs are exposed to potential infringement risks, almost always without even knowing about it.

IP due diligence is complex as it mixes economical, legal and technical information and requires multidisciplinary knowledge of the topic apart from professional skills. Therefore it is strongly recommend to consult an IP specialist for this type of due diligence.

In brief, an SME targeting an IP due diligence should address the following issues:

a) identify IP assets

i.e. trade marks, patents, plant varieties, geographical indications, designs, copyrights, domain names and others

b) verify ownership and existence of IP

Do I have the title registered? Am I the sole owner? Is my license exclusive or non-exclusive?

c) detect restrictions on IP asset use

Can I sell the products in a specific market? Have I carried out a Freedom to Operate search?

d) ascertain the validity and strength of IP rights

For how long do I have my IP protection? Is my IP protected in a specific country?

e) evaluate potential IP infringements

What should I do if someone infringes my IP? Is alternative dispute resolution better than going to court?

Obviously, a sound IP strategy is relevant for both the investor and the SME involved in investment and due diligence deals. In order to elaborate the different perspectives, we have talked to representatives of both sides.

Show Me Your IP: The Importance of an IP Strategy for Due Diligence

Written by Cristina Natal and Sergio Pérez García, European IP Heldpesk