Who speaks for the SMEs?
Harnessing IP: strategies for SMEs
Ed Pearcey finds out whether SMEs with a strong IP portfolio are more attractive to investors, and why SMEs often struggle with IP registration and protection.
A strong intellectual property (IP) portfolio supported by a comprehensive protection strategy will generally increase the value of a small or medium-sized enterprise (SME) in the eyes of investors and venture capital (VC) firms, according to Stephanie Gumm, Partner at Faegre Baker Daniels LLP (US).
However, she said, the size of SMEs may serve as a hindrance when it comes to adequately protecting, exploiting, and enforcing their IP. And there is often a steep learning curve in the first place for SMEs to understand the importance of protecting their IP and investing in registrations.
According to the Organisation for Economic Co-operation and Development’s (OECD) “SME and Entrepreneurship Outlook 2019” report, SMEs make up 99 percent of all enterprises in its 36 member states around the world, signifying how central they are to the global economy and the facilitation of innovation in national and international markets.
Moreover, as Ajit Raikar, Co-Founder and Executive Chairman of Validus (Singapore), noted, SMEs are often responsible for inventive solutions which help to close gaps in the market.
“Governments around the world know that SMEs form the backbone of any economy, and actively encourage SMEs to invest in technology and constantly innovate,” Mr. Raikar said.
“Governments around the world know that SMEs form the backbone of any economy, and actively encourage SMEs to invest in technology.” - Ajit Raikar, Validus
Tim Moss, Chief Executive Officer of the United Kingdom Intellectual Property Office (UKIPO), said that when the agency engages with small businesses, “our focus is on promoting the vital importance of IP as an asset. It should be an essential element of any overall business strategy.”
One challenge is that SMEs sometimes begin to use an IP right such as a trademark without first checking that it is available.
“Obtaining the guidance of an experienced practitioner at the outset can save an SME from a headache down the road,” said Michelle Ray-Jones, Consultant at Tilleke & Gibbins (Thailand). “It is much harder and more expensive to re-brand after receiving a cease-and-desist letter than it is to perform due diligence at the outset and pick a brand with minimal risks.”
However, as noted by Ms. Gumm, the cost of building and protecting an IP portfolio can be prohibitive, with expenses including, but not limited to, filing fees with the relevant government agencies, legal fees, and translation expenses, in addition to renewal fees and the costs of monitoring and enforcing the IP rights once they are in place.
“Moreover, SMEs often underestimate the value of their IP or don’t understand how to exploit their IP for commercial gain,” she added.
“Obtaining the guidance of an experienced practitioner at the outset can save an SME from a headache down the road.” - Michelle Ray-Jones, Tilleke & Gibbins
Having a strong IP portfolio and protection strategy is essential to obtaining investment.
Legally protecting the most valuable assets by registering for trademarks, copyrights, and patents will help to reassure investors that the risk of IP-related legal action is low, suggested Mr. Raiker, whose company helps SMEs secure short- and medium-term financing.
Similarly, Ms. Ray-Jones pointed out: “VC firms and investors want to know that they are investing in a company that owns its IP and won’t face claims of IP infringement or theft of trade secrets.”
Potential investors want to know the value of the IP in the business, as it affects the overall valuation of the company. For example, she said, “having a portfolio of registered patents may put one startup ahead of another that has only pending patents, or none at all.”
In Mr. Raikar’s view, having a strong brand and IP portfolio in place “helps to build trust and credibility with the company’s stakeholders, such as your investors and customers. A brand is something that appreciates over time, unlike physical assets that may depreciate.”
“The size of SMEs may serve as a hindrance when it comes to adequately protecting, exploiting, and enforcing their IP.” - Stephanie Gumm, Faegre Baker Daniels LLP
Ms. Gumm agreed, stating that, especially in technology-based industries, intangible IP assets are becoming more valuable to businesses than physical ones.
“IP assets that are properly protected may serve to significantly increase the value of an SME in a proposed merger or acquisition, in addition to opening doors for funding opportunities by utilizing IP assets as collateral for business loans,” she said.
Carmen Yuen, Partner at Vertex Ventures Southeast Asia and India (Singapore), a VC firm that invests in high-growth startups, conceded that VC firms invest in opportunities that will yield strong returns, and these are not necessarily limited to opportunities which are backed by IP—particularly when dealing with novel business models.
“However, the moat is usually deeper if there is IP behind the business model,” she said. “A strong IP portfolio will give the company its competitive advantage and help to secure a return on their investment in innovation.”
“A strong IP portfolio will give the company its competitive advantage and help to secure a return on their investment in innovation.” - Carmen Yuen, Vertex Ventures Southeast Asia and India
SMEs in the Association of Southeast Asian Nations (ASEAN) countries are some of the enterprises in most need of government support.
The region, comprising 10 countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam), is one of the fastest-growing in the world with a rapidly increasing middle class that is creating new economic opportunities. An estimated 190 million middle-class consumers resided in ASEAN in 2012; by the end of 2020, this figure is projected to rise to around 400 million, according to the OECD’s “SME Policy Index: ASEAN 2018.”
Micro, small and medium-size enterprises represent 97 to 99 percent of all businesses in most ASEAN countries, said the report. However, the OECD also found that in most ASEAN countries, SMEs are “predominantly found in labor-intensive and low value-added sectors of the economy, particularly retail, trade and agricultural activities.”
“As such, they continue to account for a high share of employment but a low share of gross value added in most countries,” the report added.
Many of the ASEAN nations are supporting SMEs by rolling out tax incentive programs and providing a conducive business environment for foreign investors, Ms. Yuen said.
IP offices around the world commonly encourage dialogues with entrepreneurs in emerging industries, which has the mutual benefits of educating SMEs on the best ways to protect their IP, and educating the IP offices about emerging technology.
Ms. Ray-Jones noted that the Intellectual Property Office of Singapore (IPOS) does this particularly well, holding webinars and workshops for the public.
Mr. Raikar added that IPOS expedites patent applications in certain emerging industries, such as for fintech and artificial intelligence.
In Cambodia also, SMEs are being welcomed. David Haskel, Director of Cambodia Startup Advisors (Cambodia), an alliance of legal, tax, and IP firms, said that the country is supporting “a very vibrant startup scene.” Last year a government-funded startup center was launched, and a government VC fund will soon follow.
Mr. Haskel also pointed out that Cambodia is “very plugged-in” to international IP frameworks, such as the Madrid Protocol, the Patent Cooperation Treaty, and the Hague Agreement, and that trademark applications can be prosecuted entirely in English.
In Indonesia, Nick Redfearn, Deputy Chief Executive Officer and Enforcement Head at Rouse (Indonesia), said, in 2015 the government introduced Bekraf, a department dedicated to assisting creative industries. It develops and coordinates policies to facilitate the country’s creative economy, including providing information on the value of IP.
And in another part of the region, Laos’s accession to the Madrid System in 2016 has assisted SMEs with the high cost of registering their IP in ASEAN countries. Under the Madrid System, the fee is reduced by 90 percent for international applications filed by applicants whose country of origin—such as Laos—is a “least developed country” as classified by the United Nations.
Mr. Raikar predicts that investment in SMEs by fintechs and VCs in Southeast Asia will continue to increase.
“What we are seeing is just the tip of the iceberg,” he suggested. “Some of the fastest-growing markets in the world are right here in Southeast Asia.”
As IP is central to an SME’s successfully obtaining investment, “it will be important for governments to offer them support so that they can navigate complex IP systems.” Ms. Gumm opined.
Mr. Moss noted that the UKIPO supports SMEs when they are moving into overseas markets such as in the Asia-Pacific region through its attaché network. An attaché team based in Singapore covers ASEAN countries, and there are teams in Brazil (covering Latin America), China, Geneva, India, and the United States (covering North America).
According to Mr. Moss, a particular challenge for SMEs seeking to enter the markets in ASEAN countries revolves around how they manage the disparate legal environments.
“The region is a diverse and varied group of countries where the development of IP laws has been uneven,” he said. “It’s important for businesses to make informed decisions about their options for IP enforcement and protection taking account of this diversity.”
INTA 2020, SMEs, IP portfolio, investors, OECD, innovation, UKIPO, trademarks, copyrights, patents, ASEAN, IPOS