Why are semiconductor investment institutions (PE/VC) paying more and more attention to intellectual property rights?

According to data from Ocean Tomo, a US consulting firm, in 1975, only 17% of the market value of the S&P 500 companies was intangible assets, while energy and manufacturing giants based on tangible assets, such as ExxonMobil and General Electric, dominated the market. By 2015, technology giants such as Apple, Alphabet, Amazon, Microsoft and Facebook had become important components of the S&P 500, and intangible assets accounted for 87% of the S&P 500's market value.

The proportion of intangible asset investment in GDP in developed countries in Europe and America has also been rising year by year since the 1990s. According to research by Haskel and Westlake, in 2009, the proportion of intangible asset investment in GDP exceeded that of tangible asset investment for the first time. Since then, the gap between the two has been widening.

This is even more true in the semiconductor industry. After a chip is designed, the tangible cost can be close to zero, and more depends on the value of the intangible assets behind the chip.

Foreign institutions have compared the U.S. semiconductor "million-dollar R&D expenditure patent" indicator from 1979 to 1993. The patent density of the semiconductor industry is higher than that of the computer, electronics and pharmaceutical industries, and is also much higher than the average of the entire manufacturing industry.

This period coincided with the US patent system undergoing major reforms in 1982, and as bans and compensation became more sophisticated, the US semiconductor industry entered a "pro-patent" period.

In addition, David H. Hsu, professor of management at the Wharton School of the University of Pennsylvania, and Rosemarie H. Ziedonis, professor at the Ross School of Business at the University of Michigan, jointly conducted an empirical study on the patent quality and investment and financing of 370 semiconductor start-ups established in the United States between 1975 and 1999. The surveyed companies received at least one round of venture capital between 1980 and 2005, and received more than 800 rounds of financing in total.

结果显示，专利对于投资者对初创企业的价值估值有显著影响。专利申请量每翻一番，融资估值比预期提高28%。而且专利的价值在早期几轮融资和从知名投资人手中获得投资时更大。

David concluded that having a larger stock of patent applications increases both the likelihood of obtaining initial capital from well-known venture capitalists and the likelihood of obtaining capital liquidity through IPOs in the future.

It can be seen that patents are an important form of intangible assets. As early as the 1990s, many foreign research institutions began to study whether patent information could be used to provide more references for venture capital, thereby helping VCs obtain appropriate returns on investment.

Moreover, there is growing evidence that patents can help reduce information asymmetry between investors and companies. Patents are more like a "signal" in VC investment.

Sometimes some patent indicators can even help VCs increase their interest in a company.

For example, in the field of biopharmaceuticals, some companies that have experienced patent opposition or invalidation are considered more valuable by investors, because only more valuable patents will be opposed or invalidated by competitors. The same applies to fields like semiconductors.

Currently, there is not much research on whether patents can provide a basis for VCs to make decisions in their investments.

In order to explore this issue, Professor Elisabeth of the Center for European Economic Research, together with Professor Carolin and Dr. Dietma of the University of Passau, Germany, made three hypotheses and verified them with actual corporate survey cases:

Hypothesis 1: Once a startup files a patent application, the likelihood of receiving VC investment increases.

Generally, VCs will not provide funding to companies whose business plans are not yet mature, and there is no direct correlation between patent applications and whether a technology can be commercialized. In other words, although patents mean that innovation may be new, they do not necessarily have commercial value.

Since patent authorization takes a long time, in many cases, VCs need to conduct a technical evaluation of patent applications before patent authorization. The VC can do this work itself, or hire external experts to provide expert opinions from legal and technical perspectives.

In either case, patents, as a way to disclose the technological features of an enterprise, at least disclose the technical information of the entrepreneur's invention. VCs, through the "scout" approach, may be able to obtain conclusions about the high quality or technological advancement of the enterprise's patents through patent analysis, thereby assisting investment.

Hypothesis 2: The higher the expected quality of a startup’s patent application, the easier it is for the company to obtain financing.

There are many factors that affect the quality of patents. Whether a patent can be authorized needs to be searched by patent examiners from various countries and determined whether it has novelty and creativity. Therefore, the opinions of patent examiners can be considered as valuable information for VCs, and patent examiners also determine the final scope of protection of the patent and whether it can be approved.

Therefore, for investment institutions, authorized and valid patents are more decisive in investment decisions than patent applications.

(Note: This is consistent with the requirements of the Science and Technology Innovation Board for patent applications from applicant companies. Patents that are under application but have not been authorized do not need to be disclosed.)

Hypothesis 3: The higher the quality of a startup’s patent application, the easier it is for the company to obtain financing.

This point is about the actual value of the patent, both to the patent office and to competitors.

To this end, Carolin, Dietma and others conducted a survey of German and British companies in 2005. 346 German companies and 343 British companies participated in the survey, of which 162 German companies and 118 British companies conducted face-to-face interviews using pre-set questionnaires.

Its purpose is to clarify the role of patents in venture capital.

After excluding some companies that did not want to give up control of the company and did not need venture financing, 116 German companies and 74 British companies were finally identified. Among them, 87 companies received venture financing, and 103 companies did not receive venture financing.

In terms of analytical methods, the indicators used by Carolin, Dietma and others include:

Patent application (Dummy application): refers to applying for at least one patent;

Application stock: refers to the sum of patent applications;

X-Type references/application stock: X-type references refer to prior art documents that can undermine the novelty of a patent during patent examination. Alternatively, the alternative indicator X-type references/class can be used.

Impact factor of scientific literature: the impact of cited non-patent literature;

Patent authorization (Dummy grant): refers to the authorization of at least one patent;

Shared opposition: The number of patents that have received oppositions is counted. Oppositions prove that the patent is more important. The number of oppositions is divided by the number of patent applications.

Technical capabilities: refers to the technical capabilities that employees possess;

Years to market entry: refers to the number of years from financing to official listing.

This survey yielded some data conclusions that may be of reference value to China's VC institutions.

(1) According to the statistics, 69% of the samples that received venture capital had at least one patent application, while the proportion of non-venture capital was much lower, only 37%.

(2) Companies that receive venture capital have more patent applications.

(3) There are also differences in patent portfolios: the companies that receive venture capital have higher numbers of citations and higher levels of novelty, and their patents are based on important scientific literature.

(4) Although the proportion of companies with at least one authorized patent that has received venture capital is higher, it is still not high at only 9%.

(5) Although the authorized patents of the two groups of companies are the same, the group that received venture capital received more patent objections, which means that the patents are more valuable and are more valued by competitors.

In addition to the above conclusions, this survey also has some other results, such as:

(1) The average company applies for its first patent at 1.3 years old.

(2) The first authorized patent was obtained in 4.5 years, which is shorter than the time it takes for the company to enter the market. This shows that patent authorization has little impact on VC investment.

(3) Generally, companies obtain venture capital before their first patent is authorized. (Note: This was the situation abroad more than ten years ago. China now has an accelerated authorization system and fast pre-examination, so obtaining authorization may be much faster than obtaining investment)

(4) When companies receive their first venture capital investment, 60% of them have at least one patent application.

(5) Companies with greater technological capabilities are able to obtain venture financing more quickly.

The CER study follows previous research suggesting that venture-financed companies are more active in patent applications than non-venture-funded ones.

Many subsequent studies have shown that VCs pay more attention to patent portfolios in valuation decisions, and VCs will comprehensively consider the quantity and quality of patent applications.

Research by European scholars has confirmed from an empirical perspective, at least on some points, that there may indeed be a certain connection between patents and investment and financing.

However, if we analyze it purely from the perspective of indicators, it is inevitable that there will be some bias and generalization. Patents are more of a product of market competition. It is difficult to form a complete judgment without considering any of the factors of technology, market and law.