The growth and expansion of a FinTech startup are hidden in its unique business strategy to provide services and management of Intellectual Property (IP) portfolio i.e., Patent, Trademark, Copyright, and Design. The IP portfolio is fundamental for startups in acquiring funding from investors thus it must be speculated in the beginning.
Advancement in the early plan can save precious time and money. Ideas themselves justify innovation and uniqueness with a well-oriented IP portfolio. It is not only a legal instrument to secure a venture’s trade methodology but also to commensurate the economic steadiness. Nowadays, IP is seen as a resource that has high esteem and is proficient in being security or collateral for investors.
A startup requires capital funding to finance the costs of the venture until it commences to generate profits. Possessing a strong IP portfolio might pave the way to acquire funding from investors. Experts usually assess whether the venture is investment-worthy or not based on the IP portfolio and make the decision accordingly.
This article deals with the significance of IP portfolio in the steadily growing market of fintech companies. A major focus is given to startups that seek to acquire funding from investors along with the regulatory policies, grey areas, and benefits associated with it.
PHENOMENA OF FINTECH COMPANIES
FinTech companies have rapidly grown in the previous decade with the rise in technology. It intends to enhance financial services where consumers themselves can operate and process the transaction using the internet. Initially, the term was limited to technology used by financial institutions. Then gradually several user-friendly facilities grew and today it is deployed by various sectors like real estate, money market, capital market, retail banking, etc. to be used by individuals.
The advent of demonetization (2016) and ongoing Covid-19 pandemic lockdowns assisted in the spread of FinTech services. Demonetization created a situation where individuals had a scarcity of physical money; while on the other hand, during the pandemic people intentionally refrained from using the tangible currency. It led to an upward trajectory progression of FinTech startups.
Research conducted by several entities suggests that the Q-1 of 2021 witnessed $22.8 billion of investments in 614 FinTech companies across the world. It is more than double the amount raised by FinTech companies in the Q-4 of 2020. During Q-2 of 2018, the largest venture capital was sought-nevertheless Q-1 of 2021 outnumbered it. The report states that one-third of people are currently using FinTech services through mobile apps or other similar platforms in daily activities.
IP PORTFOLIOS OF FINTECH COMPANIES
Intellectual Property is secured by law so that individuals putting labor can get affirmation and monetary advantage for their manifestations. IP rights secure computer programs, equipment, and the label related to innovations, which are fundamental for FinTech companies.
A portfolio can be understood as the commercial value attached to the business method or industrial process among others. It protects impugned work from unauthorized transgression. The Intellectual Property portfolio is the protection of corporeal or non-corporeal assets holding a commercial value. IP portfolio is a collection of novelty, industrial utility, and inventiveness in the form of commercial rights.
Investors must be assured that their investment in a fintech business will be rewarded. IP portfolio gives a sense of assured returns and the possibility to sell stakes at an adequate juncture. The investor would be persuaded of the uniqueness and ingenuity, and hence perceive returns in funding. At times, the investor wants to replace the old system with new FinTech products and under such circumstances, a company with a strong IP portfolio would lead the race. Further, it provides an extra edge to stand out in the tough competitive arena of capital funding.
IP POLICIES FOR FINTECH COMPANIES
The primary concern for FinTech companies is to apply for registration under various IP legislations. An invention having industrial application and an element of non-obviousness can be patented under the Indian Patents Act, 1970. The act of patenting has gained momentum in the past decade. It is a major tool not only against infringement but also to attract investor funding through pending applications for the registration of the patent.
The US Supreme Court in Alice vs. CLS Bank International (573, U.S. 208), stipulated that the licenses concerning claims of a computer-instigated electronic escrow meant for encouraging monetary transactions are illegal. The patent was rescinded by the Court because it was unfeasible to convert a noble idea into a computer algorithm mainly dealt with a patent on software concerning FinTech system.
The Copyrights Act, 1957 protects original ideas from being copied. It includes computer code and application program interface which is the backbone of FinTech companies. Program Design and security encryptions are entirely based on computer codes, if these codes aren’t safeguarded, FinTech startups cannot be sought for funding from investors. FinTech companies must ensure policies concerning third-party copyright since it would pose a threat to subsisting technology.
A FinTech company must ensure its brand value under the Trademarks Act, 1999 by registration of name/logo/sign/expression, it can be any combination or symbol which denotes the source of FinTech service. Trademark with good reputation plays an imminent role in merger & acquisition of FinTech startups and it becomes easier to sell portfolio in time of need. Equally important is cataloging of configuration, pattern, and color compositions of app or webpage owned by the FinTech Company, the protection of the same is availed under the Designs Act, 2000.
IMPORTANCE OF IP PORTFOLIOS FOR START-UPS
In this outlandish surge, start-ups are often unaware of IP rights which lead to unjustified misuse and illegitimate benefits by the competitors, thereby infringing their unique work and business label. Therefore, management of IP portfolio is suggested to ripe benefits of labor endeavored not at present but in time to come. The start-ups look for various advantages in the industry where they intend to establish themselves and grow ahead. While there are a variety of common positive aspects that are well known to the new entrepreneurs belonging from the management or IT sector, the law of the land offers one of the prime advantages i.e., the IP Rights.
IP Protection helps the start-ups to exercise and preserve their unique service or product in today’s highly competitive market.
An IP provides a sustainable factor and acts as a defense mechanism, which makes it stand out from the crowd. The studies have revealed that start-ups and Small and Medium Enterprises (SMEs), which have a minimum of one registered IP are 10% more likely to become a high-growth entity and 21% more likely to have a subsequent period of growth. Moreover, such businesses are more likely to receive funding to commercialize their product.
IPs offer exclusivity to their product, which results in a high entry barrier for other entities, which in turn leads to higher growth. Small businesses which possess IP rights over their product restrict the bigger manufacturers to copy their ideas and commercialize them on a larger scale.
IPs such as Patents and Copyrights offer the start-ups to allow entities other than the IP holder to pay a considerable sum, by the way of royalty, to obtain a right to produce or manufacture a product of a similar nature. Meanwhile, IPs such as Trademarks, Industrial Design, Geographical Indication offer a sense of branding to the start-ups, which acts as a catalyst to gain popularity about the product in the market. Moreover, such IPs also provide authenticity of the brand, an aspect which is often seen as a major advantage in today’s open economy market wherein second copies of the same product are being offered at a cheaper price and international competitors from the Asian and European countries provide tough competition in the market, by offering inexpensive prices with a similar quality of the product.
Thus, not only an IP right gives the start-up a legal right, but also an economical benefit and financial advantage over other businesses in the same industry. Start-ups shall look after the creation of strategic IP portfolios. It is essential to consider vital models in reality that behold secrecy and protects the company’s assets. They can resort to non-disclosure agreements (NDA) with parties, including the investors providing funds to avoid any abuse of their IP rights and resources. Efforts to manage IP portfolio are redeemed when FinTech companies are in search of funding or seem to be under merger & acquisition.
The investor would always go after assured brand value in the due diligence process.
Conclusively, the licensing and assignment of IP rights to third parties will eventually generate an additional source of revenue.
It is high time to recognize the benefits associated with the management of an IP portfolio. It serves as a principal pillar in acquiring funding to a FinTech startup. In the lack of a strong IP portfolio, the unique brand value of the company comes at stake and any third party could strike commercial loss as well as stringent violation of IP Rights.
A proactive mechanism to manage the portfolio from the initial stages would dilute future time and money in settlement of a dispute or the entire labor to raise the fintech startup might go in vain.
A startup needs capital subsidies to cover the costs of the venture before it earns profits. Developing a large IP portfolio may act as a catalyst so that you can obtain funding from financial experts. With the progress of technology in the last years, FinTech companies have quickly grown, making it possible to enhance monetary administrations where customers may work and manage the transaction using the internet.
Intellectual Property is protected by law in a manner that those who put in the effort can get recognition and substantial remuneration for their accomplishments. FinTech is the framework to subjugate transactions at any particular moment with security encryption. The IP portfolio is the key to overcoming the obstacles pertaining to IPR in FinTech companies.
– Team AMLEGALS, assisted by Mr. Gaurav Asati and Mr. Rohan Bangia (Interns)
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