Technologies like the Internet, AI, autonomous driving, hydrogen fuel cells, and electric batteries are offering the startup ideas of reinventing diverse products. The uniqueness of early demonstration of alternatives out of them has been fueling the belief of growing tiny Startups into mega-corporations by unleashing Disruptive Innovation. However, despite the uniqueness, candidate alternatives begin the journey in an inferior form. Hence, both startups and venture capital (VC) funds have been in a race to increase the valuation of startups through subsidy-led market capturing of their premature products. Reaching a billion-dollar valuation, securing the unicorn title, in the shortest time has become the target. Hence, instead of a startup intellectual property (IP) strategy, VC-backed subsidy-led push has got the priority. However, they need a Flow of Ideas to improve the quality and reduce the cost so that they can grow as better alternatives. Therefore, in the absence of an IP strategy, will the VC-backed startup valuation run the risk of collapsing, once VCs stop giving funds for offering subsidies to offset loss?
The exponential growth of startup valuation over the last decade has been due to investors’ fear of missing out on the next big company that would bring in significant returns. Consequentially, startup space has witnessed the rise of unicorns from 87 in 2015 to 1381 in 2024; consequentially, the valuation of unicorns has grown from $235 billion to $4.5 trillion over these 10 years (according to Morningstar Unicorn Market Monitor report). In this race, AI has become a new seed corn to sprout unicorns within even less than a year. For example, Morningstar’s study found that an AI startup is valued at $2 billion, which is not even six months old. However, without a strong startup IP strategy, will the staggering valuation of startups be sustained? Once VC-led subsidy is withdrawn, do unicorns run the risk of suffering from the collapse of valuation like an avalanche?
Unfolding startup valuation collapse without an IP strategy
Suspecting the weak base of startup valuation is no longer a mere speculation. Within less than a year, the valuation of India’s most valued startup has collapsed from $22 billion to almost zero. According to TechCrunch, VCs think that the majority of unicorns no longer value more than a billion dollars. Bloomberg reports that 89 percent of unicorns suffered from valuation shrinkage in private trade, limiting initial public offering (IPO) prospects. What is the underlying cause of the rapid rise and fall of startup valuation? What could be the role of startup IP strategy for sustainably increasing the valuation?
Underlying reasons of VC backed startup valuation and inherent risks
The rise of startups like Apple, Microsoft, and Google into multitrillion-dollar mega corporations has been due to their success in fueling reinvention waves and winning the reinvention race. Hence, funding startups pursuing reinvention waves has drawn intense interest in venture capital (VC) funds to grow capital.
However, although emerging technologies are offering the possibility of reinventing diverse products, reinventions of matured products out of them emerge in inferior form. As a result, despite the possibilities, they experience rejections from the mainstream market, due to higher cost and lower performance of incumbent matured products. Hence, as there is a possibility of better alternatives, startups, and VCs join hands to push the premature alternatives into the mainstream market with massive subsidies. Subsequently, they start increasing the valuation of startups based on subsidy ked market capturing success. However, in many cases, such an approach keeps increasing the accumulated loss, as startups fail to reach operating profit. Hence, once VCs stop giving, an additional fund for subsidies, those once highly valued startups suffer from a collapse of sales and valuation.
Conventional perception about IP strategy—not strong enough to increase the valuation
Conventional perception about startup IP strategy refers to how startups can identify and legally protect intellectual assets through patents, copyrights, trademarks, and nondisclosure agreements. Hence, suggested action items of startup IP strategy have been (1) identify your IP assets, (2) secure your trademarks, (3) protect your inventions, (4) safeguard your trade secrets, (5) leverage copyrights, (6) manage IP ownership and licensing, and (7) monitor and enforce your IP. However, such activities do not offer sufficient reason to focus on IP strategy for increasing the valuation of startups sustainably.
It’s worth noting that startup valuation strongly correlates with the size of the target market and the success of capturing it. Hence, a startup IP strategy must find a strong linkage with capturing market share, as opposed to just playing with legal issues about intellectual assets.
Defining startup IP strategy
Startups’ attacking strategy to win the battle and take over the market from behemoths depends on IP capability. The core issue of startup IP strategy has been about growing the reinvention wave and outperforming the competition to win the race of unleashing a creative wave of destruction. Although IPs in the form of patents create imitation barriers, that is not the main purpose of IP strategy for startup valuation. Instead, the urgency is to keep increasing the quality and decreasing the cost of initial emergence of startup innovations, so that they can keep capturing the market share while reducing the need for subsidies. Fortunately, ideas or intellectual assets offer the opportunity to substitute the material, energy, labor, and time, and increase the effectiveness in Getting jobs done. Such a possibility creates indispensable importance of IP strategy for sustainably increasing the valuation. Hence, startup IP strategy refers to the development of not easily replicable intellectual assets for fueling and unleashing creative destruction waves and winning the race for profiting from the blue ocean of reinventions.
For attaining price-setting capability by leveraging the economics of innovation, a startup IP strategy must focus on creating scale, scope, and Network effect through a systematic flow of ideas. Therefore, increasing the quality and reducing the cost simultaneously is the core objective of IP strategy for sustained growth of startup valuation through fueling and winning reinvention waves.
It’s worth noting that a startup IP strategy can create much needed competitive advantage by making innovations increasingly better and cheaper to take over the mainstream market. Unfortunately, instead of focusing on this vital hidden potential, startups have been after venture capital funds to subsidize their inferior alternatives to capture market for increasing their valuation.
Startup IP strategy for sustaining growth and valuation—fueling and winning reinvention waves with a flow of ideas
- A single great idea is not good enough—from autonomous vehicles to AI radiologists, a single radical idea is not good enough to unleash a creative wave of destruction. Although initial demonstration or minimum viable product (MVP) creates a sensation and hope for unleashing disruptive innovations, a flow of ideas, for improving the quality and reducing the cost, is needed to fuel the rise of reinvention waves. Hence, a startup IP strategy should focus on how to create that flow systematically. Besides, most startups will not be able to create a sufficient flow internally. Hence, their IP strategy should focus on accessing outside flows and fusing them. For example, autonomous vehicle idea depends on the ideas of sensors, communications, and many other strategic areas. Even Apple has been relying on more than 200 outside innovators to fuel the needed flow for turning the iPhone idea an innovation success.
- Power of ideas for improving the quality and reducing the cost simultaneously—improving the quality and reducing the cost with ideas may sound absurd. However, it’s feasible. For example, the use of the idea of robots for painting automobiles reduces defect density, improves uniformity, and lowers the need for rework and pain wastage. Similarly, the idea of replacing hardware with software improves quality and reduces the cost simultaneously. For example, Apple by replacing the physical keyboard and stylus with software-centric multitouch-based user interfaces has succeeded in addressing these apparent conflicting issues. Similarly, due to the creation of a suitable idea flow, lithium-ion battery innovators have been succeeding in making smartphone batteries lighter, while storing more energy.
- Necessity and possibility of creating a flow of ideas— relative quality and cost play vital in market size determination and speed of capturing customers. Despite the uniqueness, invariably, startups’ innovations as reinventions of existing matured products emerge as inferior alternatives. Hence, for sustainably capturing the mainstream market, those reinventions must have a flow of ideas, which will improve the quality and reduce the cost. Hence, a startup IP strategy is a must to create that flow of ideas, maintain proprietorship, integrate with products, and gain traction through profitable revenue. Fortunately, most emerging technologies are offering this opportunity. However, to harness it, promoters need a suitable startup IP strategy.
- Creating Economies of Scale, scope, and network effect—creating the scale effect is at the core of startup strategy. However, expanding the production of premature products and creating the market for them through subsidies does not create the expected benefit of economies of scale effect. Hence, creating the scale effect while reducing loss or increasing profit demands an IP strategy. Besides, creating Economies of Scope and positive network effects also demand startup IP strategy.
- Fueling and unleashing creative destruction waves—to sustainably increase the valuation, startups must fuel the reinvention waves through the systematic improvement of their initial demonstrations or minimum viable products (MVPs). For unleashing a creative wave of destruction, uniqueness and subsidy-led push of MVPs are not sufficient. In terms of quality and cost, their reinventions must cross the threshold level. At the core of this essential requirement is startup IP strategy.
- Market capturing along with loss reduction—for sustainable valuation growth, the core challenge is to keep expanding the market footprint and reducing the loss; eventually, along with market growth, the loss must be turned into profit. Although subsidies may show success in market capturing, however, it increase the loss. As a result, once VC VC-backed subsidy is withdrawn, both the sale, market share, and valuation collapse.
- Winning the race for profiting in the blue ocean—in the end, reaching profit and expanding the market is not good enough. For sustaining the valuation, winning the reinvention race is a must. For example, although Tesla’s stock value increased due to reaching the tipping point and lowering the loss due to battery technology advancement, it could not sustain the valuation. The underlying cause has been Tesla has been running short of proprietary technology edge for creating entry or imitation barriers to followers and outperforming them. Hence, a startup IP strategy is a must for sustainable valuation growth by crossing the threshold and winning the race.
Due to the uniqueness of emerging technology cores and the initial success of MVPs out of them, startups and VCs are getting caught in the temptation of subsidy-led market capturing and valuation growth. Although subsidy-led push shows success in market capturing, it fails to lower the loss and reach profit. Hence, once VCs stop giving additional funds to burn for subsidizing inferior reinventions, startups suffer a sudden loss of sales, market share, and valuation, leading to bankruptcy. However, IP strategy offers the pathway of improving reinventions, resulting in a growing market and lowering loss simultaneously. Hence, the startup IP strategy has been a must for preventing startup valuation collapse once VCs stop funding.
