From Idea to Investment: Protecting & Funding Your Tech

In tech, a strong idea needs more than momentum. It needs protection, structure and a clear route to funding. 

In the latest episode of Ellisons Connects, Partners Ryan Cracknell and Phil Slater discuss how tech start-ups can protect their brand, product and intellectual property, while preparing the business for investment, lending or future growth. 

From NDAs, ownership and IP protection to funding readiness and investor confidence, this episode offers practical guidance for founders looking to turn innovation into a stronger, more investable business. Listen now to From Idea to Investment: Protecting & Funding Your Tech. 

Thank you for listening to Ellisons Connects. If you'd like to discuss anything further about any of the topics raised in this episode, or, if you simply want to speak to one of our experts, then please do not hesitate to get in touch via our website - https://ellisons.com/contact-us/

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Transcript

SPEAKER_02 0:04

Welcome to the next episode of Ellison's Connects. My name's Phil Slater. I am a partner in Ellison's and head of the banking, finance, and private credit practice. And I'm here today with my fellow partner, Ryan Cracknell, who is our lead partner in our commercial practice. Good morning, Ryan. Good morning, Phil. Good to see you. Great to see you too. And what a beautiful sunny day it is in Ipswich today. So fantastic to be here. It's a nice early start for us. It's not often, Ryan, that you and I get a chance to sit down and talk about the tech sector work that we do as a firm. So I'm very much looking forward to this discussion. To start with a really nice broad question. When we say tech sector, what what what do we mean? Can you can you frame that for us a little bit?

SPEAKER_01 0:55

Sure, yeah, it's it's an interesting one because it is actually such a broad area. And it can be a bit misleading at times when we're talking about what is technology. Because a lot of businesses may have elements of technology they use as part of their service offering or provision of goods. Um but I think it boils down to a couple of key things. So primarily it's going to be software, apps, software as a service, some kind of platform element that is used by a business in the delivery of their services. You've got businesses that provide hardware, so that could be more electronics-based, um, telecommunications, that's more infrastructure, um, networks, and then you've got emerging technologies. So AI is a hot topic at the moment. That's the key one that comes to mind. But you've also got other ones like blockchain, um, robotics. It's a it's a massive field. And as I said, it could just be a component of how a business operates. It's not necessarily their core um business, but most businesses will have some form of technology that feeds into the way they work, and that's why it's such a broad sector. Um IP is massive in this space, and um technology is really about innovation, and that's where IP comes in. It's about new um novel things, people's ideas and taking them, registering them, getting protection and leveraging them into creating a business which is going to make them money ultimately. Um, so I think it's quite helpful just to quickly set the scene in terms of what we're talking about when we're talking about intellectual property. Absolutely if that's okay. So um the key one that comes to mind is uh patents. Um this is something that you can register for certain inventions and processes. There needs to be an inventive step. So it's not something beyond uh within the contemplation of an expert in that field. It needs to be really new. Um, so outside the state of the art um at that point, and then you can get um, in most cases, 20 years worth of protection for that. Um, you've got copyright, which feeds into most forms of um technology. So, for example, software, you're gonna have literary copyrights protecting the the code and the architecture behind the um the software itself. Um, and that can arise automatically, you don't necessarily have to register it. Um, and uh it's slightly broader than just what you can write down. You can have artistic works protection as well. Um, and yeah, really good um asset for people to have. Um, from a brand protection perspective, trademarks uh usually um the main form of IP there. So you can protect your logos, your business name, your strap lines, even colours if you've got something really distinctive. Um and then design rights is another one I'll just quickly mention. Um, that's protecting how something looks rather than the functionality of um a product. And then lastly, I'll just touch on um confidential information and trade secrets. So this is really protected from uh disclosure to the outside world. It it's it's keeping your know-how secret and not divulging it um unnecessarily. So, you know, key ones that come to mind is your KFC secret recipe, your Coca-Cola formula. If those things get out, it's gonna seriously undermine the business. So it's about protecting your assets, locking them down to the greatest extent that you can, and uh say, leveraging them as best as you can. So I think what would be good is to kind of get your thoughts, particularly in terms of how businesses can um fund that IP, because it's so critical for them to get that protection um and use it effectively. Can you talk us through some of the kind of funding options and strategies that a business might consider that?

SPEAKER_02 4:53

Yeah, for sure we can. I I mean it's interesting listening to what you've just said. I think it's a busy sector, isn't it? We know that um it is the way forward, it's the future, everything's tech, everything's technology, AI is a big part of that. I think um, you know, picking up on a couple of things you said there, the the value is in the individuality and the differentiation, yeah, right. That's what you can protect. So um, and I think when it comes to looking at companies and accessing, yeah, let's be honest, for any business, cash is king. You you can't create a business unless you are supported by some form of financial backing. Um and that, you know, if you're a founder of a business, that's going to be um potentially your own equity uh that you put in in the first instance. You may bring along co-investors that that help you to um fund those initial phases of your of your business and your exploration. Um, as businesses grow and as they develop and as the value becomes apparent, um, and and I think just to dwell on that for a second, the value, the value in a tech business can be quite hard to assess, yeah. I think it's fair to say. Um, what what what what is it? Um what is it doing? Is the value in that individuality and that differentiation, is the value in the monetization of that individuality and differentiation, or the deployment of the technology that's been created, um, the leveraging of the intellectual property asset that is new, different, um, developing. And I and I think all of those things lead to a conversation that can potentially be quite difficult from a funding perspective. So definitely early stage, you're looking at um founder equity, co-investment, um, as the business grows. And within that, you know, you might be able to access uh schemes that are um potentially tax beneficial. So seed investment, uh seed enterprise investment scheme or enterprise investment scheme, uh, second to that, um, private investors coming along that see the potential, see the opportunity, prepare to take the risk. Uh, venture capital. Um, you know, there's a massive venture capital market in that startup lower mid-market space, but you've got to come with a credible story and a view on a credible journey for the business and for the monetization of what you're creating, um, whether that's revenue streams because of what you have, or the value in the asset, the IP asset itself. And you know, I think once you're through those early stages of equity, uh, what we call equity funding, in other words, a stake in the business, um, you can start to think about debt finance. Um, I think it's fair to say, uh, so debt finance, just very briefly, um, you know, what are we talking about there? We're talking about money from banks, effectively, money from banks or money from private credit investors. Lots of news about the private credit market at the moment. We'll come onto that in a bit. Um, you know, alternative specialist lenders are all players in this market and they all have different credit parameters. So, you know, I think once the business hits a certain level of traction and there is a definable journey and a definable commodity and a definable monetization of that commodity, then you can start to leverage the business. So introduce debt capital finance, and that will definitely allow the business to grow, develop. Obviously, debt needs to be serviced, there'll be an interest cost. Always worth looking at that and thinking about those things. Um but I think the point to just leave you with there is uh it's not straightforward. Um IP assets, technology businesses that are not fixed asset heavy, because they're not, um are a lot more difficult to sell.

SPEAKER_01 8:57

Yeah, because it's it's an intangible asset, isn't it? So I guess the key thing is documenting it and registering it where appropriate, but giving that confidence to investors or whoever may be um bringing money into the business that there is actually something there that they can they can bank on. You know, they don't want to just be throwing money into the void because someone's had a good idea.

SPEAKER_02 9:17

Absolutely right. And and and so different, yeah. So at the other end of the spectrum, you've got commercial mortgage. That's great. You've got a massive warehouse and a massive plot of land. It has a value attached to it. That value is something that can be defined ordinarily. Um you have title to that asset registered probably at HMLR. Well, yeah, definitely HMLR, hopefully. Um, and and therefore you have something that you can use as collateral that provides comfort to somebody providing finance. Um and financiers like that. Uh contrast that with exactly what you've just said. Intangible assets, how do we value those? You know, there are there are lots of specialist IP valuers out there. Um, but transforming or translating that valuation into something that makes a lender comfortable or an investor comfortable that there is value is a very different thing.

SPEAKER_01 10:14

Yeah, absolutely. And I think really the the key thing for me is making sure that as a um as a startup business coming to this space, it's getting your house in order. So, yes, lock down your IP where you can, you know, get get that um protection and therefore certainty. But probably before then, it's about doing a bit more research into the field, making sure that you've got a robust and coherent business plan, um, kind of testing the market a bit, seeing if there is demand for what your product or or service might be, um it needs to really solve a problem, um, I think to be successful in most cases. So yeah, ha having a clear plan of action, um, documenting, assessing, registering IP, um, but let's say getting your house in order, so having a good uh governance structure for the business. So if you go down the limited company route, you want to make sure you've got a shareholders agreement, for example, if you're bringing on board other um people in the early stages, but being investment ready, so you've got the right kind of vehicle there to accommodate um the finance coming in. Um and then making sure that you're doing all the right things at the early stages, like uh your compliance obligations, for example. You want to um ensure that if you're bringing any personal data in that you are meeting your obligations under UK GDPR and that um you've got a really strong privacy notice so that you're telling people up front how you're gonna be using their data and not just bringing a load of information to the business that could be sensitive in nature and creating risk from the outset. Um, another key trend we're seeing at the moment in contract negotiations, particularly, is around your ESG um requirements, so environment, social governance, and um making sure that when you're going out to market that you are taking into account what how you are impacting those around you and the environment. So I think that's really key. And uh contracts as a whole is a is a critical one. Obviously, it's I'm a commercial contract lawyer by trade, so I'm gonna um highlight this one in particular, but um, having strong contractual controls around uh people that you work with is gonna be critical for ensuring you've got certainty around the business um because that sets out the framework for how you will operate.

SPEAKER_02 12:39

For sure. Sorry to interrupt you there. I just I just wanted to pick up on ESG. Uh you know, look, I think um it's interesting in my conversations with uh with with businesses and funders at the moment, it it it ESG is is is is is out there. Um and it's fair to say that um you know there are lenders that will or have their own requirements around ESG. Um I'm gonna say requirements again, Ryan, because I can't think of another word, but you know, that they have they have ESG credential at the top of their list in terms of does this tick a box for us? And I think it's it's becoming more of a focus in terms of credit sanctioned credit criteria. Not that every business needs to be super ESG compliant or friendly or you know, testing the boundaries of of becoming environmentally sustainable and and having great credentials in that regard. Every business is at a different stage and in different sectors it means different things, but it's definitely a thing.

SPEAKER_01 13:44

It is at the forefront of a lot of um companies' minds, I find at the moment. So, particularly with larger businesses that a startup might want to work with, partner with, um, sell their products and services to, um, because that's a quick win for them if they can land a big contract from a um a large customer, that's great, secure revenue. Um, but these larger companies have um sometimes regulatory duties or just um industry pressure to have these ESG controls. So they need to control their supply chain. They'll be funneling their policies down through the chain. So you need to make sure as a as a new business coming into the market that you're able to um adapt and accommodate those requirements just to um be on the pitch, essentially.

SPEAKER_02 14:28

Yeah, to be on the pitch to be able to play the game. Um it's a great point. And the supply chain, of course, is is incredibly important. And if you're a new business or a a flourishing business in the early stage, you need those contracts, you need that supply chain, you need to be part of that infrastructure to allow your business to grow, right? Yeah. Um commercial contracting, and I know this is very close to your heart, Ryan. Uh, you are a commercial contracts lawyer and you're a very, very good one. Um, standard terms and conditions. Yeah.

SPEAKER_01 14:58

Yeah, it it does feed heavily into the IP side because you need to set out very clearly what your licensing terms are. And I've seen many businesses um get tripped up with this where they're giving away too much in the contract because they're not reading what they're putting out there. And um ultimately they're going to want to make sure they've got quite tight, restrictive licensing terms so um they can ensure they've got that recurring revenue. They want to tie people into a fixed term where they're licensing their products or services, whatever it might be, um, and uh not assigning it, not providing perpetual licenses. And it's it's easy just to add a few terms in there which you don't quite understand, and suddenly you've handed over um your crown jewels is actually your your core asset uh from IP that you've might have been able to uh be successful registering, hopefully, um if if uh depending on the form of IP. Um but if you assign it, you're handing it over to someone else. So particularly when you're dealing with larger third parties, if they give you a uh 100-page MSA and you're saying, oh yeah, we'll just sign up to it because we want to get the deal done and there's all this cash on the table, you could inadvertently be handing over your IP, right? And the other one uh that I see businesses get caught out on is um contractors. So when they're working with um could be their mates when they're starting out and they've got someone helping out with the business in those early stages, um they may not have a contract in place. But anything that person creates will be owned by them, not the business, unless you've got a written assignment agreement. So having those contract agreements and IP assignment agreements in place, they're not things that a lot of founders will think um about doing initially because their cash is usually tied up with trying to get the product or service to market. But actually, without having those kind of core documents in place, you're not going to have the protection and certainty that you need, particularly when you're then speaking with investors and people are going to be bringing cash into the business, you are undermining your um position. You need to be able to show you've got a uh clear ownership position on all aspects of the business um or broad licenses, you know, for third-party IP that you're bringing in. So um, yeah, having T's and C's as well, just quickly on that on that point. You want them to be clear, robust, user-friendly, but also quite tailored to your goods and services because that is the way I've found historically to cut through these large third-party contracts, make it very bespoke to what you're doing. Um so, Phil, it'd be good to get your thoughts then in terms of what can businesses do to position themselves to access finance to put themselves in the best position they can be.

SPEAKER_02 17:59

Yeah. Um it's a great question, isn't it? And then yeah, and one that is, I think on the has always been on the lips of of of every founder that I've spoken to, own and manage businesses likewise. It you know, what what can you do? And I and you touched on various points there that I think are really important. Um you've got to protect your asset. Uh, you know, as you as you mentioned, it I know and we're we're two lawyers here talking, right? And you know, so we're always gonna say that advice early is is is the best option. Um and sometimes money invested early in getting that advice is well spent. Not sometimes invariably always well spent. Um, because you can inadvertently, through signing up to somebody else's standard T's and C's or commercial contracting arrangements, you can inadvertently lose the value in the asset that you technically think you have, own, or otherwise can monetize. So, you know, knowing about that, being advised early is a great route to what I would say becomes founder confidence, credibility, um, something that allows uh, you know, a founder, a business, a growing business, to be able to demonstrate to investors and to potential debt funders that that there is something here worth financing. Um because money doesn't come easy, we know that. And uh as the years go by, money gets harder to access, particularly in the early stage of a business. So it's all about, for me, when I talk to businesses, it's all about knowing what you have, protecting what you have, being able to have the confidence in what you have to define your journey, to tell that story. To tell the growth story. Where's it going? What are your plans? Why do you need the capital? Um, how does this business develop its market presence? What does that journey look like? And and as a result, what's the story that you're going to tell to investors or to banks, alternative finance providers, private capital funders, whoever that whoever they might be, you know, what am I saying to you that will s will will make you think that I deserve your cash, I suppose. Um and and and it's it sort of boils down to me, and I I've I've um written several articles about this um in various publications and and also on on LinkedIn. Um, but you know, I call them my five Ps. I think you and it's sort of really basic 101 stuff, you know, you've got a plan. You've got to prepare, and you've got to be prepared as a business. Then you've got to work out your priorities and prioritize where your focus should be as a business leader in terms of your growth story, your growth journey, where everything's gonna go, and why you are persuasively saying to somebody, I'd like to access some of your finance, please. Um, and once you've done the planning, the preparation and the prioritization, then you've got to think about the process. I think very often businesses feel that, you know, they've got so many things to do, and of course they do. They're trying to protect their asset, they're trying to register or file if they have to, they're getting advice on their commercial contracting terms, they're they're looking at um at their supply chain, their supply chain contracts. Um process for finance isn't necessarily quick. And I think one of the mistakes that businesses often make, in my view, is that they they often get to the point where they think, ooh, we'll need some more money. It might be too late. The wheels don't turn that quickly. Uh so it's important to to know the process and again, early stage advice is a really important thing. Um, and my final P is is professionals. Surround yourself with the people that can help. Um That know the market, that know how to manage that process and negotiate that process. And I think you'll agree with me there. It's then that goes for that isn't just a finance thing, right? That's a that's a business thing.

SPEAKER_01 22:11

Yeah, absolutely. I I think um those are all really strong points. And uh I think if you take those five Ps, you will come across as a serious business that people can engage with properly. And I think mentioned earlier, certainty is key, but cash is king ultimately. So you need to have the the funds to to run the business effectively, to invest in registering IP where applicable, to get your contracts in order, um, to make sure you've got a good governance model. Um, and you know, 60% of startups fail within the first three years. That's crazy. And I think if people could follow those steps, that's a really clear roadmap to saying, let be in the 40% that can go further and keep building, make sure that your great idea can actually make you some money and whatever you want to do, whether you're working towards an exit or you want to grow the business or whatever it may be, you're putting yourself in the best position you can be. Um one quick thing I just wanted to um touch on before we wrap up, Phil, is uh just a quick um word of warning, I guess, for businesses around um the AI side. I'm a big advocate for AI, um I should mention, but um I have seen it where businesses are putting their great ideas into open LLMs like ChatGPT, and they're exposing their IP uh in a way where they they're really watering down their offering, or they could be um generating certain documents through um likes of ChatGPT and it not being quite ripe for what they need and getting tripped up quite easily. So, yeah, word of warning just around making sure you're not putting anything in there which is going to be something you want to rely on later to protect no confidential information, no trade secrets, and um using it in a mindful way. It can be a fantastic tool, but um it may not be the full solution that businesses are looking for. So I think um yeah, protect IP and use it sensibly.

SPEAKER_02 24:22

It's uh you know, it's a great point, isn't it? I so the only time that I've used ChatGPT was actually to create a cartoon character of myself line. Um and it was quite successful, I've got to be honest. Um but it's a really important point. I I think we we you know it can't be stressed enough, can it? That ChatGPT uh we're seeing it used increasingly or other and and there are other tools available, of course. We should say that. Um but the uh you know increasingly used um in the context of business, everything that goes onto one of those platforms becomes public domain.

SPEAKER_01 24:56

Is that a fair Well it it could be it could be sourced through other people's questioning. So I think if you if you uh put it into an LLM, it becomes part of the training data that it can use. So it could be surfaced. Um so I've I've seen where um people working in PR, for example, will keep requesting um or providing prompts um on the same topics to try and influence the likes of ChatGPT, for example, and then it can start changing the results when people are searching for similar things, or it will pull that because they see well other people have been searching for this, it's been the result each time. So that there are it is it it's a whole minefield essentially, and I think people just need to be cautious in how they're using it. But fantastic tool in the right hands. Fantastic tool in the right hands, absolutely it is.

SPEAKER_02 25:45

Um and you know, just going back sort of going back, one final thought. Um, and and you you mentioned, and it it's a great statistic and it's worth dwelling on a little bit. 60% of businesses fail within the first three years. Um and and and I think that is an uns understandable statistic in the sense that if you're not looking ahead and planning ahead or you're too excited about what you've got, potentially, you might lose sight of that planning and that preparation that allows you to make sure that your business is always projecting itself forward and thinking about the next steps so that you don't, for me, from a finance perspective, potentially you don't get into a knee-jerk um position around I need money now, where can I get it? And potentially, therefore, accessing a solution that may be constraining to the business going forwards. Um, and and that's a lack of planning that can can lead to a constraint that you weren't anticipating. It may not feel like a problem today, but it could definitely become a problem in 12 months' time. Um, you know, short-term facilities will need to be refinanced, can be expensive. So all of those things go into alongside everything that you're trying to work out with your commercial contracts and everything else and protecting your asset, you've still got to have your eye on what the financials look like and where is my business going and how do I best support it? Um, but you know, assuming that we've got the growth plans, the projections and the preparations, um what I mean, just thinking out loud, what what would be your number one reason for why a tech business ultimately fails?

SPEAKER_01 27:29

Unfortunately, it is just running out of cash, the burn rate's too high for what they're doing, they brought too many people on. Um can it can be uh a challenge. So your staff costs are going up, you might be investing in premises, you've um you you stretch yourself too thin, and then um when you get to the point when you are able to get the products live, if you haven't got the uptake and the cash coming through from the from the customer side, you've suddenly got this big sinking pit of uh of debt essentially racking up, and it can be quite hard for business to get out of that hole. So I think um my recommendation would be to try and launch quickly. It doesn't necessarily have to be the full finalized product or service, it could just be the kind of MVP version of it, and then tweak it once it's live, make sure you're getting the feedback from customers, but um really make sure you've got a strength strong brand um around it as well. So obviously that feeds into the trademark registrations and making sure that you're doing appropriate background searches um so you don't have to rebrand in the first 12 months as often happens when people don't check whether other people have got the right names and have good domain rights, etc. Um so yeah, I I think making sure that you launch strong and and have those kind of key ingredients that we've touched on today, um, I think will put businesses in a much better stead to succeed. But yeah, not having the cash is ultimately where people um burn out.

SPEAKER_02 29:11

Absolutely right. And yeah, and that's not just the tech sector, that's any sector, to be honest. And and um, you know, as you as you quite rightly put it, cash is king. Um businesses need money to survive, to operate, to grow, um, and you know it's it's not that easy to come by. And I I also um I also like what you said there about you know, start strong. For me, that goes to the whole concept of confidence, business confidence. You you know, investors, funders, they buy into business confidence. You've still got to check the boxes around financials, projections, growth story, fundamental asset value, whether it's tangible or intangible, and of course, in tech section usually intangible. Um yes, you have to do all of that because you know they are requirements for credit sanctions. But you've got to be strong and you've got to have confidence. And I think sometimes for me, I I I I wrote something about this, I don't think it's been published yet, but confidence for me is not bravado confidence. This is confidence that comes from that knowledge that you've taken all those steps, you've taken the advice, you've protected your asset, you've protected the value in that asset. You know that you've got a journey to go on, but you're confident about that journey because you've done your research, you've got your market statistics, you are you know where your market segment sits, you know where you sit within that market segment, and you know what the opportunity looks like. And I think all those things um lend themselves to that ability to start strong. Yeah. Um, you know, but let's not forget it's still a growth journey, right? It's still a journey. There will be twists and turns, lots of things to think about. Nothing ever goes smoothly apart from uh the work that we do, Ryan, of course, uh together, because everything goes smoothly for us. Um you know, and I think uh, you know, on that note, I it's a it's great to be able to talk about this because I think one of the things that that as a firm in our support of of businesses, SMEs, startups, um, owner-manage businesses in the East Anglia region, um, across our offices, we we want to have that conversation, right? We're here to to to to work with the businesses because we want to help them on that journey. We want to make sure they've ticked those boxes and we want to make sure that they're putting their best foot forward to be strong. Yeah, absolutely. Fantastic. Ryan, it's been an absolute pleasure. The sun is still shining, which is always a privilege here, and um terrific to talk to you. Likewise. Thanks, sir. Thanks very much.

SPEAKER_00 31:59

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