Venture capitalists (VCs) face challenges when observing the quality of start-ups as investment targets. These challenges result from the considerable information asymmetries that exist between VCs and start-ups (Kollmann and Kuckertz, 2010 and Leland and Pyle, 1977). Start-ups are new to the marketplace and do not have an observable track record (Hannan and Freeman, 1984, Morse et al., 2007 and Shepherd et al., 2000) that the VCs can use as a criterion to make their investment decisions (Macmillan et al., 1985 and Muzyka et al., 1996). To overcome these information asymmetries, VCs evaluate, among other factors, the intellectual property (IP) assets of start-ups. However, previous research regarding the role of IP assets in VC financing has primarily focused on patents (Audretsch et al., 2012, Baum and Silverman, 2004, Cao and Hsu, 2011, Engel and Keilbach, 2007, Haeussler et al., 2009, Hsu and Ziedonis, 2008, Lerner, 1994 and Mann and Sager, 2007). Although patents are an important criterion to consider when investing in start-ups (especially technology start-ups), the literature suggests that other IP assets, such as trademarks, might also have considerable effects on firms' market values (Greenhalgh and Rogers, 2006a, Greenhalgh and Rogers, 2006b and Sandner and Block, 2011). It is therefore important to include both patents and trademarks when studying VC financing, as both forms of IP cover different aspects of the start-up's business model: patents are associated with technological aspects, whereas trademarks refer to market aspects. Trademarks grant their holders the right to exclude others from the use of protected words, signs, or symbols (Besen and Raskind, 1991 and Landes and Posner, 1987). Thus, trademarks serve as a means of protecting firms' brands and marketing assets (Barth et al., 1998, Mendonça et al., 2004, Sandner and Block, 2011 and Wood, 2000). Although this exclusion right might not produce immediate value for a start-up, the filing of trademarks nevertheless constitutes important information for VCs because it demonstrates a start-up's degree of market and growth orientation and its willingness to protect its current and future marketing efforts from the impairment of others (Sandner and Block, 2011).
Studying the role of trademarks in VC financing decisions is therefore also a highly relevant issue in entrepreneurial marketing research. Prior research suggests that marketing investments are highly relevant for the success of young entrepreneurial ventures (Gruber, 2004, Hills, 1984 and Kraus et al., 2011). Findings on VC financing decisions support this claim by indicating that VCs consider a start-up's market orientation to be an important investment criterion (Douglas and Shepherd, 2002, Hills, 1984, Hisrich, 1989 and Wortman et al., 1989). Nevertheless, few empirical studies have examined the actual impact of entrepreneurial marketing actions on VC financing decisions (Gruber, 2004 and Kraus et al., 2011). Empirical evidence on the strength of this effect and its boundary conditions is relevant from both a theoretical and a practical perspective and would help start-ups optimize their use of resources toward maximizing their VC valuation.
Our study shows that trademarks are strong predictors of VCs' valuations of start-ups. We argue that trademarks have not only protection value but also signaling value regarding start-ups' market orientations. The number of trademarks and the breadth of their applications, as reflected by the Nice classes, provide additional information regarding the scope and direction of start-ups' marketing strategies. These effects are positive but eventually diminish (and can even become negative) because of the marginal additional information and protection value that trademarks provide beyond a certain point. Our findings also indicate that the signaling value of trademarks decreases over the venture cycle; when more tangible success factors become available, the VC gains deeper insight into the start-up and begins to exert influence on its strategies. We believe that the findings of this study will motivate further research on the role of IP rights in VC financing of start-ups. Future research should, for example, disentangle the signaling and protection values of trademarks and their development over time. Future studies should also further elucidate the relative impacts of trademarks and patents at this early stage of firm development. Finally, collecting data on actual R&D and marketing activity or strategies would provide a better understanding of the underlying mechanisms.
