By Margie Peterson
Trademarks—at their best—are designed to evoke a visceral feeling: People around the world know what to expect when they see McDonald’s Golden Arches or ask for a pair of Levi’s. Some, such as Band-Aid and Frisbee, are so ingrained in the collective consciousness that the public frequently uses the names to represent all products of that type.
But it’s not cheap to obtain and keep trademarks, which can include a product’s name but also a slogan, logo or distinctive symbol, so not all new businesses spend the capital to do so. Thanks to groundbreaking research by Qianqian Yu, assistant professor of finance, and a team of academic researchers, more startups may decide the advantages are worth the cost.
Yu collaborated with Thomas Chemmanur and Harshit Rajaiya of Boston College and Xuan Tian of Tsinghua University in China on an exhaustive analysis of how trademarks can affect the success of young businesses. The findings outlined in their paper, “Trademarks in Entrepreneurial Finance,” were featured in October 2018 in the Harvard Law School Forum on Corporate Governance and Financial Regulation.
“I’m interested in how young firms can raise capital and achieve success,” Yu says. “So in this paper we study how trademarks can affect the success of young firms, starting from when they are private firms till after they go public.”
To study the value of trademarks, the research team mined files from the U. S. Trademark and Patent Office to assemble a unique database of 55,977 trademarks registered to venture capital-backed firms during three decades, from 1985 to 2015. They then looked at the investments in the firms, the valuation during their Initial Public Offering and their performance after their IPO went public.
“We came up with this idea because academics and practitioners talk about how intellectual properties are very important determinants for a firm’s success,” says Yu, adding that little research has been done on how trademarks affect the success of startups. “So in this paper what we try to do is provide the first evidence in the literature on how trademarks can create value for those young firms.”
They found that young companies with a larger number of trademarks received more venture capital investments and are more likely to achieve a successful exit via an IPO or acquisition. Trademarks play what Yu calls a “protective role”—they can help a company distinguish its products from the products of other companies, which in turn can generate consumer loyalty. It also performs an informational role by signaling to financial investors that the product is of high quality and has some uniqueness.
“Trademarks play an important role for a young firm, so a young firm should, if possible, apply for a trademark to protect their product in the product market and also signal good quality to investors,” Yu says.
Although the direct costs of establishing a trademark might be only a few thousand dollars, the process can get expensive if other companies challenge the application.
“If somebody applies for a trademark and other parties raise opposition, the median cost will be $80,000,” Yu says. “That’s $80,000 plus attorneys’ fees, which are not recoverable even if the opposition party raises a frivolous opposition.”
That’s a big expense for some startups, so trademarks tend to act as indicators of value to potential investors.
“Larger institutional investors are attracted by firms with a larger number of trademarks,” Yu says. “The firms that apply for trademarks—and have trademarks granted to them—have to be really good firms that can generate a unique enough trademark to protect them.”
Why it matters:
Start-ups must decide whether to spend the money to obtain trademarks for their products. Groundbreaking research by a team that includes Lehigh’s Qianqian Yu shows that fledgling firms with trademarks attract more venture capital investments and are more likely to achieve a successful exit through an IPO or acquisition.