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Patents and Startups: Necessity or Nuisance?

Nine out of ten startups fail.

A majority of the startups fail within 36-55 months of their inception, sometimes after raising capital.

Typically, startups spend close to 18 months and more to fine-tune their product strategy, planning their roadmap, trying to raise capital. Biotech startups have a longer gestation period, and typically focus on getting their science right. Biotech startups face little risks from potential infringement and are beset with uncertainty stemming from the long gestation cycles, and uncertain probabilities of technology being successful, and satisfying the long regulatory pathways. On the other hand, technology startups are able to spend time on not just the product, but also defining their end market, and end user.

For startups to survive, grow and thrive, they should be able to address effectively the risks that they face at every stage of their lifecycle. While product, capital and market are critical elements for startups to focus on, it is a potentially damaging blunder to overlook patents and shying away from a sound patent strategy. Why? Startups spend a lot of time building the right product, but they give away their tacit and product know-how at pitch competitions, roadshows, and campaigns without protecting their IP.

It is understandable as to why startups overlook patents. There is a cost attached to getting patents and capital is always a challenge. However, having patents helps. The reasons for a startup to have patents are very much different from that for big enterprises. While for big enterprises, patents are strategic assets for offensive or defensive purposes, for startups, the reasons would be entirely different. A patent grant for a startup would help in making it easier to secure funding; to set the startup as an acquisition target; to buttress the USP of the product innovation; and to enhance competitive advantage and brand credibility.

In fact, recent studies have pointed out that a new patent grant has a positive impact on the startup’s ability for follow-on innovation, and for filing good quality patents.

So, should all startups file patents?

Startups in the technology space should definitely consider filing for patents if the technology they are working on is unique, has a commercial potential, and cannot be saved through only trade secrets.

Startups with patents are able to achieve more, than those without patents. Recent studies have pointed out that following the grant of patent, tech startups are acquired within 40 months, or they go public in 55 months. The grant of a first patent issued raises employment growth an average of 36% over 5 years. The first granted patent grows sales at an average of 51%. The probability of securing VC funding is increased by 53% upon issuance of the first patent.

On the other hand, startups without patents are less likely to survive, and meet their death eventually. Typically, patents are a good barometer for the longevity, performance, and success of a tech startup.

A patent is a property right granted to the owner of an invention for a certain period, in exchange for detailed public disclosure of the invention. During the term of the patents, the patent rights can be asserted to gain competitive advantage and exclusivity as well as to thwart unforeseen risks.

In simple words, a good patent is one that protects a novel invention, which others might want to use. The claims for such a patent should be such that others cannot easily copy, or work around the patent.

Why should tech startups opt for patents?

Patents help attract new capital

Startups with patents are good targets for attracting new capital. For investors, tech startups having US patents indicate that they are of a certain expected quality. In other words, patents provide a good signal to the Angel Investors and VCs about the quality of the technology, and the pedigree of the startup founders. Patents help such startups establish their cred, and overcome the fact that they are relatively young or inexperienced. At the early lifecycle stage of a startup (imagine Series A level), a modest number of patent applications, and patent pipeline would help bolster the image of the startup, and make them attractive for investors.

While some angels back tech startups based on their gut-feel, others look for patents to gain confidence in the venture.

Startups aspire to be acquisition targets. Having patents helps.

Patents help increase the odds of potential acquisition for a technology startup.

In a changed innovation environment, new innovation does not necessarily stem from internal resources. So, technology companies are forced to scout for new innovation to build their pipeline over the short and long-term. They look for new startups to build their innovation capabilities. All other things being equal, what differentiates an attractive startup target from others is the valuable patent portfolio that the startup has, with granted patents and pending patent applications. Acquiring such a startup would enable large companies to improve their patent profile against larger competitors.

Defending the turf

Having patents also helps a startup in protecting itself from infringement threats from established technology companies, who are the leaders in that particular technology domain. Established companies recognise that startups have meagre financial resources, have limited or no exposure to patent risks, and hence as an offensive strategy, seek to use their patent portfolio to run down new, emerging competition.

As startups mature and grow, they also come under the direct line of fire from non-practicing entities (NPEs). NPEs typically target small companies, and tie them down with costly litigation. However, NPEs would typically leave a tech startup with good patent assets alone, and target others with no IP awareness.

Preventing theft of new innovations

Patents can help a startup stop the theft of its intellectual property by others. At the early stages of its lifecycle, patent applications would help startup entrepreneurs to discuss their technologies with potential investors, without fear of the technology being stolen or ideas being misappropriated. At a mature stage, once startups have proven technology with solid proof-of-concept, patents would enable them to assert their patent rights in preventing mature technology companies from using similar technologies.

Increase the market pie; Leverage the invention

Technology startups can increase their market pie, and leverage their innovations with patents. For startups working on next-generation technologies, a patent provides them with a window to the world. Since tech startups have limited bandwidth and means, patents enable them to enter into licensing agreements with manufacturers across the world, and build revenue flows.

Building bridges with big companies

As mentioned earlier, big companies scout for innovations outside their offices. Today, companies develop new products and services based on innovations generated by technology startups. For technology startups having patents, this translates into potential opportunities for aligning themselves with large companies through joint R&D partnerships, and increasing their leverage through their patent assets. The patents would cover the background technology that is shared for further development.

Once they have considered the benefits accrued from patents, what should tech startups do?

Here is the action agenda for startups:

Initial Research Phase

Once technology startups have established proof-of-concept and are past that early initial research phase, they should aim to file patent applications at the USPTO. They should follow-up with follow-on patents that protect new innovations built into the original invention.

Filing for a provisional patent establishes a Priority Date on which startups assert their invention.

However, filing a patent application is not the end of the IP process. Once the patent has been filed, the real challenge begins. Startups should follow-up with their time, efforts and capital to ensure patent applications are granted.

All patent applications should be filed and assigned to the startup than the startup founders. This would mitigate the risk of lawsuits from startup founders if they leave

It's a pretty bad strategy to just file for patent applications just for the sake of filing. Startups that put their time in filing good patents benefit in the long run. Towards this end, startups should typically rely on expert counsel. They could consider various options ranging from deferred to discounted fees to providing equity in startups in lieu of the expert fees.

Growth Phase

At a mature growth phase, startups could consider buying patents off-the-shelf to overcome technology gaps in their portfolio. Buying patents is a great strategy to quickly build on the strengths of the startup, and to raise the value of the startup.

The current market conditions for buying patents are good. However, prior to consider buying patents, it helps to have an expert counsel with experience in facilitating patent sales and acquisitions.

In conclusion

Every startup is on a unique journey of its own, trying to solve a business challenge, catering to a distinctive end market, operating in an ecosystem that is different from that others operate in. So, how startups act on their aspirations would also be different from that of other startups.

However in a globalized economy, intellectual property is a must for startups irrespective of the geographies they operate in. Having patents helps them give wings to their aspirations. It is upto startups to best decide on patent strategies that make sense to their business in the environments they operate in.

To survive and achieve their business goals over the long-term, it is prudent for tech startups to focus on patents. In doing so, they should rely on expert counsels who could support them in the maze that is intellectual property.

If you are a early-stage technology startup looking for strategic advisory, or if you are a mature startup looking to acquire patents, do get in touch with us.

If you are a venture capital firm, or a patent analytics firm, we would love to forge relationships with you.


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