Startup advice (creating an effective IP strategy)

We live in an age where we depend heavily on technology on a day-to-day basis. As a result, there are more emerging technology companies that are disrupting the market to provide new solutions to improve our lives. It is becoming important for these companies to protect their hard work and stay ahead of competition by protecting their assets through various forms of intellectual property.

Posted January 27, 2017

Intellectual property is an important asset to many organisations; how intellectual property is treated can vary. From large companies filing hundreds of costly patents a year to conglomerates licensing technology or acquiring the portfolios of emerging companies, a coherent IP strategy should be treated as seriously as any other business consideration such as security.

A coherent IP strategy should be treated as seriously as any other business consideration

The goals of startups obviously differ from multinational corporations; a typical startup is more concerned with keeping within budget as well as innovating rapidly and increasing customer base. The intellectual property that defines a company is important but having an effective IP strategy arguably matters more; an effective IP strategy supports business goals and helps a startup grow and become a fierce player in the market.

Which intellectual property rights are available?

Once you understand which type of intangible assets you have, focus on the best type of protection for them; different types of intellectual property are important for different aspects of a business. There are four main types of intellectual property rights:

1. Patents: There are two types: design patents and utility patents.They are typically used to protect novel inventions.
2. Trademarks: Trademarks are used to protect brand identity to stop imitators from passing off as your company. They are typically used to protect the name of a company or a product e.g. Dyson or Dyson Supersonic.
3. Copyright: Copyright is used to protect musical, literary, dramatic and artistic works e.g. pop songs and films. For a company’s creative output, it can include brochures, whitepapers, photographs, computer programs or music in advertisements.
4. Trade secrets: Trade secrets last for an indefinite amount of time and in every jurisdiction, however they are only valuable if you keep it a secret. Once the secret is out it is no longer protected. A great example is Coca Cola’s secret recipe which has remained a trade secret for 125 years. Many organisations choose not to patent but instead keep a trade secret. In the US, you can patent a trade secret later if you decide you are not ready to patent yet.

Where to file?

Patent laws vary by country; there is no patent that encompasses all countries. A patent is only good in the country it was filed in so a patent filed in the UK is only good in the UK, in the US then it is only good in the US and so on.

Although having intellectual property rights are important, filing in every jurisdiction can be unwise. Think strategically about where you wish to file the patent, do you have competitors there? Filing a patent in a country with no competitors could be a waste of money and time.

Patent protection exists to exclude the right of others from producing and selling your technology. If you have no competitors in that country, you do not have a threat in that market. If you do have competitors with similar technology, patents will protect your assets as well as setting you apart from the competition, making your company more valuable to investors and potential acquisitions.

Think strategically about which markets to file the patent in, do you have competitors there?

When to file?

As soon as you can.

The law in the US is a first-to-file system rather than a first-to-invent system. This means that the right to the grant of a patent for any given invention lies with the first person to file a patent application for that invention, regardless of the date of the actual invention.

Once you have decided to file, it is important to consider whether you should file a provisional or a non-provisional patent application.

Provisional vs non-provisional

A provisional patent application is a legal document filed through the USPTO. It establishes an early filing date but does not mature into an issued patent unless the applicant files a non-provisional patent.

Some organisations prefer to file provisional patents before filing a non-provisional patent to gauge a market. Other organisations may file a non-provisional patent directly because they can add more detail to the patent to capture the embodiment of the invention better. The choice depends on the company and its goals.

Typically, large firms like IBM may file many non-provisional patents each year because their strategic business goals demand speed. Their goals may be buying and selling licenses for the technology which is why they’re able to churn out so many patents a year.

For startups, the concern is growth, increasing the number of customers or reaching IPO. Most want to be recognised as an emerging innovative company but must do so while keeping within strict budgets. Startups can find a lot of value in filing a provisional patent first as it’s typically cheaper than a non-provisional patent and allows the inventor to use the term ‘patent pending’ while still developing their invention and before taking it to market.

Filing a provisional patent establishes the filing date of the patent but does not start the review process with the US Patents and Trademark Office (USPTO). This is different to Europe and China’s patent office which doesn’t have a provisional filing system. Conversely, a non-provisional patent also establishes the filing date but does begins the USPTO patent review process which can take 18 months or more.

A provisional patent can be used as a useful milestone during development; if you decide to slightly change your invention, you can do so providing all the updates are included in the final non-provisional patent application. The ability to change a non-provisional patent does not extend to non-provisional, meaning any changes after filing could lead to potential litigation at a later stage.

Additionally, by filing a provisional patent, you can sell the invention to get a feel for the need in the market and evaluate whether a patent is appropriate.

A provisional patent lasts for a period of 12 months, during which time you can license your invention to another company. This could be an additional source of revenue that could contribute to the costs of filing a non-provisional patent.

Why is an IP strategy important?

Investors

A good patent portfolio is an indicator to investors that you are worth considering for investment.

A study by the USPTO found the following results:

• Firms with approved patents are far more likely to receive critical venture capital support
• Patents more than double the probability that a startup will eventually be listed on the stock exchange
• Firms with an approved first patent continue to innovate receiving many subsequent patents of higher quality relative to their firms¹

Patents more than double the probability of a startup becoming listed on a stock exchange

According to a 2014 MINES ParisTech report, startups holding a patent were between 2.5 and 3.6 times more likely to be successful within 10 years than those that did not.²

Acquisitions and licensing

Having a strong patent portfolio unlocks the opportunity to license or sell your technology to other companies. Many big companies have closed R&D and innovation processes, often they are looking for opportunities to license technology from another company or acquire a patent portfolio.

Having a strong patent portfolio can potentially open both M&A opportunities and additional revenue streams

Google didn’t file many patents historically yet as their competitors started filing more patents, they realised they needed a portfolio to fire back with. By acquiring Nest Labs in 2014 for $3.2 billion (£2.54 billion) in cash this significantly increased the value of their patent portfolio. At the time, Nest had two hit products, the Nest Learning Thermostat and Nest Protect smoke detector. Since the acquisition, Nest have made $300 million (239.2 million) in annual revenue.

Competitors

Having a strong portfolio enables you to stand out from your competition; it allows you to stay ahead and maintain a monopoly without worrying about a competitor imitating.

Use your patents to defend your company from rivals

This again is demonstrated by Nest Labs when their Smart Thermostat was hit by patent infringement lawsuits from Honeywell. However, Nest were prepared and had begun patenting its products which protected them from their rival Honeywell.

Even having a patent pending is perceived as a valuable asset and an accomplishment by other organisations. It shows that your technology is of high-quality and thereby increases a consumer’s desire to buy that technology.

Summary

• Understand which types of intellectual property rights are right for your business
• File a patent as soon as you can
• Filing a provisional patent gives you time to understand the market
• A good patent portfolio attracts investors and acquisitions

Footnotes

1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2704028
2. Can patent data predict the success of startups? (June 2014, MINES ParisTech)
3. http://www.forbes.com/forbes/welcome/?toURL=http://www.forbes.com/sites/connieguglielmo/2014/01/14/google-takes-a-cue-from-the-apple-playbook-with-nest/&refURL=&referrer=#1a645ee17283