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An Entrepreneur’s Guide To Patents: How To Determine Whether They Are Right For Your Company

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Editor’s note: This is the second in a series of articles by Brad Woodcox that explores the patent system for entrepreneurs. The first examined the basics of the system. Woodcox is a technical specialist focusing on startup development for Novak Druce + Quigg, an intellectual property super boutique law firm. Follow him on Google+ and Twitter.

Now that you have background knowledge of the patent system (at least within the U.S.), we can analyze probably the most difficult question: “Should you pursue patents for your company or invention?” Unfortunately, there isn’t an easy or direct way to answer this question. Each business is unique and requires an individual analysis. This article discusses some frequently asked questions and presents an analysis framework that may be useful for you to explore the applicability of patents for your business/invention.

Given the significant costs of obtaining a patent, should you spend any of your limited capital on them?

It depends. A patent will not directly make your company’s product or service more successful, but it can have a positive financial impact on the business. The best way to analyze your situation is to look at what a patent could do for your company and how it would fit into your company strategy. This self-analysis should include product, finance, and market/competition elements.

For many Internet startups, the timeline to make it or pivot and try something else is often 9-24 months. With a standard patent application taking three-plus years and 80 percent to 90 percent of startups failing in that timeframe, most startups will not be around long enough to enforce the patent.

Given the startup failure rate and patent timeframe, should most Internet startups skip patents?

Not necessarily. A patent (or portfolio of patents) may be useful for both successful and unsuccessful companies. For successful companies, the reason is clear in that patents can be used as an offensive or defensive tool against competitors. An example of this is the patents that are being asserted in the smartphone industry by companies such as Apple and Samsung. For unsuccessful companies, the patented innovations can still hold tremendous value.

An example is Internet search engines. There have been dozens or even hundreds of Internet search engines, but most failed, as Google became the dominant search engine, even though they weren’t the first to market. Some of these now-defunct search companies had patents on innovative elements for search engines that Google later licensed or acquired (see Google acquires Cuil patents). Other large-scale examples are companies, such as Nortel, Novell, and Kodak, that faced financial challenges and were able to sell or are in the process of selling their patent portfolios for billions of dollars. Hence, a company can use patents as a tradable asset, perhaps even earning a profitable return which otherwise wouldn’t have occurred.

How can you determine whether your patent will be valuable?

This is difficult to expound. At the highest level, the patent must be regarding a topic in which other people or companies are interested. You can design the most amazing product, but if no one wants, needs, or buys the product, then it isn’t worth very much. While this sounds trivial, innovation bias can affect intelligent inventors and entrepreneurs. Other factors to consider are:

  • Is the patent in a subject area that is earning significant profits?
  • Are there currently patent litigation cases in process in the subject area?
  • Does the invention allow for reduced costs or increased performance?
  • Are there any competitors that could directly benefit from your invention?

The deepest level of analysis requires a thorough review of the construction of the patent, including the exact wording and coverage of the claims. This requires extensive knowledge of patents and the industry, so it can’t be briefly summarized herein. It is further noted that multiple patents within a single subject area that are packaged together in a portfolio can return a higher per patent valuation than the patents valued separately.

Will a patent help me fundraise and what do angel investors and VCs think of patents?

In many instances, yes, a patent can help your company be more “investable.” Fundamentally, investors will analyze the risks and potential rewards of a single investment (in this case, simplified by not factoring in diversification and portfolio theory). Owning one or more patents can reduce the risk of the company by strengthening the competitive advantage and providing an additional saleable asset. Thus, many investors react positively to a company holding patents and other forms of intellectual property. However, some investors are apathetic to patents. These investors typically contend that patents and the enforcement of patents are too time consuming and expensive, so they prefer to have as little interaction with them as possible. Hence, patents may increase the chances that your company receives future investment, but a patent doesn’t guarantee that your company is valuable or an investable business.

What are the consequences if you don’t have patents?

They can be wide ranging. The following are a few scenarios:

  • Nothing. Whether your company succeeds or fails, patents may never be an issue.
  • A competitor steals your idea/duplicates your product. Without patent protection, there is little you can do other than try to outmaneuver the competition. You’ll be forced to compete on product, marketing, pricing, and/or strategy. If you have one or more patents, you could threaten to or file a lawsuit, in order to get the competition to stop sales or license your patents.
  • You are sued for patent infringement. Without a patent, you’ll be forced to either fight in litigation or license/acquire the patent. These both assume you have enough funding. Otherwise, it could result in closure of the business. If you have one or more patents, then additional options become available, including settling through a cross-license or filing a patent infringement claim against the original plaintiff.

Analysis Framework: Should You Apply For A Patent Or Not?

The following list of questions that you can use as a guide to kick-start your analysis of your invention and business in order to determine whether you should pursue a patent for your invention. Many of these questions are the same as those used to evaluate the viability of a business idea. While some may not apply to every business/invention, the questions should help you develop a story and strategy that you can use to discuss with colleagues, advisors, investors, and/or patent attorneys to determine whether to pursue a patent.

Product

  • Is the invention core to your business?
  • Is the invention important enough that it could sway customers to your product versus competitors’ products? Could you charge a premium due to the invention?
  • How similar is your product to other products currently available?
  • Would your innovation be easy for competitors to copy?
  • Could your idea be stolen or copied by your outsourced manufacturer?
  • How easy or difficult would it be for a competitor to “design around” or find another method to replicate the function of your invention? What substitutes are available?
  • Is it better to keep your invention secret rather than detailing a full disclosure in a patent?
  • How long might the invention be viable or valuable?

Market

  • Will a patent deter competitors from entering the market?
  • How long would it take a competitor to copy the invention?
  • What is the current market structure? Number of competitors? Pricing/margins?
  • What additional percentage of the market could you capture with the invention?
  • Does the industry highly value or have a history or utilizing patents?
  • How are the interactions and rivalry between competitors in the market?
  • Could the invention be useful in other markets/products?

Finance

  • Is the potential profit from the invention greater than the cost to obtain a patent?
  • Would your patent be of high demand/value to others?
  • Would a patent help you fundraise or advertise?
  • Do you have the desire and resources (time and money) to defend the patent if necessary?
  • Would a patent make your company more valuable to a potential acquirer?

The decision about whether to pursue patents can be difficult. Each business requires an individual analysis to determine how patents fit into the overall strategy and circumstances of the company.

For some companies, patents can serve as a form of pseudo-insurance. If your company does well, the patents can protect you from imitators, patent trolls, and competitors. If your company doesn’t do well, then the patents may serve as valuable assets when the business is wrapped up. Some very successful companies have chosen to proceed without this “insurance of patents,” perhaps because they viewed the “make it or break it” risk greater than the risk of needing patents later. However, some of these companies later scrambled to gather patent protection (e.g. Google acquiring Motorola Mobility and Facebook acquiring AOL and IBM patents).

Now armed with your knowledge of patents, the details of your company/idea, and the framework presented in this article, you can hopefully make a more informed decision about whether or not to pursue patent protection for your invention and/or company.