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IP for startups: It starts with strategy

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Image Credits: Bryce Durbin / TechCrunch (opens in a new window)

Intellectual property can be a powerful weapon in your startup’s arsenal. It can protect you from competitors using your tech, and it can drastically improve how valuable your company is: If your IP is stopping a big company from doing what it wants, that could, in itself, be a good enough reason for acquiring you.

In this new series, we are talking to Michele Moreland, who is a general partner at Aventurine, which is taking an IP-first approach to investing. Moreland has been at the cutting edge of IP strategy throughout her career and has been responsible for $3 billion in patent verdicts as a portfolio strategist. As a trial lawyer, Moreland represented some of the most important tech companies of our time, including Qualcomm, Amgen and Nvidia.

So, what’s IP? Well, it refers to “creations of the mind,” such as inventions, literary and artistic works, designs, symbols, names, and images used in business. Some IP is automatic (e.g., this article is automatically covered by copyright because I wrote it), and other IP — such as trademarks and patents — need to be protected more actively.

In this series, we take a deep dive into the various types of IP — including patents, copyrights, trademarks and trade secrets — seen through the lens of early-stage startups. As a startup founder, what do you need to think about — where and when, and how much will it cost — when protecting the IP your company is creating?

Start with the “why”

“Oftentimes, people think they just need to get the patent, because it checks a box for VCs,” Moreland said. “But if you really want IP to be a scaffold for the business and potentially create value, and maybe offer support in the context of a future exit, you need to take a broader view.”

The considerations are manyfold, but it starts with thinking about where your company is in the market and the space you take up vis-à-vis your competitors. This includes thinking about your company’s geographic location and that of your customers and potential acquirers. You need to think about the types of IP that may support your business and the people who need to be involved in the strategy and execution of your intellectual property approach.

“I think there are certain people in the company that get left out of the mix. That may be a mistake. From my litigation experience, I’ve seen that outcomes may have been different if certain marketing people had been part of early conversation about IP,” Moreland said. “Starting from the 100,000-foot view, the conversation starts with ‘Where are we?’ and ‘Where do we want to go?’”

When to start thinking about IP

When to start thinking about intellectual property protection depends on a few things, including what your product is. If you’re developing, say, a new semiconductor, you pretty much need patent protection right out of the gate.

For other applications — for example, if you’re building a mental health app — it’s a little fuzzier. Some more abstract ideas that apply to computer software are no longer as obviously patentable as before. The Alice decision, a 2014 Supreme Court ruling, established that abstract ideas implemented on a computer aren’t patent-eligible under Section 101 of the U.S. Patent Act. The court introduced a two-step test: Determine if the claim is directed toward an abstract idea. If yes, then verify if it adds “something extra” that embodies an “inventive concept.” If not, it’s deemed ineligible. This decision significantly affected the patentability of software and business methods, causing many existing patents to be invalidated and future patent applications to face greater scrutiny.

“Because of the Alice decision, patent protection isn’t going to be available — or maybe you have to get super creative about it,” Moreland said.

But even for companies that are deciding not to pursue patents, it’s still worth doing that strategically. An investor isn’t going to accept “We didn’t think about our IP protection” nearly as much as they would “We spoke to an IP specialist and discovered that patenting is going to be tricky in our case. Instead we are relying on trade secrets and are thinking of ways of monetizing our substantial dataset through licensing.”

Drawing up an IP strategy is crucial, both in terms of allocating resources (patents aren’t cheap!) and setting the course for the company.

The key is to think about three things: Where your company and technology are today, where they are going, and where the market is. For the latter two, thinking about how IP protection might facilitate an exit opportunity, or an opportunity to pick a fight with (or defend yourself from) a competitor, is the name of the game.

NDAs

As a rule, investors don’t sign NDAs when they are evaluating startups before they invest. That could be risky for any technology that’s not yet patented. Realistically, it makes sense to avoid talking about the specifics of the technology before an NDA is in place.

If a potential investor says they don’t sign NDAs for pitches, try pitching the parts that aren’t directly related to the patentable technology. Talk about the market size, the quality of the team, and the problem you are solving, but stay clear of the solution and the product you are building. To unlock that part of the story, ink needs to meet paper. Sophisticated investors will understand, and if you need to file your patents before you continue the conversation with your investors, that’s sometimes an option as well.

Yes, investors will sign an NDA, but only in this specific circumstance

Similarly, it may be tempting to talk with other people who are solving problems in the industry where you are developing technology, but that could be a mistake as well. “So let’s say you are a small startup — it’s just you and three other people — and you have this great solution. And you go and talk to a friend who’s at a big tech company, and you start outlining what you’re doing. That’s a problem,” Moreland said. “They have thousands of engineers; they could do what you’re doing, faster than you can. They may not do it as well, because they don’t have what’s in your head, but it is a risk, nonetheless.”

Only share the patentable specifics with people on a strictly need-to-know basis.

Apple’s 5,000 patents

I recently wrote about Apple’s new VR headset and how it was a game-changer for startups. One nugget that stood out in all the coverage was that Apple has been working on this for the better part of a decade and filed 5,000 patents along the way.

Apple’s AR headset is a game-changer for startups

For a startup that certainly doesn’t have an Apple-sized army of lawyers and researchers, 5,000 is an unreasonable number. But zero might also be wrong.

“As a startup founder, if you have something truly novel, something truly groundbreaking, and something that’s a different way of looking at things, you need to protect it,” Moreland said. “I haven’t looked at Apple’s patents, but what I suspect is going on is that they are thinking about how the market could develop. They are thinking about what Meta is doing — and how they can protect all of that work they are doing.”

For a small startup, the focus is the differentiator; if there’s a big idea that is broad and hard to patent, there may be specific aspects of what you are doing that can be protected. Perhaps you can choose to not worry about the device but patent the cartridges — that’s how you’re going to generate the revenue.

Building a patent family

A patent family is a collection of patent applications covering the same or similar technical content, filed in multiple countries or regions. These applications are linked through priority claims based on a single priority filing, typically the first application (known as the “parent” patent). The “children” are patents that are related, either because they carve out additional details of an implementation of a patent or because they cover specific regions.

“The biggest mistake I saw was that [the whole patent portfolio] was in one patent family, and the company did not keep the family alive,” Moreland said. That means the company stopped filing applications within the family. “The courts might change what’s required. If the family isn’t ‘open,’ you can’t go back and reshape your claims.”

The risk is related to language. Patents are written, and language is inherently inaccurate; it isn’t the perfect way to capture ideas and technology. You may have the greatest idea in the world when described one way, but then a court decision comes along and completely obviates that characterization. If the patent family has gone stale, you can’t update it. If it is still alive, you can update it with newly approved language.

If you are talking about distinct technologies that are separate inventions, you are probably talking about different patent “families.” This might come up if you are solving a particular way of manufacturing microprocessors, for example, and in the process of making those, you come up with a new type of X-ray to test the microprocessors. They are related — you use both on your manufacturing floor — but they are different, because the microprocessors may have different customers and use cases than the X-ray technology you developed.

Trade secrets

In this article, we have talked a lot about patents, but there are many forms of intellectual property. And while patents are real, tangible documents that may have value, the others are also important pieces of the puzzle.

Trade secrets are a type of intellectual property that consists of information. This could include a formula, pattern, compilation, program, device, technique or process. Trade secrets are kept secret (duh), and give your startup a competitive edge. It is typically information that is not generally known or readily discoverable by others, and it must be subject to reasonable efforts to maintain its secrecy.

Unlike patents, trade secrets do not expire after a set period of time, offering potentially indefinite protection as long as the secret is kept confidential. The classic example of a trade secret is the formula for Coca-Cola, which has been kept secret — in a vault! — for over a century.

Trade secrets do not need to be registered, unlike other forms of intellectual property such as patents and trademarks. Obviously, this can also be a disadvantage: Others who independently create or discover the trade secret can legally use it.

If there’s a chance that someone can reverse-engineer or figure out how your trade secret works, consider trying to patent it. Choosing how to protect your tech is the core purpose of having an IP strategy in the first place.

Branding and trademarks

For some companies, the brand is more important than the trade secrets. Using our previous example, even if someone were able to reverse-engineer the Coca-Cola recipe exactly and create a copy of the beverage, it is unlikely that the new brand would sell as well as the original. That’s thanks to branding and brand recognition.

“You could ask the question, for Facebook, what is the most valuable: its patents or its brand?” Moreland said.

For some startups, developing a brand — and protecting it with registered trademarks — is an important part of the IP strategy, and particularly important for consumer-facing brands.

Copyright

Copyright is a legal protection given to creators of original works such as literature, music and art. It means that if your company creates something — whether that’s documentation, graphics, or text of some kind — you have the exclusive right to use and distribute that work.

But Moreland cautions against relying on copyrights because the rules are in flux.

“Honestly, as an investor, don’t focus on copyright much. There have been some big developments such as the Andy Warhol case,” Moreland said, referring to the Supreme Court ruling that the late artist wasn’t entitled to use another person’s work, thus restricting fair-use rules. “If the only protection is copyright, I’m wondering if there’s going to be value there long-term. I just don’t know.”

There’s also the Oracle v. Google case, which turned out to be a huge copyright battle around Android’s use of the Java programming language, which was owned by Sun Microsystems until Oracle acquired the company.

Your data is valuable too

Data, in itself, isn’t one of the IP categories, but given that you own the data you create, and this data could be valuable, means that it should probably be part of your IP strategy.

“Data can pretty much be its own product, and a lot of platforms and code-based solutions are creating data, which has its own independent value and can be licensed. In that way, data is similar to other types of IP,” Moreland said. “It may not be your core business, but it’s an artifact that’s been produced as a result of your business.”

Some data can be licensed, and some falls under privacy protection, which may still have value for other applications. One example of this might be if you are running a huge sales SaaS solution. You may not be able to license your customer’s data, but data analysis might show which emails are more likely to be opened and responded to than others. That data could be used to give others feedback about the effectiveness of their email efforts. Feedback that’s based on a huge dataset has inherent value, and you could potentially charge customers for this feature, or build a separate product that is trained on this dataset.

Defensive and offensive IP

Intellectual property should be thought of as a tool for both defensive and offensive activities.

Defensive IP is typically used as a protective strategy to prevent others from suing for patent infringement. For a startup, that means building (or even acquiring) patent portfolios to dissuade competitors from suing your company.

Offensive IP involves proactively enforcing patent rights, typically by suing alleged infringers to gain financial compensation (through licensing, settlements or both) or to be a thorn in the side of your competitors.

Defensive IP strategies primarily focus on risk management and fostering innovation; the offensive strategy aims to leverage the patent as a competitive tool or revenue source. Both approaches are essential parts of a comprehensive IP strategy.

Another way to use offensive strategies is to patent technologies or innovations that you develop in the course of your business, even if you choose not to use those technologies yourself. You may build a prototype, for example, and realize that there’s a more efficient way of accomplishing what you are trying to do. The original approach may still have value in other contexts or use cases, and by putting IP protection around that approach, you can dissuade competitors from using it. You may even be able to generate revenue by licensing the technology.

Who needs to be in the room

Innovation happens at many layers of the business, and as your team grows, different business units or teams may have a different lens on what might be valuable IP.

The C-suite should be part of the IP strategy. In fact, the CEO is likely to be the product’s inventor. But Moreland points out that as the tech team grows, innovation starts happening elsewhere. “I think the C-suite has to understand and be interested. They determine how to prioritize resources, so they need to be involved.”

Beyond the top leadership, involve your legal team or external counsel. It’s also a good idea to get an IP specialist involved; your litigators will do whatever you tell them to do, but that may be at odds with your overall vision and strategy. It’s easy to fall into the trap of trying to patent every little improvement, and that could easily become a huge resource sink.

“You need technical folks to weigh in on your IP strategy. They will tell you what’s new and exciting. They may want to cover everything,” Moreland said. “You may have to say ‘OK, I hear that’s novel and new and exciting, but it’s not core to the business, and it’s not going to create value for the company, so we’re not doing that right now.’”

One often-overlooked team is marketing. This is the team that’s creating the language around how to position the company and keeping an eye on what the competitors are doing. Often, the materials used in sales and marketing give a very clear indication of what has commercial value in your industry.

“Here’s a little secret: If I’m going to go litigate and sue somebody on a patent, it’s much easier if the patent has to do with a core feature that my competitor touts as an advantage,” Moreland said. This means that if their benefits stem from your technology, that can bolster your chances in court if you decide to sue.

Keep the strategy updated

Your strategy isn’t set in stone. In business, and especially in the world of startups, things can change rapidly. Your engineering team is moving at breakneck speed and building new innovations left, right and center. Product teams typically hate “scope creep” — when new features keep getting added — but it happens, as customers give feedback, and your company learns more about the value propositions the product offers. In that scope creep, you may find new innovations, some of which may be IP protectable.

“Plans can’t be static,” Moreland said. “If I’m a salesperson, and the sales plan isn’t working, you change the sales plan. Same thing is true here: If the IP world changes, you have to adjust. The shifts in patents is causing a shift toward relying on trade secrets right now, for example.”

The real risk is to not keep your IP portfolio in lockstep with the technology advancements, or allocating resources to IP that won’t be usable, defendable or strategically important to the business. Remember that you’re not Apple, and you can’t afford to file 5,000 patents for a single product. Being smart and strategic about where you deploy resources is crucial.

As a company, you have an edge: You are deep in a market or industry, and you can probably with some degree of accuracy estimate the direction a market is going. If you know that, and the market hasn’t caught up yet, that’s a great opportunity to deploy resources and protect the IP your company is generating.


About this series

This is the first installment in a broader series where Michele Moreland and I dive into the murky world of intellectual property for startups. We’re starting with strategy, but we will go much deeper on how to allocate budget for IP, how to pick IP lawyers, and how to think about all the various forms of IP.

If you have feedback or ideas for topics you’d like us to cover, send me an email at tc@kamps.org!

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