As much as the IP leaders wish IP to be top-of-mind in every business and investor, in reality this is not always the case.  In an ever more globalised environment, there are seemingly more immediate needs to speed up R&D execution, lower local manufacturing costs to compete globally, and constant pressures to attract more customers or clients.  In short, global competition and accelerated technology development timeline has fundamentally changed how successful businesses need managed.

However as this has happened, IP has become the common pillar of success for key market leaders. This poses the question: What are market leaders doing different than their competitors? How are all levels of their management bringing IP discussions to the C-Suite?

What are the key business oriented challenges that any manager or executive should be considering in 2015?

Based on patent and market changes, below are the top 5 challenges all executives or company leaders will face in 2015 – these challenges directly impact R&D departments, legal groups, innovation teams, and even finance departments.

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Earlier today Archimedes IP  published one of my articles on IP Strategies for high-growth markets, which I based around Nest Labs as a case study.

Why is this topic important to high-growth technology ventures?  Because Nest Labs’s demonstrates why active attention and refinement of an IP strategy within high-growth markets is critical: Within the span of four short years a new billion dollar market was born; litigation by a market incumbent was launched to block the first movers from Nest; key IP acquisition and defensive licensing deals were arranged, and fast-followers launched competing products.  From the IP-lifecycle perspective, four years is an incredibly short time, often not enough to generate legally enforceable IP protection. As a result even a delay by a few months of IP planning and execution will increase the risk and challenges of an entrant in this new market.

Below is a piece of the introduction, with the full article posted on the Archimedes IP Forum Blog. My thanks to Tom Ewing for both editing my draft, and contributing to the final copy.

Why High Growth Markets need an Evolution in IP Strategies (Part 1):

A successful corporate intellectual property (IP) strategy must account for the pace, style and strategy of key competitors – it is simply not enough to plan and execute an IP strategy based solely on the direction of your business.

This fact of life is especially true for companies operating in high-growth markets where it is even more critical that an evolution and refinement of strategy needs to happen at least on an annual basis if not quarterly or even monthly.

Nest Labs offers a valuable case study on both how and why a strategic IP position needs to shift as competitor’s tactics are unveiled.  From Nest’s experiences, we find three fundamental lessons in developing a successful corporate IP strategy:

1. IP is the long game, so keep strategic options open.
2. Buy vs. Build needs to be in the business planning cycle
3. Business Strategy must be integrated with IP Strategy

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10 years ago is was about just having patents. 5 years ago it was about having a high volume of patents. Today it is about having quality patents.

The impact of this re-balancing for investors, either venture capitalists buying into companies with portfolios or institutional investors adding IP licensing companies to their portfolios, require a shift in the way traditional due diligence is both approached and reviewed.  The legal side of patent or trademark due diligence is still critical, however the investors that layer a business oriented approach to more deeply understand the full opportunity will be poised for greater success.

As an investor, one can break the business-IP due diligence reviews into at least 3 discrete points for review:

1) A strong portfolio alignment with business opportunities:

As a sign of alignment, the IP due diligence should highlight what markets and segments the patents cover, as well as the type of IP opportunities they support.  To accomplish this it requires a technical and business expert review of the portfolio against the business use will give direction on where value (or gaps) are identified.

From a due diligence perspective one measure of a ‘quality’ portfolio against opportunities is in considering the use case the business – defensive, standard essential, commercially essential, licensing grade, litigation-ready, etc.  Further, for operating firms, this needs to take into account not only the current business environment, but the future business opportunities of the venture.  Having a partial IP position as a company moves into the space or segment may prove to be immensely valuable as the venture (and investment) matures.

2) Tomorrow’s geographical coverage:

With an average protection of 20 years for many patents, there is ample time for emerging markets to catchup with iterations of technology from developing markets.

As an example, even 10 years ago the volume and growth rate of companies filing patents in china were small as compared to todays rates, which WIPO reported as high as 35% increase in growth in past years. Even now the high costs to expand all patents into multiple geographies it was only the large multinationals that kept their coverage in China. However IAM Magazine recently reported how a focus on IP in China has been key in solidifying high value technology transfer deals between companies like Xiaomi and Leadcore.

From a due diligence perspective, geographically relevant filings needed to reviewed to understand the best business scenario of the investment.

3) Mind the gaps:

A strategic portfolio analysis, for either due diligence or other investment purposes, needs to highlight the business value of the portfolio.  Moreso for investors looking to purchase an operating company with IP rights, an additional an in-depth analysis needs to also highlight the portfolio gaps.

Understanding the limitations will allow the investor to to both make a more informed valuation or purchase price. For more hands-on investors it gives an indicator where the management team needs to add to their position, or where the board needs to continue to steer the investment towards.

Summary:

In the past such an approach was not needed – mere presence of IP (or any volume of IP for that matter) was all that mattered. Now, with the realistic shift in the PAE or NPE IP savvy market towards measuring patent portfolio quality before purchasing, investors must play catchup as the new benchmark becomes the standard.

As a result, for investors being asked to offering a premium for existing IP, a business focused due diligence analysis needs to be done along side the traditional legal review and validation.

It is not about validating the patents in a traditional sense of validity and infringement, it is about validating the business position the portfolio will support (or not support).  It is the difference between having IP as an add-on to the purchase, and a pillar that the future valuation and revenue will be built on.

Late last month BCG released The Most Innovative Companies (2014): Breaking Through is Hard to Do.  The paper outlined the top 50 innovative companies of this year, and the trends they share.  They report reinforces the five characteristics of strong innovators, one of which is how they leverage IP to exclude and build markets.

Rethinking your Innovation System

Another BCG Perspectives posting, Rethinking Your Innovation System (October 2014), builds on this and discusses how to approach Innovation as a System. The article describes the three major components of the system as “a strategy comprising choices on where and how to create growth and value through innovation; a supporting set of processes for research and product development; and an enabling set of systems, tools, and capabilities. (See the exhibit, ‘World-Class Companies Treat Innovation as a System.’)”  It further goes into detail on how inside this Innovation Strategy there are four areas where value growth and creation can happen – Innovation Types, Innovation Sources, Targeted Domains, and IP Strategy.  To me this demonstrates that to have a replicable innovative product there has to be much more depth in the process behind the ideas as a company grows.

Interestingly it also highlights the tangible number of IP assets have on the companies who develop breakthrough innovations on a consistent basis:

“Companies that manage their IP assets effectively are more successful than their competitors at winning approval for their applications, securing patents more than 60 percent of the time. They control a disproportionate share of the IP within their industries, measured not necessarily by raw numbers of applications and claims but by breadth and depth of coverage.” – BCG, Rethinking Your Innovation System.

Rethinking your IP System

Almost every startup or high growth venture I talk to or read about seems to want to emulate at least one of the companies on this list of 50.  However few of them take the system level approach to growing their innovations, and even less of them have an institutionalized approach to IP strategy.

To move any venture into contention for this “Most Innovative Company” title in the future, they must first decide if they are going to embrace all components of the strategy, and with respect to IP ask the following questions:

• Do we have IP built into our operational and strategic processes?
• Do we let our patent portfolio manage the IP process, or does the IP vision drive the process and portfolio?
• Do we have the right team in place to deliver on the IP we need to own the breakthrough innovation R&D is producing?

Aligning an IP Strategy with a business strategy is inherently not difficult with the right team in place. It is, however, one critical piece consistent in the innovation system the current market leaders all have.  So if you are going to emulate the market leaders and turn your venture into an Innovation Leader, you can’t pick and choose the pieces of the Innovation ecosystem you wish to use – it is all of them, including a defined IP strategy.

With the shifting sands of patent law, building a patent strategy that will stand the test of both time and legal challenges isn’t getting any easier. And for certain industries it is becoming more important.  Reviewing the Thomson Reuters State of Innovation report for 2014 illustrates an uptick for almost every sector in patenting: Telecommunications (33% increase), Automotive (35% increase), Medical Devices (26% increase) and so on.

One of the larger ‘hidden’ growth items that was interesting is the “Data Transmission Networks”, up 27% with almost 56,000 new patents filed in 2013. Behind that title is the infrastructure that keeps our internet rolling, the data centers and the way the information highway supports the digital aspect of most businesses.

The reason why this is an important item to note is that for many businesses looking to grow their technology that have any kind of interaction with data, there is an opportunity (and risk) to ensure that the information infrastructure that supports the technology is protect.  Multiple older and industrialized businesses may believe their technology is bereft of the data infrastructure, but two simple examples show where the data infrastructure can be used:

Oil & Mining: Monitoring of equipment through the cloud – how do you efficiently and cost effectively get data out of a mine or well to enable real-time tracking and predict critical failures in the field?

Transportation & Travel: Monitoring and tracking of transportation trends in real-time, or travel spending trends of passengers – how do you extract, combine, and create models out of the big-data that can result in critical business intelligence to give a competitive edge?

Companies that rapidly develop data and information driven supporting infrastructure, or even client offerings, around old-school fields such as Mining or Transportation are positioning themselves to move their industry into the next digital age. The question for these firms to ask is whey they get there, who will own the IP rights to the way they have evolved – or will they have filed the visionary IP that is needed to be the leader of the new industry?

Without question there is another venture contemplating how to digitize the industrial age, and the way to get the data moved from earth boring machines and into the cloud where it can be analyzed for efficiencies and opportunities.

To address this and create a patent strategy that fits both the industry direction, as well as matches the patent trends, industrial based firms can approach IP with the following actions:

• Creating a patent portfolio profile that covers both existing R&D efforts, but also adds in the breakthrough innovation piece of digital technology.
• Analyzing the patent trends of the current space to identify where gaps and clusters of IP exist, taking into account the trends of patent law as they pertain to the digital and software world.
• Building an IP team that has the technical, legal, and business perspective of both the industrial needs of the present, and the digital needs of tomorrow.

Shifting business that were historically rooted in industrial machinery and equipment is already happening.  Patent filings in the high-tech area around the topic of data and communications have been experiencing rapid growth.  At a certain point in time they will collide, and it will be the venture that understood both of these factors that will end up on top.