Do Startups Need Patents?

Most blogs and websites have short posts, enough for a soundbite, but not enough to sustain any depth of conversation. However there are a few exceptions.  This week Jackie Hutter at IP Maximizer Asset Blog posted a good article entitled “Do Startups Need Patents? Rigorous Study Presents Real Data on Startup Company Patenting Behavior“.  I am not going to summarize it because it would encourage you to go read her post in its entirety. It has some great soundbites, but also some in-depth discussion and commentary to help startups understand why patents should be filed.

What is most interesting is her comments are supported by a data driven study by author Stuart Graham, a Georgia Tech Business School professor who from 2010-2013 served as Chief Economist of the US Patent Office, entitled “High Technology Entrepreneurs and the Patent System of the 2008 Berkeley Patent Survey” (published in the Berkeley Technology Law Journal and available in this link).  Graham’s article is quite long, but also worth a review.

As a service provider (consultant, lawyer, patent agent, mentors, startup advisers, etc.) I always find it somewhat egotistical for the profession to always be proclaiming “Everyone needs patents!” without giving a valid business reason why, and more pointedly without giving a business reason that is based on more than personal experience or a few selected tidbits of A little startup beats a huge multinational with a patent story we see summarized in the news. As such I find empirical data to backup logic is always beneficial.

This type of post and data it links to is the type of information business and IP advisers can use for their clients on the importance of IP in their business strategies. It is also beneficial for resource and cash strapped startups to see why it gives a good reason to prioritize IP as a fundamental piece of the strategy from the beginning and not have it as a ‘checkbox’ to say it was done.

Strategic Patenting Decisions and their Influence on Firm Patent Valuation

In 2005 I did a thesis-option for my Masters in the area of IP Strategy.  I was going to submit it for publication back then, but graduation + the general busyness of life happened and it was put on the “probably will not get done” list.  However, my research was driven in part by business reasons -I really wanted to understand patenting differences between large & small firms – and more importantly how can a small firm with relatively smaller resources get “more for their money” by having more valuable patents. Those in the patent field realize that small firms have less experience than large firms, as measured by filed applications – but I wondered was it by enough to statistically compare the two groups?

The ultimate driver was to help small and medium size firms, as well as smaller groups in a large multi-national, approach IP from a strategic view and generate a higher volume of “valuable” patents.  There will be a volume of discussion on what “value” is defined at but for the purposes of this paper I used citations as a proxy for value. While the dataset is quite old and could be updated to see if the conclusion changes, I suggest the general trends are probably still valid.

A PDF of the paper is available here, and the abstract and some take-away points are listed below.


Abstract:

The economic rents associated with patent portfolios are highly skewed with only a small portion having value. This leads researchers and industry to ask what early strategic patenting decisions around the patent itself will impact the future value of the patent, specifically within the context of small firms. To address this question the paper modeled these ex-ante strategic patenting decisions by using a common measurement of forward citations as a proxy for patent value. Six indicators were modeled with two of them, provisional basis and priority claim, not explicitly investigated in previous research.

A focus on the small firm as well as the two strategic patent decision indicators provisional basis and priority claim are areas that have not been explicitly investigated in previous research.

A stronger relationship was found for small firms with indicators of breadth and priority claims, as compared to a weaker relationship of only claim counts for large firms. Research also indicated that from a small firm management perspective the most potential valuable patent is one that covers a broad scope of technology is a new filing and does not claim priority to other applications.

Take Away Points (or what Academia confirms with reality):

How can I apply this to my firm? Small firms can benefit from this research by seeking to increase the value of their future patent portfolio by filing new patents that do not claim priority to other applications, yet cover a broad scope of technology.

How should I change my filing strategy? Dont’ just churn them out. Simply having a patenting strategy that is focused on creating large patent portfolio counts, or having a standard procedure to patent all innovations across a pre-defined batch of jurisdictions will not necessarily lead to a portfolio with a high volume of valuable patents. They must consider each new innovation separately and make filing decisions accordingly and not based on pre-determined business decision procedures.

Can small firms really make a difference by patenting things? Does their lack of patenting experience matter? Although small firms have less patenting experience than large firms as seen by their experience distribution plots, surprisingly the firms patenting experience was not a significant predictor in the model. This suggests to industry that small firms with little or no patenting experience still have potential to create valuable patent portfolios from inception.

IP Strategy, Technology Transfer, and Commercialization

Last week I attended the ACCT Innovation Partnerships conference, which was focused on The Changing Landscape of Partnerships and Commercialization.  I spoke on both Tech Transfer Commercialization and IP Strategy for IT based inventions. For those interested my slides are posted below:

Stakeholders’ Perspectives on the Changing Landscape of Technology Commercialization

As North America recovers from the 2008 recession, emerging trends in technology commercialization include significant changes in the ways that research institutions,companies, and services providers engage, interact and collaborate. Large corporations from across many industry sectors have significantly downsized their internal research activities while increasing their focus on acquiring IP from external sources and financially supporting selected institutional research programs. Research institutions are moving away from their traditional approaches to protecting and disclosing innovations and industry engagement. Non-practicing entities (formerly referred to as “patent trolls”) have emerged as significant players in the acquisition and deployment of commercially useful intellectual property. The role of service providers to both sectors are evolving from only the protection of IP, to include counsel for strategic IP deployment, acquisition, and divestments.

The Case for Protecting I.T.: When it Makes Good Business Sense

In recent years, the focus of courts on patentable subject matter has generally been in the biotech area – Mayo and Prometheus come to mind. However, protecting information technology has also become a veritable minefield, with courts in both Canada and the United States struggling to define what is patentable subject matter in the IT field. This seminar will address the difficult task of how best to claim, prosecute and manage IT patents throughout their life cycle.

Many thanks to the ACCT, the speakers, and my c0-panel members on both discussions.

In Pursuit of Patent Quality

If you informed any R&D executive that only 5% of their efforts may result in some value for their products, and any value they did create within that 5% would be worth the entire value of the company, there would be quite a few nervous R&D executives waiting to explain to the CTO why they are wasting so much of the company resources to generate so little.

IP Strategy Patent Value Distribution
IP Strategy Patent Value Distribution

Now, taking the same stance as patents, why is a 5% value acceptable? Is it lack of business drive to grow relevant IP, inability to execute on generating quality patents, or just acceptance of the “status-quo game of IP”?

Research (and experience) validates that generally about 5% of a patent portfolio volume holds 95% or more of the value for a business.   I would propose that the strategy of randomly filing patents based on generated ideas or shipped products actually generates even less value than 5%.

Here are some back of the envelope estimates as to why a random strategy will not generate any value, arguably close to 5%:

Taking some rough numbers and assume only 20% of a mature R&D organization’s ideas get turned into final products, and of that estimate generously that 50% would be protected by IP, that gives:

20% x 50% = 10% patent coverage of all possible generated ideas.

Now, again consider that only 5% of a portfolio has value, that gives:

10% x 5% = 0.5% patent coverage of all possible ideas generated by the venture have value.

It is fairly rough, and discounts a large number of variables, but is a simple way to illustrate that while a venture may believe they have 50% of their products protect by patents, in reality they only have about 0.5% of all possible ideas they generated protected by patents. Playing with the rough numbers will change the results slightly, but still give the same order of magnitude to consider.   Next, and more importantly to consider, who is to say along the R&D process that out of all the ideas that were dropped, there did not exist most of the “valuable 5%” patents?

A good patent strategy still needs to have real market applicable patents that can be used to at least defend, license, or enforce.

This now begs the questions: Who in your venture is taking the cancelled product ideas, which may be dropped due to financial or resource issues, but have the potential to be future game changers? How early in the patent process is mining (and prosecution) happening? Fundamentally, where does IP execution happen in the business? If it starts – and finishes – at a product release, I would expect to be called into the CTO’s office and explain why I was wasting so much of the company resources to generate so little potential returns with IP.

Execution of a patent strategy to generate a high number of valuable patents has to have many points to mine ideas in the Innovation, R&D, and Product Release stages. With this type of model it affords the IP Manager, Legal, and CTO to be in a better position to ensure they can chose the best innovations to protect.

An IP Manager’s Influence on Positive Cash Flow

I had an interesting discussion today with a colleague about looking at high growth companies, and we both approached the question with two distinctly different perspectives on what makes a valuable company from an acquisition point of view.  Fundamentally our discussion still focused around a question that is also relevant to the new product view for any venture – when is the real value and ROI generated in regards to cash flow?

With my IP Strategy background I am naturally drawn to the IP and Patent aspect of a venture, so naturally I extended this question to how can an IP Manager or leader in an organization ensure an IP portfolio support a positive cash flow position.

One view was a ‘high velocity cash’ position, where the value of an acquisition is fully linked to the amount of ROI it immediately generates in positive cash flow, which may or may not include the influence of IP. If IP existed cash flow would be via licensing, royalty rates, increased pricing due to brand, etc. The alternate view was ‘high growth IP’ backed position, where the value of the acquisition was based on the value of the tangibles, as well as the future market protection the intangibles covers – including the long tail opportunity seen in future licensing both inside and outside of the specific venture’s industry.  Removing the actual ROI seen, the main differentiator was the time of positive cash flow with the ‘high velocity position’ heavily front loaded in comparison.

I don’t necessarily think either perspective is incorrect, as the value perceived is different depending on which criteria you use for acquisition.  However the discussion does raise a broader point for Startups, SME’s and even multi-nationals:  A venture’s business model of IP has to incorporate multiple views and timelines to be marked as successful, as having a singular model that moves from one binary state to the next will give the appearance to fluctuate in value strictly based on who is looking at it. There needs to be a more balanced perspective when looking at the real value IP brings to a business.

IP programs that align with the business should have many stakeholders, for example, Inventors, CEO’s, Product & Market Managers, Finance, etc., and each with their own measure of success of the actual impact of IP in the venture.  Again, it is not that each view is wrong but rather HOW each views it through the priorities they have that an IP Manager or leader needs to take into account.

In practice, successfully implemented IP programs are able to balance the functional needs by providing a strategy where value of IP in a business can be seen from each perspective.  Without this, there is now way to talk about IP in the boardroom, either at the strategic or execution side of a discussion.

Take, for example, an average patent portfolio of a venture: Generally there will be a long tail distribution of the value, where a few patents are worth the majority of the portfolio as a high value, and the remaining abundance of patents may have been provided to protect a product offering but realistically have low or no value for generating cash flow.  The ‘high velocity cash’ perspectives (perhaps as a Finance or Operations view) tend to view the value of a portfolio of what can be monetized or leveraged in the moment to influence the immediate cash position. Product Mangers or Inventors tend to view the value of “IP success” as what breadth scope is protects products, and not always with the specific concern of immediate cash returns from IP.  CEO’s and those in the boardroom focus on both short and long term views, placing value on the venture or product if the current quarter as well as several into the future.

To make it more complex, as time moves on both portfolio scope and market needs will independently shift and unless the portfolio grows to take this into account the relevancy and ROI of the portfolio will be impacted. Granted, given the length of patent terms the shift may be slow, but for fast moving consumer markets and areas where disruptive innovation is moving the direction of an industry it will happen.

With that in mind, and coming back to the original question: What perspective is the best when looking at an acquisition, high-velocity cash or high growth IP potential? And, taking this to the SME and Startup venture level, what perspective is best when looking at developing a new product, because after all a venture with a new product idea is essentially “acquiring” the product through its own development efforts.  Should an investor or CEO focus on the high-velocity cash opportunity or the long game of an IP based option?

The answer in my view is either, or the combination of both that that strikes the right balance for the stakeholders in the venture. In other words IP Mangers need to be able to create an IP portfolio that has portions which are able to be monetized in the short term – the “high-velocity” cash position – as well as build a portfolio that can be used in longer term protection strategies – the “high growth” IP backed position. It sounds incredibly simple but in practice the actual balance of creating a portfolio mix that takes into account items such as breadth of coverage vs. depth of coverage, timeline to grant vs. market trends for product releases/end-of-life, etc. is incredibly complex and may take several years to build.  To make matters more difficult, unless an IP Manager or Chief IP Officer can successfully talk to this at all levels of the organization to generate support which will help create such a balanced portfolio- from Inventors to the CEO in a boardroom setting – there will always be other strategic or operational items that dominate in the discussion of “What makes this venture / product valuable?”.