WHY DO STARTUPS NEED PATENTS?


Patent is all about safeguarding your innovation. However, it has been observed that the startups are reluctant to file for patents. The possible reasons for the same could be that the startups believe that they need to concentrate all their efforts towards their core competences of product/ software development, and they don’t want to devote human resources to patenting activity. They consider going into patenting as a hassle as they don’t have much information about it, and some of them may shy away from it because they consider having patents as a cash burn and regular maintenance of the patent is a task for them. Apart from the above stated reasons, there are some startups which understand the concept of ownership of IP but are not exactly aware of the impact of having a patent or a patent portfolio. These are the startups which may even have a couple of patents in their portfolio but the part of creating value out of the patent portfolio is still an alien concept for them.


After interacting with the inventors/startup entrepreneurs for almost two decades, we understood that most of the prejudice against patents is due to the lack of knowledge of patents and their potential. Education about patents could play a pivotal role in putting a stop to these biases.


For a startup, having a patent portfolio is far more necessary for encouraging innovation, technology growth, and competitiveness. Patents demonstrate & safeguard creativity, and also enhance the reputation of the startup. Patents act as a bargaining chip in business negotiations. In addition to all these benefits, the patent assets can also be leveraged as a financial instrument for source of revenue.


Especially for technology startups, patents should be an integral part of their innovation strategy as patents effectively grant the right to exclude others from practicing the patented technology. Theoretically speaking, a patent directed towards an industry relevant, non-obvious, novel and useful invention can give a startup a monopoly.


Before making a decision against having patent assets, the startup owners need to reflect on the advantages which come with ownership of patent assets. Sometimes, patent assets could be a game changer for startups. The most critical being the ability for a startup to raise money. Leveraging patent assets as a financial instrument for revenue generation is just one of them. If a startup has patent assets, it gives a lot of confidence to the investors. The investors get a sense that the company is innovative, has unique proposition, is committed to its core technology, has a long-term vision and in all likelihood is not infringing on someone’s else IP. The other key factor for having patent assets is that, for some reason, if the startup's business fails, the patents it holds still survive. In such a case, the investors or company owners can sell or license out their patent assets to bigger and more successful firms in the market or even to Non-Practicing Entities (NPEs or Patent Trolls – though not considered one of the best options, however, still an option). Further, the patent assets can be used as collateral to secure loans. Another option for patent monetization could be patent pooling where patents of a number of startups operating in the same technology space could be pooled together attaching a reasonable (and fixed) royalty to each asset (Yes, the terms and conditions for such a pooling and consortium need to be defined), so that all the startup members can use those patents and get access to the similar technology (this is kind of a cross pollination). This can show the strength of the startups together against the big firms and this might make the big firms license-in the patents of the pool, making a win-win situation for every party involved. Moreover, having patent assets in the armory can help the startup get access to Govt. funding more easily. In today’s times, most of the Governments support the technology and innovative companies and have grants or funding programs for them. If the technology startups have patent assets, it increases the probability of securing Govt. funds without much hassle. If we look at the episodes of the world-famous TV Program - “Shark Tank”, we can witness that the reaction of the investors become favorable when a startup co-founder mentions that they either own a patent for their technology or have already filed a patent application for the same. If not much, having a pending patent application provides a good platform to the startup owner to pitch his/her idea and technology to the potential investors, as investors become more receptive after knowing that the technology is backed by patent assets. According to various studies, venture-backed startups have reported that patents have been vital for them in securing investment. Even in mergers and acquisitions, the startup’s patent assets play a vital role. In January 2014, Google had acquired Nest Labs for USD 3.2 B. One of the key reasons for this acquisition was Google’s interest in Nest's portfolio of patents focused on home automation and related technology, which gave Goggle more substance to expand beyond Internet search and mobile. Not just M&As, patents can help startups in JVs, collaborations, and R&D partnerships. Around the patented technology, more research can be conducted making a lot many players interested in a partnership with the startup to further develop and leverage the already existing patented technology. Sensetime, a Hong Kong-headquartered artificial intelligence company, founded in 2014 currently has a patent portfolio of ~1500 patents, most of the patents are related to image processing and artificial intelligence, it is a well-funded startup with major investor being Alibaba and total funding received by Sensetime is ~ USD 3 B.


Apart from the direct monetization benefits of patents, one advantage is that patents prevent the larger and much stronger firms to use the startup’s technology without their permission. In 1999, Amazon still in its early years had secured a patent on the “one-click” technology and had filed patent infringement suit against one of the then-larger and stronger competitor Barnes & Noble over the latter’s use of a similar system. The lawsuit got settled in 2002, but Apple began licensing the technology in 2000 for use on its website and the iTunes platform. At that time, e-commerce was in its formative years and Amazon was primarily an online bookseller. The court had granted an injunction ordering Barnes and Noble to stop using Amazon’s one-click technology, thereby giving Amazon the edge in online book retailing. The power of preventing your competitors from using a cornerstone technology gives the startup a much-needed competitive advantage and an upper hand that could accelerate the startup’s growth.


The peace of mind is another aspect that one gets while building their own patent portfolio. Firstly, you are rest assured that inadvertently you are not stepping onto someone’s else patent assets. Patents can safeguard the startup from other incumbent rivals and unwanted litigation. Secondly, it gives the startup freedom to operate knowing that no one else can copy their technology. Otherwise, it becomes very easy for bigger firms with more resources and deep pockets to simply copy a startup’s technology, package and market it better, and earn more profits, thereby trampling the startup which actually created the technology. Patents can assist startup in accelerating its growth and in occupying market share at a much faster pace. Around 10 years back, companies such as Facebook/Meta felt the need to have a patent portfolio that was the reason the company spent millions of dollars to acquire 650 patents of former AOL patents owned by Microsoft, this helped Facebook get ready for an IPO.


Lately, it has been witnessed that to survive in today’s market with cutthroat competition, it is essential not only to have a USP but a way to protect it and also show the strength to the world. Having a patent portfolio shows that strength and acts as a marketing tool. Wherever the startups are showcasing their products/ technology, they can support it (patent marking) with the patent/ publication number that covers it. This gives the customer (whether the business is B2B, D2C, or B2C) a lot of confidence in the product/ technology they are buying. Further, startups with patent assets have achieved far more long-term success than startups without it. If the startup trusts its technology and knows that it could create a business or industry wide impact, no second thoughts should be there, just go for the patent, you never know, it could be your trump card. Google had a PageRank related patent that became a game changer for Google.


With patents there may not always be an overnight impact, but surely from a long-term perspective these bear fruits and if the patented technology is really impactful and innovative, it can help your startup become a billion-dollar company.


Happy Patenting!


References:

[1] https://www.forbes.com/sites/forbesleadershipforum/2015/08/18/the-top-10-reasons-why-your-startup-needs-patents/?sh=5a3bfa9822c7

[2] https://www.quora.com/Are-patents-valuable-to-tech-startups