Early stage startups tend to worry about patents. Usually they shouldn’t. Intellectual property lawyers might disagree with this advice but, remember, they make more money if you don’t take it.
There are two strategies to patents. A defensive strategy tries to protect value, and an offensive strategy tries to create it. Early stage startups should only have offensive strategies. Here’s how it works:
Defensive strategies
A defensive patent strategy tries to protect value. Your strategy is defensive if you might use patents against competition. Especially if your startup builds proprietary technology, this seems like the obvious approach. But it is almost never the right one.
The first issue is money. Actually defending patents is almost impossible for startups. By definition, startups don’t have the money to invest in litigation. You’ll run out of money before anyone worth suing. And your competitors will already have won if you spend your resources trying to build a legal case instead of a business.
The money problem is compounded by time. You can’t defend against patent infringement until your patent is granted so, for the application period (usually a few years), patents are pure cost. If you are outcompeted or die before you can defend them, whatever patents do get granted are too little too late.
Third, patents are flimsy. Doing patents well means creating a portfolio of mixed risk applications, like you would with an investment portfolio. Some are broad and speculative – hard to defend but valuable if you can; and some are narrow and safe – easier to defend but probably less valuable. There’s the flimsiness: the patents you’re most able to defend are the easiest to work around. A few tweaks and competitors won’t be infringing.
Ironically, for early stage startups, a defensive patent strategy is more likely to be a cause of death than protection against it.
Offensive strategies
This doesn’t mean patents are useless for early stage startups. You can use them offensively — to create value, rather than protect it.
The first way is to use patents to increase acquisition value. Although early stage startups can’t have a defensive patent strategy, big companies often do. If you’re in a competitive field with acquisitive corporates, a good patent portfolio could be extremely valuable for them. You can use this to your advantage.
Like with talent acquisitions, big companies will buy startups’ technology at a premium to its immediate value to the startup. Talent acquisitions have double value for big companies: if you work for me, you create value for me; and you also can’t work for my competitors. The same thing is true for intellectual property: if I have your patents, I can use them against my competitors; and my competitors can’t use them against me.
The technology you’re patenting isn’t necessarily valuable for your startup, even if your startup is more valuable to your acquirers. The ways you can monetise your technology might be different. This is your hedge – ‘what are we doing that’s relevant to potential acquirers?’.
The second way is to use patents as signalling to investors. If you’re working on something novel or hard, most investors won’t understand it. Often it won’t be cost effective to do the due diligence required to, either. Patents are a quick, if unreliable, shortcut. You can use this to your advantage.
Having patent applications often makes investors less sceptical about your technology. This is especially true if a reputable firm filed your applications: their reputation depends partially on useful patents getting approved.
Given this, you should patent proof points for your most ambitious technology claims. This strategy won’t make your technology actually new or valuable – anyone can file a patent application. But, oddly, it might make investors more likely to believe you.
Three simple rules
There are three simple patent rules for early stage startups:
Don’t think about patents until you need to raise money.
You can’t patent defensively.
Only patent offensively.
There will always be exceptions, but you’re probably not one of them.
PS. hedging
You can use provisional patent applications to hedge and buy optionality. Using patents offensively can be complex, expensive, and time consuming. Buying time is useful, especially if you’re in an fast moving area where new information becomes available quickly.
Provisional patent applications give you a placeholder for a fixed time, usually a year, to apply for a patent. They require less effort and, if you do end up filing a full patent, the date you made the provisional application will be used as the filing date. They also don’t require you to publicly disclose as much information as a full patent application.
You can focus on building your business, but keep the option to patent later.
I am not a lawyer and this is not legal advice. Thanks to the EF team for reading drafts of this.