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IP Strategy for Startups

October 8, 2012 by Duncan

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By Ian Maxwell
Here are two very true statements
1. A startup should have a patent portfolio
2. Startups can rarely afford to properly invest in a patent portfolio
With this fundamental paradox in mind, this article describes some of
the options that startups have with respect to IP strategies that most
effectively balance the costs and benefits of patenting.
But first, why do startups need patents? There are a number of reasons
and not all of them are obvious.
1. Most obviously, a startup with strong patent protection will have
higher exit value, i.e. the value when listed on a public market or
sold in a trade sale. This higher value is a premium paid for a
startup with high gross margins resulting from some degree of
patent-enabled monopoly protection for its products and services.
2. These same higher margins, based on patent-enabled monopoly
rights, also mean that startups with good patent portfolios receive

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Carbonneau Luca Escoffier Mac Leckrone
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Adam Falconer
Alexander von
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Ana Popescu
Andrew J.
Sherman
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need to raise less investment funds in order to further promote

Sneddon Naim Khan

Bill Meade

their own growth by investment in R&D, marketing and company

Filler

enablement.

Kharkar Patrick Terroir

more contribution margin from their early sales, and hence may

3. For investors in startups, typically venture capitalists, patent

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Nick Redfearn One-Blue LLC Pallavi

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Peter Ackerman Peter Beven Peter

Bernard J. Cassidy
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Cheryl Milone

portfolios also represent downside protection. Even if a startup a

Cowan Peter Slate Peter Vanderheyden Ralph

Chhavi Bhandari

venture capitalist invest in happens to fail (runs out of cash or

Eckardt Ray Felts Reid Adler

Danny Cook

breaches debt covenants), the companys patent portfolio can

sometimes be sold, licensed or enforced, in order to recover some

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Cantrell Rupert Mayer Russell Parr Sam

Daniel T. Jarczyk
David

Wiley Sean M. O'Connor Sebastien Aymeric

DiGiammarino

of the original investment. A Venture Capitalist only gets to share

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David Healey

in the profits when the whole fund is profitable, hence it is very

Higginson Tony Owens Vinita Radhakrishnan

David Kline

important to get capital back from the startups that fail since this

Weston Anson

David R. Jarczyk

helps a fund, in its entirety, creep towards profitability. For a

David Wanetick

startup this means that seeking investment from professional

Donal O'Connell

investors usually means committing to creating a patent portfolio.

4. In a similar vein to the last point, a patent portfolio represents

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downside protection for founders and staff of a startup as well.

Efrat Kasznik

This means that, even if the business fails, the startup may have
value to an acquirer (say a competitor) because of the patent
portfolio; this can afford founders and management (who have to
negotiate such deals and be rewarded for doing so) some exit

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5. In many cases a startup does not end up pursuing the original

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encounters problems, and has to deal with a rapidly changing and

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competitive commercial environment. By having a patent portfolio

a start-up has more strategic choices when a change of direction is
required. An extreme example of this is an operating startup
(building a product or service) shifting to becoming a licensing
company. Another example is a move into a new product space,
yet where the technology requirements are still underpinned by
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they can have, for all the reasons listed above. But on the other hand

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on patents in startups are the founders and management. Normally

these guys have a moral dilemma. On hand they want all the patents

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they want to minimize how much their stake in the startup is diluted at

Strategic intellectual property

funding rounds, and they do this by raising lower amounts of capital or

offshoring through outsourcing

Lily Li

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Luca Escoffier

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by focusing their expenditure on accelerating early revenues. Both of

these objectives can be achieved by reducing expenditure on patents
because this is an area of high expense, and also where the impacts of
under-investment are not always realized until some years later. This is

To Sell or License your IP? How

where a startup board-of-directors, with professional investors as

to determine which, if either,

directors, needs to pay close attention and influence management

route is best for your business?

decisions where they can.

In terms of building a strategic patent portfolio in a startup there are
also a couple of shortcuts available.
1. A key one is to seek licenses to external patent portfolios these

Louis Carbonneau

Marshall Phelps
Martin A. Goetz
Mary Adams
Mary Juetten
Michael D.
Moberly
Michael Factor
Michael Sneddon
Naim Khan
Neil Wilkof

can be owned by larger operating companies, or by any number of

Nick Filler

the so-called patent banks. Most start-ups can negotiate license

Nick Redfearn

deals without upfront payment, so these types of deals have

One-Blue

minimal cash impact. The benefits of licensing patents are

Pallavi Kharkar

numerous but one good reason is to establish a foothold in the

Patrick Terroir

operating space such that larger competitors cannot so easily bully

Paul Adams

the startup, which is easier to do when the startup does not have
granted patents. Another reason is to prime the patent pump
of a startup patents beget invention and other patents; by
licensing-in, the process of crafting a patent portfolio can be

Paul Cole
Peter Ackerman
Peter Beven
Peter Cowan
Peter Slate

accelerated within the startup. One of the key issues for startups is

Peter Spours

that patents take so long to get granted, typically three years or

Peter

longer. By licensing-in a startup can have a real and defendable

Vanderheyden

patent position much earlier in its life-cycle.

Ralph Eckardt

2. A new model that is emerging in the U.S. is a form of outsourcing

of startup patent portfolios. Acacia Research Corporation, for
example, will purchase patents of a startup and provide a lease
back license. This enables a startup to get the benefit of the
commercial monopoly granted to it by its patents, without tying up
all the capital required to build and maintain a patent portfolio.

Ray Felts
Robert Cantrell
Rupert Mayer
Russell Parr
Sam Wiley
Sean M. O'Connor
Sebastien Aymeric

For Acacia Research the benefit is that they get to seek patent

Severin de Wit

monetization opportunities for the patent portfolio outside of the

Swaraj Paul

field of practice of the startup. I expect many new and diverse

Barooah

models for outsourcing of startup patent portfolios to emerge

Tim Higginson

over the next few years.

Tony Owens
Vinita

On a tactical front there are many ways to reduce patent budgets. Here

Radhakrishnan

are some of the key approaches:

Weston Anson

1. Take great care when using large attorney firms. These typically
have high fees and also many practiced ways to extract money off
their customers. One example is high mark-ups on foreign filing
activities through associates. Where low-cost introductory work,
like drafting of provisional applications, is offered, ensure there is

a clear understanding of the charges for later work.

2. Work only with patent attorneys who are experts in a specific area
of activity. This leads to more attorney-focus and feedback, and
often better results at lower costs. Shop around for the best
attorneys, not the best attorney firms. Often, for example, a canny
startup may have three vaguely unrelated areas of patenting and
use three attorneys from three different attorney firms rather
than three partners from the same firm.
3. A startup should have its own IP manager, possibly part-time, to
manage a portfolio and even to do the first drafts of patents. This
saves a lot of money and also ensures that the administration load
(which can be very large) does not distract the key employees.
Such IP managers can also directly manage foreign associates.
Another benefit of a professional IP manager is to ensure due
process, such as proper assignment of inventor rights to the
company, are in place. Many startups are an administrative mess,
and this only becomes apparent when a third party is doing critical
due diligence in, say, an investment round or an acquisition of the
startup; in these cases a failure to have rigorous administrative
processes for patent matters can be fatal.
4. Carefully choose countries (jurisdictions) where patents will be
pursued. The number of jurisdictions should be minimized to save
costs, but in careful fashion so as not to destroy enterprise value.
Sometimes, from a financial point of view, the smaller jurisdictions
can be ignored because they do not impact exit value. Often U.S.
patents are a must-have because trade sales are common to U.S.
corporations. Decisions are often made based on the importance
of patents to the business, for example, a foundation patent may
be broadly filed across many jurisdictions whereas a less valuable
patent might only be filed in the U.S. and the BRIC countries, or
the specific jurisdictions of delivery of a start-ups products or
services. Germany is sometimes chosen as a jurisdiction of choice
because it is a great place to enforce patent rights, whereas to a
startup the rest of Europe just looks like a lot of filing costs.
5. Often start-ups also face key choices in timing. There are means
within the patenting process to delay or accelerate the full
examination of patents. Fast examination is great from the point
of view of getting granted patents and increasing enterprise value.
But it also means earlier and higher patenting costs. Its a
balancing act that has to be well considered.
6. In some contested areas of technology, or where the proposed
products are marginally inventive, it is sometime a good idea to
drop all of the early product and technology ideas into a
placeholder patent application on behalf of the startup, with the
intention of filing a large number of divisional patents at a later
date. This approach reserves the right to protect a number of
potential invention claims, but potentially comes at a price of early
and incomplete disclosure, limiting what can be subsequently
claimed. As in all things patent, it is a balancing act which is best
navigated with the benefit of experience; if you dont have it, then
get some advisers that do.
What does a startup do when it has granted patents and it finds a third
party infringing its patents? My advice is to seek assistance from a
litigation funding company; these guys are becoming interested in
patent enforcement actions for startups, but typically only where
infringement has been happening for some time, and a hefty damages
liability has accrued. If these entities are interested in financing and
pursuing the infringer, a startup may get the benefit of reduced
competition (if the process is successful and the infringement was in the
direct area of practice), and they also may get to share in the financial

proceeds of any such enforcement. Very few startups have the

resources, both financial and in management time, to directly manage
the process of enforcing their patents.
Insurance against patent infringement is also available. Historically
start-ups would only insure against infringing patent rights of others (if
they insured against IP risk at all), but now it is possible to obtain cover
against the risk of a start-ups own patents (and other IP) being
infringed. Of course, enforcement insurance wont help if the
infringement has already started, so its necessary to insure, and start
paying premiums, at an early stage.
In the modern era of patent portfolios it has become clear that a single
patent holds much less value than in previous eras. In the liquid market
for patents (as embodied by the world of non-practicing entities) a single
patent often has little value because a party looking to monetize a single
patent might be blind-sided by some hidden prior art which invalidates
the claims of that patent. There is so much prior art in the world that it is
virtually impossible for patent examiners to thoroughly test novelty and
invention. As a result companies must now choose to either operate
without patents, or develop large patent portfolios with at least 20 or
more patents.
For startups the decision to patent, or to not patent, is often influenced
by how open source the area of commercial activity is. For example, in
some areas of smart phone apps, say games, a vast majority of
companies operate without a single patent. Having said this, in this same
area there are a small number of patent companies extracting huge
rents via enforced licensing from these same majority of companies who
do not have their own patents. Which one would you rather be? In
other areas, e.g. drug discovery, the idea of operating sans-patents is
unthinkable.
In most areas of startup activity the smart money is on having patents,
and the smart move is figuring out how to finance the creation of a
patent portfolio. At a high level this can be understood by realizing that
startups are typically moving into white space areas of technology, and
this is exactly the space where high-value patents can be obtained. A
failure to get finance for the patent budget is an implicit admission of
flaws in the value proposition of the startup, either in the choice of the
area of technology and commercial opportunity and/ or in the skills and
know-how of the entrepreneurs and investors.

[This post originally appeared at Accordia IP.]

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