Billion dollar start-ups: do unicorns like patents?

Earlier this year The Wall Street Journal published a list of 'unicorns' – start-ups valued at $1 billion or more. By July 2015 there were more than 100 and as at August 27 2015 there were 115. The companies are spread across 11 sectors: software, hardware, consumer internet, e-commerce, financial services, healthcare, gaming and entertainment, energy, education, aerospace and defence and real estate.

Taking a closer look at the importance of patents to these companies, the headlines are as follows:

• More than over half own patent rights and US unicorns lead the way.
• Counting does not count when trying to understanding IP strategy.
• Youth counts against unicorns and almost one-third have bolstered their position through acquisition.
• Unicorns are prime targets for non-practising entities (NPEs), but it is not long before the hunted learn to hunt.

Where do you find a unicorn that likes patents?
The companies with the largest portfolios are Chinese smartphone vendor Xiaomi and drone maker DJI. However, the largest concentration of patent owners is based in the United States (49 of the 67 patent-owning companies).

The fact that 45% of the companies own no patents at all may seem surprising. However, this is not as extreme as it seems when appreciating that many (22 out of 41) e-commerce and consumer internet companies outside the United States exist in jurisdictions where software patents can be much harder to secure. Even in the United States, companies such as SpaceX place significant emphasis on trade secrets – a reminder that there are many ways to protect innovation.

How do you measure the strength of a unicorn’s patents?
There are many ways of using IP analytics; when considering unicorns, there is a big difference between counting and what counts. DJI has the largest granted portfolio (171 families) and Xiaomi has the most applications (1,912 pending patent families). But both of these companies focus entirely on China, which has implications for those with plans to compete globally. Of the top 10 in terms of portfolio size, only Jawbone, Intarcia Therapeutics and Proteus Digital have a global patent strategy.

Overall, the data shows that US-based unicorns focus more on patents – which tells you something about both the US patenting (and patent litigation) system and the mindset of those who invest in and advise these companies.

The feeding habits of a unicorn
If you are a unicorn, you are typically younger than your established competitors, many of which will be considering how to slow you down. This has led unicorns to boost their patent holdings through acquisition.

Nineteen start-ups (35% of start-ups that own patents) have acquired patents. Forty-four percent of software companies and 50% of hardware companies that own patents have acquired patents. The primary source of acquisition has been from other small companies. The trend continues post-initial public offering, but sometimes from the larger players – for example, only months after going public, Twitter carried out a $36 million acquisition of nearly 1,000 IBM patents.

Unicorns are vulnerable when they raise funds
Using CrunchBase together with Cipher shows a strong correlation between funding and patent litigation. The table below shows the top 10 highly valued unicorns that own patents, eight of which were sued for patent infringement within six months of a major funding round.

However, all unicorns are vulnerable to lawsuits: nearly one-third (33) have been sued for patent infringement at some point, by both operating companies (competitors) and NPEs. Between them, unicorns are defendants in more than 100 actions (28 initiated by competitors), with 46 still active. Popular targets are those in the software and consumer internet sectors. The top targets are Jawbone, in the field of wearables, and Dropbox.

In some ways Jawbone is highly typical of the breed. It has a significant portfolio of its own, bought Bodymedia to bolster its position and has now commenced litigation against Fitbit (see https://aistemos.com/2015/08/06/cipher-snapshot-how-fit-is-fitbit/).

However, Jawbone is not the only start-up that has moved from hunted to hunter; Square, Docusign, Actifio and Good Technology have all initiated lawsuits against other operating companies (including activity from acquired companies). Good Technology is highly litigious, with more than 15 lawsuits to its name, including actions against Microsoft and BlackBerry.

Comment
Tagging companies as unicorns suggests that they might have some mythical powers. From an IP perspective, in many ways they are just like any other company. Most grow through innovation and patenting is an important part of that. They suffer at the hands of IP litigation, and this can slow and sometimes be fatal to their development. As they grow, they learn the same habits of the established – they understand that lack of patents can be a sign of weakness (and so buy some more). They then start to litigate those rights to continue the circle of life. Things will change, but not quickly.