For start-ups, patents should be a means to an end, not an end in themselves

In her article “Why start-ups should get serious about patent protection” (IAM 97), Bridget Diakun correctly observed that patents are central to many start-ups and that aligning them to long-term company objectives should be an important part of early business strategy. However, IP practitioners need to remember that patents are simply a tool – and a specific and finicky one at that. Consequently, patents should be used strategically as a means to accomplish a start-up’s goals.

In an ideal world, creating a patent thicket (through organic discovery or acquisition) would protect a business model from intrusion or copying (if that is the goal). But for most companies, the key to start-up success is to raise the capital you need to get to the next milestone comfortably and then spend that capital as efficiently and effectively as possible. Much like real estate or marketing, some spending on patents is often useful. However, just as early-stage start-ups should not typically build giant headquarters in Silicon Valley or purchase Super Bowl ads with their precious seed funding, filing or acquiring dozens of patents in the early years solely for their own sake is often a terrible waste of money.

Thus, it is key to figure out the objectives for each specific start-up, both in the long-term and at their stage of growth, before matching their capital expenditure and business strategy accordingly.

Many start-ups that come out of university research labs have similar characteristics:

• They are based on fundamental innovations emerging from federally funded basic research – the so-called ‘eureka’ moments.
• They are transformative and discontinuous in nature, with the potential to revolutionise an industry.
• In many fields, it will take years and tens or hundreds of millions of dollars to fulfil their market potential.

In fields such as software, strong patents based on research innovations may still turn out to be deeply important and valuable. However, for early-stage software start-ups in particular, over-investing in filing or acquiring patents solely for their defensive value (beyond what is needed to protect the company’s own innovations) may be a mistake.

Spending excessive capital too early to acquire a patent thicket unrelated to the core innovation is likely to come at the expense of hiring engineering talent, enhancing speed-to-market, improving the ability to attract customers and other critical matters. Further, the business models of software start-ups often pivot multiple times. Therefore, acquired patents may not even be relevant to the ultimate product or service.

Acquiring a big, expensive portfolio, even in the best of circumstances, does not actually provide freedom to operate. As we know, a patent is the right to exclude others from copying that specific patented invention; it does not necessarily allow the owner to make, build or sell products that practise the specific invention itself.

Nor does acquiring patents-by-the-pound necessarily protect a company from litigation. Owning a thicket could prevent a competitor from suing you, but only if your portfolios are of comparable size and quality and your own company provides a credible risk of a countersuit – something that small start-ups can rarely afford (at least without litigation finance or contingency counsel). Further, a start-up’s patent portfolio provides no benefit at all from a suit launched by an NPE.

Bulking up a patent position just before an initial public offering or product launch may make sense, since that is when competitive lawsuits might happen, when capital is plentiful and the need for protection at its peak. However, spending precious cash on diverse patents years in advance of any competitive threat, when the ultimate product may not be known, is unlikely to be a good idea.

University tech transfer offices evaluate every patent filing on its own merit:

• Is the invention truly transformative?
• Does it provide comparative advantage to a potential product or service?
• Is it distinct from prior art?

For these inventions – especially in industries such as biopharma, medical devices, energy, advanced materials, certain software fields and IT hardware – it is critical that the university and the start-up secure strong and broad patents to the core discovery. Without rigorous and defensible intellectual property, investors or industry will not be willing to back a high-risk start-up over so many years. If costly inventions can simply be taken or copied by others, capital will be impossible to raise or may even be withdrawn.

If the US patent system has taught us anything, it is that the exchange of a limited government monopoly on a patentable idea in exchange for disclosure to others (to allow even further advancements) is critical not just to the success of our economy, but to technological innovation that has improved so many lives.

The reason for this is that every precious dollar spent on a patent could otherwise be spent in furthering the university’s core mission (in our case, education and research).

Most early-stage start-ups would be well advised to follow a similar approach when deciding whether intellectual property is the highest and best use of their precious cash. For most start-ups, a patent is a tool – a means to an end, not the end itself.