By: Hardware Massive, 01/02/2018
As patent agents, we hear a lot of reasons – good and bad – for filing patent applications and building patent portfolios. Phrases like “stop competitors,” “licensing revenue,” and “fundraising due diligence” come up frequently. However, despite the emphasis and value that many tech companies place on IP, there is still a great deal of confusion about when and how patents can be useful.
In this multi-part series, we will track a startup through its various stages – from the first concept to fundraising to exit – and dive into how patents may be useful or counter-productive at various stages of this startup.
1) Pre-Startup Phase
Initially, there is no company, no product, no data; there is only an idea in your mind. Around eight billion people inhabit this planet, many of whom have ideas, some of whom are actively pursuing these. The likelihood that your idea is patentable (i.e., truly novel and non-obvious) at this stage is not particularly high. But even if this idea is patentable, we have no data to confirm that anyone else thinks this idea is useful or that it will meaningfully impact their lives
In our last article, we discussed the interplay of 1) confidence in the patentability of an idea and 2) understanding the idea’s value when determining whether to patent it. At this early stage, we have insufficient quantifiable evidence to support arguments to patentability and value. Any patent application filed at this stage is likely to either focus on the wrong technology or describe the right technology in an incomplete – and therefore less patentable – way. In other words, your idea and your company are just not fully baked at this time.
What you need next is – feedback from others regarding perceived value of your idea; you alone cannot impartially evaluate your own ideas. At this early stage, the best validation of your idea comes in the form of a co-founder who believes as strongly as you do in the idea and who is also willing to take the risk to execute it. It is your vision and your ability to clearly communicate that vision that will attract the right co-founder. Together you can build a business plan, prototype the tech, and develop tests to validate your assumptions. You can see why patents aren’t even under consideration at this stage of the life of your startup. Patents are simply not going to help attract an ideal co-founder or answer business- and tech-related questions.
TL;DR – Tech entrepreneurs (often) need strong, complementary cofounders. Patents simply don’t help attract ideal cofounders. Early / pre-seed companies should probably skip considering patents and focus on building a team.
2) Pre-Seed Phase
So you found a great cofounder – one as audacious as you are – and now you need an influx of capital to fund development. Maybe your friends and family have invested in addition to your own personal cash. Maybe you are targeting individual angel investors, an angel group, or even a micro-VC to fund a seed round. Maybe you are applying to an accelerator or incubator. At this stage, you are targeting checks starting at a few thousand dollars up to $50k or even $100k. With few exceptions, your investors want to: vet your team and your vision, and review technical or user data that validate key assumptions of your business plan.
Beyond questions related to patent strategy (i.e., what the startup may patent and when applications may be filed in the future), patents are rarely an integral part of these early-stage fundraising conversations. There are good reasons for this: many pre-seed investors understand that the company is young and that capital is best invested in the development of the product. Moreover, the cost to hire a patent firm for patent due diligence – which may be upward of $20k per deal – is often too large a percentage of the check that any one of these investors is willing to write at this stage, which reduces the likelihood and necessity of seed-stage patent-related due diligence even further.
What you need next is – a refined vision, data supporting fundamental assumptions of this vision, a path to revenue and/or user acquisition, and technical progress. Spending time and money to file patent applications at this stage indicates that you are allocating limited resources away from development and user testing, which may slow technical progress, thus delaying your fundraising efforts.
TL;DR – Patents rarely help a startup close a seed round. Pre-seed companies are often better off allocating resources to development and user testing than to patents since the former directly impacts seed-stage fundraising whereas the latter does not.
3) Post-Seed Stage
At some point, however, investing in a patent portfolio may yield very positive returns. In fact, we can quantify this trigger. Over the past several years, we have found that patents become a viable option for a startup once it has raised between $250k to $300k. Having raised this amount of capital indicates that the company has collected enough data to understand the value of its tech and has made sufficient technical progress to isolate something patentable – the two components needed to justify filing a patent application. Furthermore, given the average cost per provisional and non-provisional patent application in the United States, a startup that has raised this amount of capital could strategically file one provisional application + one non-provisional application for less than 5% of its annual budget, which is a reasonable expenditure for an earlier-stage tech company.
But why invest in patents at all at this stage?
What you need next is – a strategic patent portfolio. For a startup working toward raising institutional capital, a patent portfolio says, “We are a technology company, and we are actively taking steps to maintain ownership of our technology.” More specifically, a patent portfolio that contains solid, strategic patents directed to core revenue-driving and user-facing technologies communicates that: 1) you understand the long-term impact of your space; 2) you are capable of finding the right partners (e.g., a patent firm) to help you build value; and 3) you are capable of managing limited resources to create something significant.
TL;DR – A founder who is able to demonstrate that her company has: a strategic vision, made significant technological progress, a roadmap for go-to-market and user acquisition; and a patent portfolio that aligns perfectly with progress to date and a future roadmap is pitching something powerful.
4) Institutional Capital
For institutional investors who are obligated to return for their limited partners, patents can also function to de-risk deals. Consider this: Over the past several years, patent portfolios have sold in secondary markets for roughly $250k per patent on average, with peak sales over $1.6M. We also have also heard from several serial entrepreneurs that their startups’ individual patents were valued well into the millions of dollars at the time their companies were acquired. When we consider that the average cost per patent in the United States is approximately $38k, we may be looking at 6x, 10x, or even 40x returns when a startup invests in a strategic patent portfolio. These are the kinds of returns that are sought by institutional investors. Even if a company folds, the patent portfolio remains a valuable asset that itself can be sold to recuperate investors’ losses. Patents can function to 1) boost a company’s valuation during an exit, or 2) as an insurance policy for investors during the dissolution of a company.
TL;DR – Once a company reaches fundraising and development milestones, patents become a powerful tool for building value and de-risking deals when raising institutional capital.
Source >> https://hardwarenews.wevolver.com/patents-portfolio/
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