Why Patents Should Be Part Of Every Startup's Risk Mitigation Strategy

By: Russell W. Binns, Jr

Founders who want to start a company face daunting odds. There are a lot of statistics, but the consensus is that 90% of startups fail within three to five years. See e.g. Ron Berman, et al., Startup Genome Report (March 2012). With odds like these, young companies need to do everything they can to mitigate risks they face in their early days. Most start-ups tend to spend nearly all their time thinking about how to make a great product and get people to buy it. That makes complete sense, but in my experience too many start-ups overlook the need to protect their intellectual property -- a costly and sometimes even fatal mistake. Startups sometimes refrain from pursuing patents and other intellectual property due to limited funds. Despite the costs, however, there’s a strong case that start-up companies and their legal counsels need to incorporate intellectual property into their risk mitigation strategy early on to avoid problems as they grow. Besides being able to monetize patents, they can potentially block others from negatively impacting your business, and investors often see patents as a valuable property right.

Here are some of the reasons why, as well as some tips on how start-ups should approach developing a patent strategy that protects their businesses over the long-term.

Patent Protection Can Reduce Litigation Exposure and Grow Value

Most companies have some innovation that needs protecting whether they’re in the fast-growing tech or mobile sectors or in more traditional sectors like manufacturing. Perhaps the biggest reason for a start-up to think early on about patent protection is the threat of patent litigation. Litigation is a potent weapon that some competitors use to halt the progress of fast growing companies, and in some cases, they become bet-the-company cases. Smaller companies are easy targets – they have limited resources and expertise – and they are not in a position to deal with large patent risk. And, as companies grow, they also become targets for non-practicing entities and what some refer to as “patent trolls,” who can tie companies up in often frivolous but very costly litigation. In fact, a staggering 60% of defendants in non-practicing entity patent suits target companies with less than $100 million in revenue. See RPX Broker Rundown (May 2016).

But there are a number of other good reasons for start-ups to think more proactively about patents. A strong patent strategy is often a competitive advantage; can help a start-up get funding; can enhance its reputation; can facilitate joint ventures and partnerships; help it go public or be acquired; and can lead to licensing and monetization opportunities. Investors and Wall Street often look at a startup’s patent portfolio in their decision to invest, as well as how much to invest.  Mary Juetten, Do Venture Capitalists Care About Intellectual Property?, Forbes (Aug. 11, 2015). Patents provide investors security and position a startup for long term growth. They add gravitas to reaching the initial public offering stage and are a factor in the longevity of a business after IPO. See Wagner & Cockburn, Patents and the Survival of Internet-Related IPOs, 39 Research Policy 214 (2010).

Some Thoughts for Software and Tech Companies

Perhaps somewhat surprisingly, companies in industries that are seeing some of the most rapid innovation -- like software and tech companies, particularly those focused on content delivery -- often ignore the problem and don’t focus on future risk mitigation until they have a problem, and the result can be costly. See Ozluturk, The Cost of Not Having Patent Protection, IP Watchdog (Oct. 21, 2014).

Source >> https://www.forbes.com/sites/groupthink/2016/12/14/why-patents-should-be-part-of-every-startups-risk-mitigation-strategy/#2f790bc61af6