Patents: Enabler of Investment and Startup Success

The writers at TechDirt have a lot to say about patents and patent reform, and I sympathize with many of their points. Here is a recent article of theirs on the topic that prompted me to write this post.

I have worked in technology startups and I have patents issued and pending. I would prefer to avoid the patent process entirely since it is time-consuming and expensive, with no certainty of bankable benefits. Yet they are still necessary; we live in an environment where it would be foolish to avoid the acquisition of patents. I have some thoughts about why they remain important for technology startups, regardless of my personal feelings on the matter.

Prospective investors treat patents, even those that are still pending, as company assets. They provide some assurance, though imperfect, of a company's ability to build a sustainable competitive advantage. Without that, they are primarily investing in the team's ability to execute in getting to market first and successfully. This is not a readily defensible strategy (e. g. Vonage) since others with the same idea could execute better. There is also the bitter reality that if the startup fails, whether by poor execution, market timing, or funding availability, and if the patents have enduring value, the investors have something of value left other than desks, chairs and keyboards. You need only look as far as domestic companies like MOSAID and Wi-LAN to see how investors can profit from patents rather than (failed) product-based businesses. This may be distasteful to some, but it is the current reality.

While you may not believe in the value or expense of patenting, that does not hold true of competitors. It is typical that two or more people people will think of the same innovation around the same time since the underlying thought process is often driven by evidence for the need from the surrounding society and economy. If you don't file a patent, it is likely someone else will. With the common failure of the patent office to properly notice and credit prior art, even if you were first your enterprise will be in jeopardy. If you end up in court be prepared to lose. Even if you do not intend to litigate if another company utilizes the claims in your patents, you must defend your company from those who would litigate against you.

Less concrete, yet still arguably valuable, the cost and effort of filing a patent application tests the entrepreneur's belief in, and viability of, an innovation. When you must spend hard effort to document in detail the workings of your innovation and then pay your own hard-earned cash to a patent agent and the patent office, you naturally question if this is merely a whim or an investment. That is, whether you realistically expect the patent filing to attract outside investors and create a competitive advantage contributing to the enterprise's eventual success. You must also believe you can execute quickly on the innovation since 18 months later your patent application will be public and therefore open to viewing by your competitors and customers.

Today's litigious environment in which entrepreneurs must play may change in the future. Now, however, it is not prudent for an entrepreneur to avoid the patent game, painful and uncertain as it is.