Why Technology Startups need patents

The patent system was in fact designed to favour independent inventors, universities, R&D units, and disruptive startups and to protect their market position against bigger players. The patent system is not unfair to startup companies. However, startup companies need to make the most of the patent system in order to benefit from it. Bigger companies can rely on their dominant position in the industry to create a market or economic barriers for newer entrants, but startup companies cannot create barriers for newer entrants through such means. However, they can leverage the patent system that gives them monopolies for their technologies by law. Thus, they can defend their market position and gain an advantage over competitors and newer entrants by leveraging the patent system. 

Some of the main concerns that startups have are mentioned below, with suggestions on how they can be overcome:

1) Are my patents defensible and enforceable? Will I be able to afford to defend my patent in a patent lawsuit?

A patent that is written well, that satisfies all the legal requirements of patentability, and that covers commercially viable implementations of products is defensible, enforceable, and valuable. A patent is an asset that has a value not just on its own, but also in combination with other patents. It may have value for third parties in their litigations with other third parties. A smaller company can enter into a joint agreement with a larger company to profit from a patent or to enforce it. You can also sell your patent or assign it to a bigger company that has a need for the patent to defend itself against its competitor. Patents are assets like any other property. They can be bought, sold, licensed, mortgaged, etc. There are also many Invention developments, patent licensing, and patent auctioning companies that will help to enforce or monetize your patent in return for their share. The US patent system ensures that patents are defensible and enforceable. Startups and/or patents owned by startups are attractive acquisition targets for bigger companies that are looking for patents to exert against their competitors.

2) Can I afford the costs/expenses to obtain a patent in the US?

If you engage an IP firm in India with specialized training in US patent prosecution by US patent attorneys, you can get a high-quality US patent application written in India for a fraction of the cost. The patent application can be filed in the US by a US patent attorney with the minimum review. If you engaged an Indian IP firm not just in the drafting stage but through the prosecution stage (including response to office actions), the cost savings are even more. The costs are distributed over a period of time so they can manage if projected and budgeted for in advance. Some costs can be postponed using patent prosecution strategies. For a minimum amount of money, you can first file a patent application and immediately label your product ‘patent pending.’

3) Is it worth my time to spend on the patent process when my time is limited?

There are several advantages of going through the patent process, even apart from getting a patent. A patent search makes the inventor aware of previously published documents, published patents, and granted patents in a similar domain. This body of information that is revealed in a patent search helps the inventor know his competitors and the extent to which their inventions overlap with that of the inventor’s invention. Also, he goes through the exercise of differentiating his invention from existing ones so that develops a clear understanding of his value proposition and differentiators. He can also make changes in his invention to further distinguish it from the existing information.

A ‘freedom-to-operate’ search identifies third-party patents that may be potentially infringed when a product is launched in a market. In such cases, licenses may have to be negotiated to launch the product. If there are too many such patents, it may not be viable to enter the market directly, and the business model may have to be reworked based on partnerships, joint ventures, etc. A product launched that infringes on third-party patents is likely to be taken off the market due to injunctions. Time spent in identifying and mitigating such future risks before they arise is time well spent.

The patent preparation process makes the inventor think of his invention in terms of wider scope, elaborate on the implementation, think of alternative implementations that competitors may come up with, and identify and protect each of these. Many times, inventors themselves find it challenging to describe their inventions. This is where a good patent attorney can help. A patent attorney’s job is to capture the invention in a broad manner and write it in a single sentence (an independent patent claim) and cover alternative implementations in various dependent claims.

The patent requires clear illustrations in the form of drawings that describe the working of the invention, use cases, and examples.  The patent attorney has to sometimes create new drawings that better illustrate the main features or components of the invention so that a patent examiner, judge, or jury can easily understand the invention. The drawings have to be formalized and redrawn to comply with patent office requirements. Thus the patent process enables an inventor to gain a lot more insight into his invention so that he is able to develop it further, distinguish it from existing information, and articulate it better to a plurality of audiences. Also, you don’t have to wait for your patent to be granted. You can commercialize your invention as soon as the patent is filed. Hiring a good IP firm that works as an external patent prosecution firm (with an experienced patent agent/attorney) but also as an IP Consultant (that works closely with the inventors) will help save time and develop a patent application that is more closely assigned to business objectives.

4. In a domain like software, the internet (e.g., e-commerce, online portals, and platforms), or financial services, technology itself is not a barrier to entry. So why bother to patent such a technology?

Software may be easy to copy and develop independently, hence the technology per se does not afford a barrier to entry. However, a patent can create a barrier to entry even when technology is not a barrier, because a patent does not merely protect software code (which is protected by copyright) but it protects the underlying process or method, system, or storage medium. US patents protect aspects that go beyond technology and even extend to business processes or models. Patents also protect User Interfaces, APIs, etc. A software may be easy to reverse engineer, but a well-drafted patent is not. Business methods using distributed client-server architectures over networks (e.g., the internet) are patentable in the US. A patent is a legal barrier that is much more difficult to circumvent than a technological barrier.

5. How can I negotiate with a big company and get them to license my patent?

A startup may be required to interact with big companies as customers, through alliances, channel partners, etc. A startup may not have much-negotiating power with a bigger company, but the exception to this is when the startup has exclusive rights for a technology that the bigger company needs, which is possible through patents then the startup does have more negotiating power. A startup without any patents is like a sitting duck to a bigger company that can put the startup out of business with a patent lawsuit. Having patents of its own enables the startup to defend itself and assert counterclaims of infringement against the bigger company. Then there is room for a settlement through cross-licensing where the startup gives licenses for its patents to the bigger company and the bigger company gives licenses to the startup to allow freedom to operate. Bigger companies typically have more to lose in terms of market share in case they lose in patent litigation and they are more likely to settle when faced with a potential threat of patent litigation. Turning a blind eye to the patent system (i.e. the ostrich effect) will not make the threat due to third-party patents vanish. Startups have to equip themselves to deal with such threats before it is too late.

6. My priority is my existing customers who help us generate income as of today, and on growing the pipeline of future potential customers. I also need to recruit people who are ‘stars’ and ‘brands’ to help me attract customers. Why should I care about generating new assets or protecting my existing assets?

You may even end up losing money on your existing customers if the cost of customer acquisition, customer support, etc is higher than the returns. Many potential ‘customers’ for startups are bogus customers who are just fishing for quotes, getting free know-how and trial versions, and looking to steal your resources and maybe even your people. Some customers may leave and other customers may take their place, some people may leave and other people may take their place but IP assets that are assigned to the company will remain with the company. In fact, having a culture where innovation is recognized, patents are filed for them, and inventors are rewarded will help you to not just attract ‘stars’ but also generate stars, nurture stars and retain stars in your company. All successful innovative companies have a reward program for inventors that helps them to stay at the forefront of innovation.

Further, you might as well focus on the 20% of the customers who provide 80% of your revenues and look for other sources of revenue (like patent licensing) and build your asset portfolio rather than repeatedly personally chasing the bottom 80% that contribute the remaining 20%. You can have other competent people in your organization focus on the other clients while you take time to invest in creating and protecting your assets. 70% of the valuation of a technology company comes from its intellectual assets. Focusing on income at the expense of assets is like being penny wise and pound foolish. In the real estate business, it is like being a broker who only makes commissions on transactions instead of an owner who makes a lot more and retains control. It is like preferring income over wealth. Income can be converted into wealth only when it is invested wisely invaluable assets. IP assets are not only less expensive to acquire than physical assets (e.g., land or buildings), they are potentially more valuable. Even those who license your IP from you are your customers. Your patents are also your products because they are a by-product of your innovation and investment in research, and there are ‘customers’ who are willing to pay to license your patents. Patents help increase valuation as well as generate revenue.

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