Monday, April 16, 2007

To patent or not to patent

More and more, I am hearing the same question from entrepreneurs: is it really necessary to file patents, or to have a patent strategy at all? I thought the market and the investor community had dealt with this matter pretty definitively, but maybe I'm wrong. I also thought we'd never again hear from the boy band Menudo, but they're back, too.

Here's the bottom line on patents: if you require venture capital money to grow your business, you must have patents and a rigourous intellectual property program and strategy. While there are many VCs who decry the use of certain types of patents, few believe their investees should do without them. The same applies to those of you who are hoping to sell your Web 2.0 companies to Cisco in under 18 months. Hear me out:

The traditional theory is that patents give the holder a monopoly in the marketplace, and therefore contribute strongly to company value on acquisition or IPO. This theory has been largely debunked by the realities of the patent regime in the United States, the largest customer market for many startups.

Since the early 1980s, when the US patent system was overhauled, patents have become progressively easier to obtain and enforce. (Adam Jaffe and Josh Lerner's book, Innovation and Its Discontents, is a terrific recount of the decline of the patent system, for those of you wanting to learn more) The result? Instead of providing a single patent holder with a protected monopoly, there are now multiple players with overlapping monopolies. Patent litigation has grown exponentially and the cost of infringement litigation or royalties have become an expanding cost of doing business for high tech companies.

This is the current reality in which you are scaling your companies. If you succeed, chances are someone will sue you for ip infringement. (We know our clients have made it when that first statement of claim comes in the door). When that happens, you need to have on hand some defensive patents that can either knock out parts of any infringement claim, or that can be sued as bargaining chips in any patent licensing discussions.

This applies to you Web 2.0 startups with equal force. Look at the amount of money that Tier 1 VCs in the US are putting into this space. It is getting harder and harder to attract top investors as the space continues to crowd. Patents are a key indicator of your competitive advantage in this kind of market.

There's no cost-efficient way to get a good patent application done. Everything you've heard is true - $5,000-17,000 tends to get you to the first step. That does not mean that you should not dig deep early on and find some funds to get the job done. A patent application drafted by someone who is steeped in the technology, and who understand the business, is worth every dime. It can also form the cornerstone of the ip strategy you articulate to investors and acquirors. (Finding that lawyer is priceless, too. I know of only two, and I'm not telling you who they are. They might get too busy to help my clients out).

My two cents.

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