Do tech startups need patents?

It is a truth universally acknowledged that any tech startup wanting success needs to acquire a patent portfolio.  Is that really true?  Or is it just a fiction?

Whether a tech startup needs patents and an IP portfolio is an entirely different question to “should a tech startup file patents”?  Unless you understand the difference between those two questions, you may waste hundreds of thousands of dollars, but today’s perceived wisdom is that it‘s money worth wasting.  That perception isn’t new.  When W. S. Gilbert penned the lyrics for Iolanthe, back in 1882,  he had a character describe a colleague, observing that “his inventions may have enriched him by degrees, but all his little income went on patent office fees”.  In the ensuing 140 years, the patent industry has worked very hard to perpetuate that status.

I’d argue that startups need to put far more thought into the value of patents and whether they really need them.  Rather than adding value to a company, in many cases they are just a drain on cash, which a startup could use more effectively elsewhere, not least because a company lives and dies on its cashflow, not its patent portfolio.  So, what’s the point of patents?

If you’re wondering why your tech startup should go to the bother of acquiring patents, you should start by considering what you plan to do with them once they’ve been granted.  There are five main reasons that are generally cited for having a patent:

1. Using a patent offensively.

This is what started the whole patent industry, where a patent is essentially used to grant a monopoly, stopping competitors copying what you do.  The concept dates back to 1474 in Italy, morphing into its current form with the reform of the UK patent office in 1852, exactly thirty years before Gilbert vilified it.  Enforcing a monopoly in commercialising your invention only really becomes useful once you’re making something.  Unless your business is to be a patent troll, enforcing a patent before you’re in production just gets in the way of developing or selling a product; the resulting delay simply gives competitors more time to catch up.  For almost all startups, execution is key; prosecution is a diversion.

If your competitor is a large company, they’ll be able to afford more lawyers and string out the proceedings, causing disruption to your business.  If they’re a small startup, they’ll probably have no money, so even if you win, it’s a pyrrhic victory, as without the ability to extract any compensation, you’re left to pay your own legal fees, which are likely to be substantial.  You’ll also end up diverting attention away from managing your business.  This probably isn’t how it was meant to be, but once lawyers get involved, it’s how it ends up.  (Although, as lawyers designed the process in the first place, it may be exactly what they intended.)

Taking an infringement to court is predominantly a game for large companies, who like to strut their stuff in billion dollar lawsuits.  However, even they are beginning to tire of it, accepting the fact that concentrating on execution makes more sense than funding lawyers.

The painful fact is that having a patent to ensure a monopoly isn’t a lot of use to a startup.  There is an exception.  If your technology is bleeding edge, then you absolutely want to protect it.  That’s particularly true if you are breaking new ground in semiconductor or pharma.  But very few tech startups are bleeding edge, although a high percentage imagine they are more inventive than they actually are.

2. Using a patent defensively

The opposite argument is that if you have patents, they are useful to fend off anyone who threatens you with patent infringement, as you can either throw back a counter claim or cite your patent as demonstrating prior art.  However, few challenges arrive until you have a product on the market, which brings us back to the primacy of execution.  At the point a challenge arrives at your startup, your best option may be to consider it as an opportunity for an exit, either to whoever is attacking you, or one of their competitors, as the legal cost of defending a challenge is likely to be unsustainable.

Defensive patent portfolios help large companies, which is why many have been desperately buying up patents for just this reason over the last decade.  Their value for startups is questionable. 

3. Using a patent for revenue

This generally means selling it to someone else, either to reinforce their patent portfolio, or to help them go and sue someone, because that’s their business.  But it’s orthogonal to what a tech startup needs to do, which is to get products to market.  Selling off a patent can be useful if you’re running out of cash and want to monetise what you spent on getting it granted, but that’s not a good argument for spending the money in the first place.  It’s also difficult, and probably won’t recoup the money you’ve spent on getting it granted.

4. Using a patent for licensing

If your name isn’t ARM, Nokia or Ericsson, history suggests that this isn’t likely to work for you.  A few companies make money out of licensing, but even with the likes of Nokia and Ericsson, the licensing business is generally an evolution of a manufacturing business.

5. Using a patent for marketing

It can be helpful to have a patent or two to help establish a tech startup’s reputation, as you can say “Patent protected” or “Patent applied for” whenever you are promoting your product or your company.  It’s an intangible benefit, as it’s unlikely that you can use it to raise the price of a product (unless you’re in pharma).  The marketing aspect may be helpful in fund-raising, as it implies that the company both owns and has the capability to develop IP, although the caveat is that in this instance, IP may stand for Intangible Promises.  Despite that, putting a patent in a picture frame, even if it’s just a patent application, and hanging it in your main meeting room can look very impressive, especially when you’re negotiating an exit. 

Companies like Qualcomm have even used this approach to save money on interior designers for their head offices. Those aren’t window panes in the picture below – they’re framed patents.

My experience, through several acquisitions, is that although framed patents look pretty, having a patent is generally just a tick box.  Acquirers should be far more interested in your freedom to operate.  Which brings us to the sixth reason for filing a patent, which is normally the one which is ignored:

6 .Using a patent to assess your freedom to operate

I’d argue that for most startups, the greatest benefit from filing a patent is to assess your freedom to operate.  Freedom to operate is the process of finding out whether there are other patents out there which you might be infringing.  If there are, you might want to consider whether your business is viable or saleable, so it’s useful to do this fairly early on in your startup’s existence.  You can do this yourself for free on the patent website by searching for keywords, but it’s useful to have a professional do it at a patent office as a parallel exercise.  To do that, you need to file a patent, ideally describing what your company is planning to do, then pay for a search.  If nothing much comes back, you may consider taking the patent to grant, but as that costs more money it’s best to delay it for as long as possible.  You can write the patent yourself, or get it done professionally – neither is a major cost.  If it turns out that there are lots of other patents covering what you thought was your novel idea, then you need to work out how to get around them, whether you need to license something, or whether you’d be better off doing something else. 

Filing a broad patent and taking it to search probably returns the most value that a tech startup is going to get out of a patent.

Where to file patents

I’ve seen startups spend hundreds of thousands filing patents in multiple territories, most of which they’ll never sell in.  There’s a lot to be said for starting off with a patent office which will perform a fast, efficient search.  The UK patent office is pretty good at the moment.  If it looks as if the patent has legs, you can subsequently file in the US and/or Europe.  If anyone suggests filing beyond that, ask them why.  Even really successful tech startups generally get half their revenue from a single market area – typically the one they’re located in, so being able to repulse competition there should be sufficient. 

How bright do you think you are?

The patent industry plays on the vanity of tech startups, making them think they’re another Edison.  They tend not to point out his view that “Genius is one percent inspiration and 99 percent perspiration”, as they don’t make money out of the perspiration, unless you’re filing patents for deodorant.  Back at the end of the nineteenth century, Charles Duell, the Commissioner of the US Patent Office is alleged to have claimed that “everything that can be invented has been invented”.  He was obviously wrong, but not that wrong.  Most tech startups really do believe they’ve invented something new.  In most cases they haven’t.

The value of Prior Art

 I’ve explained above, a patent doesn’t give you the right to stop a competitor.  It gives you the right to take them to court, where they will probably argue that your patent isn’t valid.  Few patents are as good as their owners think they are.  My experience as an expert witness in IP cases is that a good subject matter expert will almost always be able to find enough prior art, or inconsistencies in the claims, to challenge the validity of the patent.  You may still win your case, but it’s unlikely to be as black and white as you hoped.

Prior Art is the technical term for “it’s already been done”.  If you delve into patents, you’ll quickly be surprised to discover that in many cases, competing companies appear to have been granted patents for exactly the same thing.  Dig deeper and you may well find that someone else was selling the product before any of the patents were filed, or that it was described in a scientific journal thirty years before.  These may or may not invalidate your patent, but they weaken it.

A useful strategy for a tech startup is to complement any patent filings by putting their information in the public domain after their filings, so that there is a record of your prior art.  That can be on an obscure blog that nobody reads.  As long as it’s public and archived in the wayback machine, you have a degree of protection against latter patents.

So, should file you patents?

It’s a different decision for every tech startup, but it needs to be a considered one.  Startups succeed if they manage execution and cashflow.  Anything that takes money away from those is a threat to success, so its merits need to be assessed, not taken for granted.  The current orthodoxy is that a patent portfolio is money well spent, but that could just be an industry conspiracy designed by patent attorneys to keep themselves off the streets.

Running a tech startup is an exhilarating, but precarious experience.  Unless you have deep-pocketed investors, (and they’re becoming increasingly rare), every expenditure needs to be carefully considered.  Ask yourself the questions about what you really need and be prepared to explain those decisions.  Shop around for patent advice and make sure you understand what you are spending your money on.

There is one further sting in the tail.  Tech Startups that fail will probably see their patents sold by an administrator.  The most likely buyers will be patent trolls, who may well use them against better funded startups.  If you’d spent that money on your business, rather than your patent portfolio, not only might your company have survived, but it wouldn’t have created a legacy of misery for future tech startups.

Good luck.