Marcello E. Miranda

@marcelloecm

The Real Value (or Lack Thereof) of Your Tech Startup Patent

A few years ago, as an applied econ & finance undergrad dipping my toes into the startup ecosystem for the first time, and trying to learn all I could about running an early-stage tech company, I had my work cut out for me. Just cutting through the noise of buzzwords and platitudes espoused by “startup gurus” in search of real wisdom was challenging enough, and at this point my brain has overwritten most of that with lessons learned from actual operating and investing experience.

One point has remained with me though, a truism I’ve continued to hear even to this day.

Do not waste your time, money, or effort on a patent.

There are a few reasons a tech startup founder might consider disregarding the patent process entirely.

That being said, having recently moved into venture capital:

One of the overriding factors in whether I or my colleagues choose to invest in a company is defensibility.

I want to be certain that the team I’m investing in is uniquely positioned to solve whatever problem or gap exists in the market that they’ve set out to tackle. To be sure, a major component of that is the team itself — talent defensibility — and the assurance that they are both qualified and motivated to make their worldview a reality. However, intellectual property (IP) defensibility, ensuring that my company’s brand and product remain distinct and competitive in the market, is just as critical.

The issue isn’t clear-cut, and the answer today may be different than it was just a few years ago.

Why You Should(n’t) File a Patent

The maxim that startups should avoid pursuing a patent does have some basis in reality, and there are some very real benefits to steering clear of the patent process as an early-stage company.

  • Reverse-engineering. Patents are public, and while a competitor may not have the right to reproduce a work entirely, there is nothing to stop them from producing something similar in function but just sufficiently different to avoid litigation.
  • Foreign competitors. Filing a patent in the U.S. Patent & Trademark Office will not protect a patent-holder from infringement overseas, and even filing in foreign offices offers no guarantees in countries with less sophisticated patent courts.
  • Resource constraints. As an early-stage company, time and money are in short supply; the work involved in filing a patent is just another distraction from execution, hiring, and so on. And a startup finding itself up against a large corporation in court simply will not have the funds to challenge any act of infringement.
  • Pivoting. It is entirely possible — and, in fact, rather likely — that a company will go to market with a very different idea than what the founders initially envisioned. In which case, founders may find themselves having spent significant resources on IP that is no longer relevant.
The Lean Startup methodology, which advocates iterative learning and pivoting

Even in consideration of these issues, IP should be a major concern for any startup, and whether a founder intends to pursue external funding or not, applying for a patent on any proprietary technology can go a long way toward a company’s success.

  • Deterrence. Having a patent will serve as a defense against patent trolls, otherwise known as non-practicing entities or patent assertion entities, which will gladly pursue frivolous or bad-faith litigation claims against startups and multinational corporations alike. These claims often cost millions to fight off, forcing startups to settle for significant sums.
  • Barrier to entry. Communicating ownership and progress on an idea may dissuade competitors and new entrants, or turn a potential competitor into a future team member or collaborator.
  • Acquisition opportunity. While large, well-funded incumbents acting in bad faith may have the resources to infringe on an early-stage company’s patent and out-muscle them in court, a company with valuable IP and strong defensibility is often easier to simply buy out.
  • Alternative IP protections. Patents are, in the overwhelming majority of cases, not even necessary to protect a company’s IP. Oftentimes, copyright and trademark protection will more than suffice.

Historical Precedent

According to Paul Graham, at least 70% of startups have a different core idea at the heart of their business after three months than when they started.

This figure, if accurate, should not be surprising. In building an MVP or scoping out a potential business model, most successful companies pursue an iterative learning process with prospective customers. This process inevitably yields new insights that oftentimes change the entire direction of a company. In which case, a patent application may quickly be rendered worthless or obsolete.

In any case, business model more often than not trumps patent protection as a factor in a company’s future. Many of the electric scooter unicorns now competing for market share across the United States are using scooters from Xiaomi rather than their own designs, and like Uber & Lyft, are primarily competing on business model and marketing strength.

Where patents do make sense are in the case of hardware companies: Skydio, Planet, and Magic Leap have all filed for patent protection around their core technologies. However, these companies are all banking on their technical superiority, and operating in burgeoning frontier technology markets where a breakthrough could all but guarantee market dominance.

An interesting example is SpaceX, arguably the most frontier of any company mentioned so far. In 2012, Elon Musk famously claimed that publishing patents would give China a “recipe book” to follow in constructing similar technology. A patent was not necessary; between its employees’ non-disclosure agreements and the low likelihood that a competing company or nation-state would ever get a chance to fully dissect and analyze their rockets, SpaceX’s edge was guaranteed.

Bad Actors

Unfortunately, patent law is wide open to fraud and abuse, making it easily exploitable by firms or individuals hoping to profit from others’ inventions, making patent protection a necessity in some industries. In the United States, patent protection is awarded on a first-to-file basis, rather than first-to-invent, giving patent trolls leeway to dissect existing technologies, file a patent, and then prosecute the inventors for what may be a massive sum. In fact, patent trolls typically earn far more in patent cases than practicing entities.

PriceWaterhouseCoopers

Perhaps the clearest inflection point in the fight against patent trolls was the dot-com bubble bursting. In the aftermath of the bubble, many tech firms went bankrupt, liquidating their assets and seeing their patents scooped up by non-practicing entities. Following this wave of bankruptcies, there was a 47% jump in the number of patent complaints from 2000–2010 over the decade prior.

Increased litigation against both startups and larger, established corporations has forced many companies to band together in what are called defensive aggregators. The LOT Network, a non-profit patent-sharing organization that recently counted 149 large corporations and 75 startups — including Red Hat, Lenovo, and Alphabet — among its members, was founded as a response to non-practicing entities.

Putting aside frivolous litigation from patent trolls, startups are still vulnerable to having their own R&D reverse-engineered and used by incumbents as a shortcut to innovation. Fortunately, this remains a relatively rare phenomenon, and in cases where the aggrieved party has suffered blatant patent infringement, even against more established corporations, patent courts in the U.S. have traditionally ruled correctly.

The challenge then becomes having the funds to fight a patent infringement suit against a much larger competitor. This remains a danger for any early-stage company.

Where IP protection starts to break down, however, is in the foreign markets. China has been a particularly problematic market for both startups and established companies, and although a score of new, specialized IP courts and patent laws have made the country ostensibly more secure for companies going global, examples of blatant disregard for IP still abound.

Not a Matter of “If”, but “When”

One thing is important to establish upfront: investors demand IP protection. You are unlikely to receive funding from any sophisticated angel investor or VC without that extra sense of security.

Sure, you’ll give away your product roadmap, but you can still outpace and out-innovate any of your competitors, it won’t matter.

That’s the argument, and it’s right.

As crucial as IP protection may be, however, you should not necessarily apply right away, nor should you focus strictly on patents.

If your company prioritizes its technology innovation over its business model, focus on trade secrecy. In the early stages, it will be more than enough — if Google can pull it off with thousands of employees, so can you — and you will have more leeway for experimentation/iteration while you determine your core tech stack and business model.

As a startup, worry about trademarks instead; they are much easier and faster to secure. And unlike patents, absolutely necessary. Meanwhile, any code you produce is automatically protected under copyright, even if any physical apparatus that uses it is not. If you are a software startup, or you’ve innovated on your business model above all else, you’re done. Congratulations.

If not, even if you are a hardware or deep tech company, you have no business worrying about patents until your trademarks and technology strategy are fully established, and ideally until you have already secured enough funding to hire a quality patent attorney for the job. The process may not be cheap, but the sense of security for both you and any future investors is priceless.

Once that’s done, relax. Take a breather. That’s one major load off your back.

Then get back to work.

Marcello Miranda is a tech junkie, and frequently writes on startups. Follow him on Medium and Twitter, and if you enjoyed this content, give a few claps to help spread the word!

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