AA 018: What is your opinion on intellectual property for VC valuation?

Comments (6)

• A startup has to clearly understand what their patent portfolio is going to look like as a commercial success over the next 5 years. Some early investors will want to see what your IP is to support your startup product, especially in life sciences. Forget the idea that you can litigate successfully your IP unless you have $3 million in your war chest (average price to litigate a patent). Here are some defensive positions you can take to protect whatever your IP is: investors with big names and big funds who are invested in you can tell a potential competitor who will infringe or reengineer your IP, great, steal the startup money and you steal our VC or PE money. You guys will not be on the short list when this product goes to market and is a commercial success for acquisition but your competitors will. Do put a budget amount to do a Freedom To Operate analysis to see exactly what you have claims to and not as well. A serious corporate acquisitor will do one if they seriously want to buy you or steal your product. The ultimate defense is during the seed round include your customers, especially big customers an opportunity to buy equity at the least expensive cost. If they are Key Opinion Leaders, they will not be happy and casually tell your potential competitive poacher it would probably be a better idea to acquire your company in the future than risk losing the KOL’s business on what they buy from them today. When Brand X wants to take whatever IP you have, just mention your capital structure and list of investors. They will back off real quickly. But more importantly, patents portfolios are impacting valuations less due to the importance of your trade secrets and the value of your data. If your product or service is going to generate data that creates value in your industry and insights into that data translate to value to your customers, your company valuation is increased. But it all depends on how disruptive your IP will be and how much value you create as well as who will share that value.

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  • Hi Byron – Thanks a lot for sharing!
    The $3m average price of litigation is a super interesting fact.
    I learnt a lot from this.
    Would you be interested in doing a blog around what you just wrote? You share a lot of perspectives I wouldn’t even think of so I’m sure founders would find it insightful.

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• I would agree with your IP approach in 99% of all practical cases. You are right, the absolute majority of all filed patents are pretty much useless from business development perspective because:
  – they disclose an invention that has little commercial value (yes, you invented this, but who cares?), or
  – can be easily worked around (yep, I can get the same result in a different way!), or
  – you will never know if your competitors are using your invention (think of some smart backend algorithms that are invisible for external world that includes you and your lawyers), or
  – cannot be protected in legal debate due to lack of resources (an inventor cannot afford the legal fees that could be $XXXk or $XM).

  However, I believe that there are some rare cases when a true innovation (big or small) is on the table. Here decision making is more difficult. Think of Snapchat features such as disappearing images or Stories that their much bigger competitors such as Facebook could not copy because of a patent protection. This could be a matter of life or death for your startup.

  Also, in some cases big players (think Google, as an example) could decide that it is easier to buy your company with a desired IP rather than spend time and money in legal battles. In these cases, your critical IP could be a major factor for an acquisition which for some entrepreneurs is the best exit strategy.

  I’m interested in this discussion since I believe that my case has decent chances to be in the rare case of highly needed IP protection. Thus, I’m crying over my IP budget, but getting ready to file several patents.

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  • Hi Pavel-
    Thanks for weighing in.
    I agree with everything you are saying.
    There are of course exceptions to the rule. You just need to believe they are worth the effort. Hopefully, they are in your case 😉

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• I agree that customers usually don’t care about patents. But there are industries that value patents; industries that are patent heavy – hardware, medical devices, biotech, chemistry, etc. So, patents could affect whether a startup has a successful or failed exit.

  Your friend’s idea of easily designing around may be unsuccessful. Founders can create patents that are difficult to design around. The first step involves performing customer discovery; performing interviews and gathering information about a potential customer’s pain and providing a solution that relieves that pain. That solution is the founder’s value proposition and helps the founder find product market fit. The second step is to draft patent claims that cover the founder’s value proposition. (Claims are the part of the patent that define the scope of the invention.) The third step involves brainstorming about all the ways that a competitor could possibly provide that value proposition; including less efficient solutions, more costly solutions, and any other type of solution, whatsoever, that provides the founder’s value proposition. The entire team – both engineers and business/marketing people – need to participate in this brainstorming. The fourth step involves revising the patent claims, using the broadest possible language, so that the claims cover all the different ways of providing the founder’s value proposition.

  Of course, the founder’s team may be unable to think of every possible design around. But the goal is to make any design around too expensive; such that, licensing the patent from the founder is cheaper than spending money to design around.

  This type of patent is referred to as a broad patent because it creates a wall around the founder’s value proposition. It is part of the moat for the startup because founders can prevent competitors from easily designing around.

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• I agree with Denise that finding a bullet proof design for a high business value proposition often is not possible either because of arguable some prior arts included, albeit in a unique/novel way or an alternate way (with some pros and cons) to fight against potential infringements. Exception will be, for example, more in drug chemistry with a specific structure and protection around critical part of the molecule or a medical device with novel function (e.g., drug eluting stent to prevent arterial occlusion). Even then it may be challenged by different drug structure or mechanism built in the stent for same result. Bottomline, less that 1% of patented claims are often enforceable because of prior art (conceptually) or getting around it! Patenting is still a valuable asset for a startup to create an image of novelty for VCs to prevent or slow down competition during early years of growth!

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