By: Jay Knobloch, EVP Intellectual Property
When it comes to advice on intellectual property (“IP”) for startups, too many entrepreneurs start with what seems like the logical place — an IP attorney. However, the reality is that IP is fundamentally a business consideration and requires business strategy and vision. Entrepreneurs in the hardtech industry should start with a business professional when developing an IP strategy and vision. This article is meant to capture some of the business aspects of IP that should be considered.
Understanding the business implications is even more important for startup companies than it is for large corporations. In many cases, large companies are able to take a plain vanilla approach to IP strategy because they own such a large market share that IP becomes an afterthought. That is not the case for entrepreneurs. Startups generally need a more customized approach to IP strategy, and it will differ for each company. In many cases, IP attorneys spend a lot of time billing large companies and simply port a plain vanilla approach over to startup companies. This is dangerous. Entrepreneurs need to educate themselves on the business considerations that should drive an IP strategy.
So, what is the business goal of IP? For hardtech companies, IP is the life blood. It is what differentiates these companies from competitors and what drives companies to build IP strategies into the business plan. Thus, when it comes to intellectual property for startups, especially in hardtech, it is important to drill deeper and understand the “why?” Why is the technology a value to the end customer? A well-developed IP strategy requires understanding the customer. What pain points is the technology solving or, alternatively, what gains is it providing? The answer to these questions is commonly referred to as the value proposition. Too many times, the value proposition is detached from the IP strategy and is an afterthought. However, the value proposition should drive IP strategy.
IP rights are not just patentable ideas. It also includes other forms of IP – trade secrets, know-how, trademarks, copyrights. Understanding the value proposition will allow a hardtech company to properly evaluate how to protect the “secret sauce.” In some cases, the most important assets may be trade secrets. By way of example, customers may hire a hardtech company to reduce the design time of a certain technology. The reduction in design time may be due to a proprietary equation Protecting an equation may require a different strategy (e.g., trade secrets) than having a differentiated technology (e.g., patents). Understanding what the customer is paying for will drive this strategy. Answering the value proposition question will ultimately protect what is most valuable.
Another reason understanding the value proposition is important is because it will unearth possible areas of exploration for further IP. Knowing what the customer values (and is willing to pay for) will shine light on future developments.
It is also important to understand all the business value that IP can provide. Most attorneys are solely focused on intellectual property rights as weapons that can be used against competitors (either offensively or defensively). This is no longer the case. IP rights can be used for many business solutions. For example, IP rights can be used to help secure financing alternatives to venture capital. There is a growing asset class of IP backed debt financing for IP heavy companies. If this is an option that is interesting, it will drive a specific strategy that is different than VC raises. As another example, sales departments are beginning to use IP to identify customers. There are many patent searching tools that help flush out these lists, but it requires developing a portfolio.
IP portfolios of startup companies are many times viewed as “gap fillers” when licensing or acquisition is considered. If a large company has a gap in their own IP portfolio, they may look for a smaller company to fill that gap – either via licensing or acquisition. It is important for entrepreneurs to know those gaps and build a strategy that fills those gaps. In many cases, this is where the value proposition is found.
It is also important for entrepreneurs to understand the reality of enforcing IP rights. Most entrepreneurs do not understand the massive time, effort, and cost to enforce IP rights. There is an upfront cost of obtaining IP rights. However, that cost is minimal compared to the enormous cost of funding a litigation. In many cases, it will cost $5-10 million to enforce a patent against a competitor. There are litigation funding resources for entrepreneurs to utilize; however, it is not cheap money. Having a firm understanding of the expected value is also important. It may change the equation with respect to the investment in the upfront cost of obtaining IP rights.
In conclusion, when considering intellectual property for startups, it is important to understand the business considerations surrounding IP before developing a strategy. Entrepreneurs should find a business professional that has successfully navigated the IP landscape in recent years and ask advice before consulting an IP attorney. Understand the right questions to ask an IP attorney. As with most things in the startup world, an entrepreneur needs to be a self-advocate. Blindly trusting legal advice is a way to lose money and waste time and effort.
This blog was originally published on mhubchicago.com as part of its blog series in March 2021. For additional resources on this topic and more, consider becoming an mHUB member to access prototyping space, a robust curriculum for startups, and a network of industry partners.