Friday, 14 December 2012

When Should a Start-Up Seek Patent Protection?

In carrying out due diligence, how many times have I heard this refrain from a start-up: "Oh yes, we have a couple of a patents or patent applications, but they don't really address our current activities." And so I ask--"so what about seeking patent protection for the current activities?" The answer tends to be: "We have not gotten around to it" or "it is not really within our current budget." Being told that the company can always try to sell the patent, especially if things don't go well, is beside the point. Suggesting that the patents can be licensed looks good on paper, but less so in the marketplace for technological transfer. The problem is that the patent no longer matches the start-up.

I thought about this disjunction between the patent position of a start-up and the nature of its current business activities while listening to a recent podcast about a survey conducted at Stanford University on the impact of the university and its graduates on the world of entrepreneurship here. One of the salient points made was that around 60% of start-up ventures alter their business model [Jeremy notes: Neil asked me to guess how high this figure was: in my own experience it has been very much higher, possibly because I only get to speak to start-ups after they have hit a problem] and around 80% change the definition of their target audience. Since these are aggregate figures, the correlation between the change of a business plan or a target audience and the ultimate success of the start-up will differ, depending upon the specific industry involved. However, generally speaking, these results mirror those that I have frequently heard in connection with entrepreneurial activity.

In considering these results, the question crossed my mind: what is the relationship between the likelihood that a start-up will alter its business plan and the capacity of the company to plan an effective patent strategy? A useful way to understand this interaction is in terms of David Teece's influential notion of "dynamic capabilities". Teece describes "dynamic capabilities" ("Dynamic Capabilities & Strategic Management", Oxford University Press), as follows:

"For analytical purposes, dynamic capabilities can be disaggregated into the capacity (1) to sense and shape opportunities and threats, (2) to seize opportunities, and (3) to maintain competitiveness through enhancing, combining, protecting, and when necessary, reconfiguring the business enterprises's intangible and tangible assets. Dynamic capabilities include difficult-to-replicate enterprise capabilities required to adopt to changing customer and technological opportunities. They also embrace the enterprise's capacity to shape the ecosystem it occupies, develop new products and processes, and design and implement viable business models" (p. 4).
In a more pithy form, as set out on page xi of the Preface to the paperback edition to the book, it is "the managerial capacity to engage in sensing, seizing and transforming ..."

As described by Teece, managing "dynamic capabilities" in general, and in particular, "reconfiguring the business enterprises's intangible ... assets", is a tall order for any company, no matter how established. A fortiori, given the likelihood of a substantial (and often early) pivoting of the business plan of a start-up, the challenge is dramatically increased. Here, the question is how to align any potential patent program with the likelihood that the overarching business model of the company may well shift. here seems something fundamentally at odds between the swirl of the entrepreneur's "sensing, seizing and transforming" and the (presumably) more measured process by which an invention is identified and a corresponding patent application is then drafted and filed.

Under such circumstances, should the start-up even consider engaging in any type of patent registration programme, at least until the company has a relatively firm notion of what its ultimate business is likely to be? Whatever the inventor's imagined clairvoyance about his or her ability to comprehensively embrace all the possible preferred embodiments in the patent, the likelihood of successfully doing so seem daunting. Or should the patent applications wait until it is more clear whether the start-up will need to change its business plan and, if so, in what direction? Guidance from readers who can point to empirical studies that have sought to analyze the connection between the especially dynamic nature of a start-up and the nature and timing for seeking patent protection would be most welcome.

3 comments:

Jackie Hutter said...

Neil
As someone currently deeply embedded in the startup world, this is a subject very near and dear to my heart. There aren't any current empirical studies of which I am aware. I wrote about this topic a few months ago. (http://ipassetmaximizerblog.com/?p=1338) I think that all of the studies regarding patents and startup businesses are based on deeply lagging data that addresses startups from previous eras.

One thing to note is that those of us in the startup world are quickly moving to the Lean Startup Model (http://en.wikipedia.org/wiki/Lean_Startup)that has emerged out of SV in the last couple of years. In this new world, we don't have a business until we have a product that someone will buy repeatedly for an appropriate price. As such, a patent (or the technology for that matter) is irrelevant unless it solves a real consumer problem. Pivots will happen even more frequently than you indicate (actually, I think your number is pretty low, but it may be based on lagging data). Filing a patent application before you have a business model makes no sense because if your patent doesn't cover anything you are selling, you have a worthless patent.

I will be looking for empirical data on how this new way of looking at startup business affects those in the patent world who provide advice to startup entrepreneurs. Perhaps the best place to start is the from the baseline of virtually no issued patents support a viable business model and how IP experts can work with clients to change this abysmal value proposition.

Fred Logue said...

This is the perennial question and there is of course no general answer. It is a hard question and with hard questions the way to find the solution is through a deep understanding of the problem and imagining the scenarios through which the problem might play out.

However I was struck recently by this article by Paul Graham

http://www.paulgraham.com/startupideas.html

Where he says:

The way to get startup ideas is not to try to think of startup ideas. It's to look for problems, preferably problems you have yourself.

What struck me is that a great patent, like a great business, captures the solution to a problem.

So figuring out whether to patent or not is almost the same as figuring out what your business is.

Now of course there are pivots along the way. For me that means the early patents have to be either quite fundamental or else be seen as options while the business model is being validated and the PCT system should be used to prolong the option to avoid expensive patenting decision points until the problem is validated.

Patents aside, for most businesses, work needs to be done to try and capture the most fundamental problem-solution concept early and often but once it is done then it should be a lot clearer if a patent is appropriate or indeed whether the business is providing a new or improved solution at all.

I would recommend Ron Slusky's book on claim drafting as an excellent primer for how to arrive at the most fundamental problem-solution statement for an invention.

http://www.claim-drafting.com/

Matt Lawman said...

Neil,
I did a stint as IP Director in a start-up. We exited after three years to a buyer who mainly wanted to acquire our early patents, which had nothing to do with the business we were in at the point of exit. We knew the early patents were good and kept them going despite multiple subsequent pivots. There is in my view no one correct answer on the matter of "when" to seek protection. I'm afraid it depends. But I would always advise a SV to seek patent advice very early on and regularly thereafter... to increase the chances of getting the timing right.