In my 15 years of advising startups, I have heard a number of negative opinions from early stage founders regarding patents:
- Patents are too expensive
- Patents are too complicated
- Patents take too long to be granted
- Patents don’t offer barriers to entry for a startup
- There’s no guarantee that a patent will be granted
Of course, there is some truth in each of those statements. And any of them can be used as an excuse to avoid the hassle of going through the process of pursuing patents.
But these excuses obscure the fact that patents have very real value, and their value is usually different at various stages along the way in a company’s evolution.
At the Funding Stage
When a company is seeking its first round(s) of funding, patents can play a significant role in determining the level of investor interest.
If you have patentable technology, then investors naturally expect you to pursue patent protection. The big benefit for the startup: the more robust the patent portfolio or potential, the higher the pre-money valuation. That’s because investors know the long-term value of patents (see below).
A quick note on timing: It’s critical that you pay attention to deadlines for filing patents. I worked with a client a few years ago who released some patentable technology in a mobile app, but didn’t apply for a patent right away. More than a year later he discovered to his dismay that he was unable to file for patent protection due to the earlier public disclosure. Fortunately, he had other things going for his company and was able to raise a round of angel funding. But his valuation might have been higher had he filed for a patent in a timely manner.
By the way, if you don’t have any patentable technology, then investors will want to know what other ways you plan to gain a competitive advantage in the marketplace. In the absence of patents, the ability to clearly and distinctly differentiate your product or service is especially critical.
NOTE: The value of patents at the funding stage is reflected in one of the 20 questions on the Minimum Fundable Company® Test (http://www.mfctest.com). The MFC Test is a free self-assessment tool for founders seeking their first round of outside funding. It helps pinpoint the areas in your business you need to work on to get your startup “investor-ready.”
At the Operating Stage
Once a company is growing revenue, patents can have a chilling effect on potential competitors. At this stage, most growing companies don’t have the money and attention to prosecute patent infringement lawsuits. But the mere existence of patents may give other companies pause before they jump into creating products that may infringe on your rights.
At the Exit Stage
This is where having a strong patent portfolio can really pay off. After you have grown your company to the point where it may be an attractive acquisition target, your early patent applications have likely resulted in granted patents. An acquiring company may place a very high value on your patents, especially if your IP meshes nicely with IP they already own.
Spending the time and money early on to pursue patents can thus dramatically increase the eventual valuation of your company when you sell it. This should make you – and your investors – very happy!
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