Startups are like the little fishes trapped in a tank filled with Sharks. One mistake and all is lost. Other established rivals are always on the lookout for an easy meal or two. Patents can act as a barrier between the startups and them. They can provide the necessary protection to safeguard their technologies and market position. Patents are often quite valuable to a startup’s success.
Here are the top reasons why a startup should get their ideas patented:
- Patents facilitate Investment.
Investors like companies which are protected and ready to handle litigations. Investors like innovation. Investors want to earn money. Getting a patent facilitates all of the above.
The 2008 Berkeley study, Patenting by Entrepreneurs: An Empirical Study, found that 67% of venture-backed startups reported that patents facilitated funding. The study also showed that 80% of the startups receiving venture capital investment owned at least one patent.
In January 2009, Haussler, Harhoff, and Muller published a study, The Role of Patents in Venture Capital Financing, which stated: “Patents are a signal of quality that facilitates access to financing”.
- Patents increase acquisition chances.
Patents are assets for any company and they can have enormous value depending on the technology they disclose. Large companies may decide to acquire other companies for various reasons; diversification, technology advancement, safeguard against other competitors, eliminate competition, etc., however, Intellectual property plays an important role in most of these factors.
For example, Nest’s Intellectual property was a major reason for it getting acquired by Google in 2014 for $3.2 billion in cash. As an article in USA Today reported, Bernstein Research analyst Carlos Kirjner advised investors that “we believe Google would not have purchased the company if it did not have substantial and valuable intellectual property.”
- Patents increase Valuation.
Filing patents is a great way for startups to increase short-term as well as long-term valuations. Initially, during the Seed and ‘Series A’ stages, filing a small number of patent applications (provisional applications also counts) reinforces any claims to innovative technology the startup may have, in turn increasing the attractiveness of the start-up to early stage investors. In the later stages of a startup, owning a strategic patent portfolio (including issued patents with significant protection on the startup’s valuable products or services) can be particularly attractive to a large company that wants to strengthen their position relative to another large company. Issued patents are commonly valued at approximately 25 times their typical patent costs.
- Patents defend against Rivals.
A startup may have several rivals; they may be small competitors or industry giants. If startups don’t have patent protection, their ideas can easily be copied and replicated either in a better manner or at a much bigger scale with the millions their rivals can afford, seeking to wipe out any competition.
For example, it is contemplated that the litigation filed by Honeywell against Nest shortly after they introduced their first product, a smart thermostat, was to litigate its upstart rival Nest out of business. Nest’s patents acted as their shield and made that impossible.
- Patents deter Patent Lawsuits & ensure Freedom to operate.
Filing patents is a good method to deter other companies, especially competitors, from initiating patent infringement lawsuits. Other companies must first ensure that they are not infringing on any patents of a target startup and then think of filing a lawsuit. If they are infringing on their patent, they may have more to lose than gain, owing to the inevitable countersuit. Hence, a startup’s patent portfolio may successfully discourage competitors from filing infringement lawsuits.
Filing patents may also serve as a deterrent to patent trolls. Because a strategic patent portfolio is a good indicator of IP law knowledge and sophistication, patent trolls have skipped over patent-savvy startups in search of easier targets.
- Startups with intellectual property achieve greater long-term success than startups without it.
Cao, Jiang, and Ritter published a study in 2015, Patents, Innovation, and Performance of Venture-Capital-Backed IPOs, which stated that “patents strongly and positively predict the long-run performance of VC-backed IPOs.” Nothing can be truer, “VC-backed IPOs with patents substantially outperform other VC-backed IPOs. The same holds true even for non-VC-backed IPOs.” It is noted that startups without patent protection have much fewer chances of survival.
- Patents facilitate joint ventures and partnerships while increasing leverage.
Filing patents allow startups to increase their leverage over strategic partners. Large companies generally enter into a joint venture or partnership with a startup to get the insights and technology of the startup. Since the large company often dictates the terms of the agreement, a startup can significantly increase their leverage if they already have a strategic patent portfolio in place.
This is only a non-exhaustive list of advantages a young startup company may have by filing patents, there are several others as well. However, almost always, getting a patent acts as a catalyst in the growth of a company and ensures that it is protected and focussed on innovation.