Good patent practice for a venturecapital financed high-tech sta

 http://www.buildingipvalue.com/06intro/023_026.htm

Good patent practice for a venturecapital financed high-tech start-up

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Malte Köllner
Triangle Venture Capital Group

What should a venture-capital financed high-tech start-up do in the patent field to become a strong company? Is it worth spending money on patents? Is this of strategic importance, or is it more of a marketing tool? Do patents have any influence on turnover and profit?

A number of studies have shown that patents have a significant influence on a company’s success. But it is not enough simply to file patents – a comprehensive, well-thought-out patent strategy is crucial for success.

Quality matters

Studies have shown that high-quality patent applications significantly boost the turnover of a company two to three years later. This effect increases with the quality of the patent. One possible reason for this is that good inventions covered by high-quality patent applications are commercialised more often than others. Little wonder, then, that patents with a broad scope of protection increase the value of a company.

Likewise, where individual patents are grouped in a portfolio, a valuable, high-quality patent portfolio increases the stock price and market capitalisation of a publicly traded company.

Strategy and management matter

Studies further reveal that implementation of a patent strategy in the research and development (R&D) department, along with corresponding patent management processes, almost doubles a company’s profit margin, particularly if combined with the systematic use of patent information.

This could be because a well-managed patent portfolio is of higher quality and thus increases the turnover of the company. At the same time, systematic use of patent information can save on R&D expenditure by preventing money being spent on reinventing things that have already been created elsewhere.

What is also apparent is that quantity is not important. It costs a great deal of money to obtain a lot of patents. If anything, low-quality patent applications have a negative influence, because they consume money without producing anything helpful to the company’s success.

Unsurprisingly, companies which actively pursue a systematic patent strategy therefore have a higher turnover growth rate. However, while this conclusion may be self-evident to those familiar with these studies into patent value, few people will have seen them, as most have appeared in journals that are not read by patent professionals. Consequently, these ideas are anything but commonplace in industry – even though they should be.

Consequences

As a result of all of this, as a start-up company you should always focus on building a high-quality patent portfolio. You should not file everything but always look for quality. Put in place effective patent management; be systematic. You should put real thought into patent work: develop a strategy and actively pursue it.

You should also understand there is a difference between patent management and patent strategy. Arguably, strategy concerns the goals to be achieved and the big picture of how to do so. Management, on the other hand, concerns everyday routines of doing business, in particular identifying processes to support the strategic goals.

Within this context, a patent strategy could encompass any one or a combination of the following aims:

•   out-licensing patents. If you are lucky, your ideas will form the basis for a standard, or else you can claim damages (so-called stick licensing);

•   cross-licensing your patents with those of your competitors; or

•   building a monopoly position based on your patents.

Experience shows that the patent strategies of high-tech start-ups do not differ from those pursued by industry leaders. A suitable patent strategy for a high-tech start-up would thus be an imitation of best practice in the respective industry sector, complemented by some additional measures which are highlighted below.

Strategic steps for high-tech start-ups

First, imitate best practice in your industry sector. In the pharmaceuticals sector, for example, this might involve trying to monopolise a drug, while in the telecommunications sector it could involve an attempt to create intellectual property that may serve as the basis for a new standard.

Second, remember that patents are better than trade secrets. The personnel of venture-capital financed start-ups often fluctuate with the company’s fortunes, and may change considerably if the company is sold. As those who leave take trade secrets with them, there is a perpetual risk of disclosure.

Third, rather obtain a few patents too many than one too few. It is important for a high-tech company to build a strong patent portfolio. This should ideally contain only valuable, high-quality patents. However, it is not always possible to determine which patents are valuable; especially as this may change over time as business conditions evolve. Therefore, in case of doubt, file for new patents and maintain old ones. Abandon patents only if you are certain they are doomed to fail. (You may be forced to lower this threshold if money is short.)

Fourth, file for patents regularly (eg, once a quarter or once every six months), since building up a strong patent portfolio is a primary objective. Do not rely on the strength of a single patent, as your assessment of its value may be incorrect.

Finally, try to obtain patents quickly and accelerate the application procedure where possible. It might be wise to avoid the Patent Cooperation Treaty (PCT) route and go directly into different countries or regions, as it generally takes four to five years before a patent is granted through the PCT route. Remember that in a financing round, a patent application has a much lower value than a granted patent. On the other hand, the preliminary report on patentability issued at the end of the international phase of a PCT application can be obtained fairly quickly (after about two years) and, if positive, is almost as good as a granted patent.

By following these simple measures, a high-tech start-up can achieve a number of advantages:

•   The company will be in possession of a respectable patent portfolio. This can always be used as a marketing tool for the next financing round. Granted patents bear testament to the uniqueness of the technology. A well-established patent portfolio also has a crucial influence on the valuation of the company, in particular for a trade sale (ie, where the start-up is taken over by an industry leader). The younger the company, the more its potential will be judged on the basis of its patent portfolio.

•   A strong patent portfolio can help a young company become visible, even if turnover is low. The threat presented by a strong patent portfolio may capture competitors’ attention even where negligible sales will not.

Valuable patents might also enable the company to trigger a merger or acquisition using its patents (eg, by filing a patent infringement suit and settling it through acquisition).

Patent management

In achieving these strategic goals, it is important to bear in mind a number of things.

First, identify a patent strategy and the objectives to be achieved. This strategy must be deduced from general business goals. R&D, sales and intellectual property must be interlocked. Moreover, the strategy might not work quite as expected, so keep the strategy dynamic, updating and fine-tuning it regularly.

Second, have regular meetings to discuss IP matters, attended by representatives from the R&D department, the IP department, sales and management. In a small start-up, the chief executive officer and the patent attorney might be the sole attendees, with others joining in as the company grows. Simply raising awareness of patent matters will help to improve the company’s IP position.

Ideally at these meetings the participants should collect and discuss all ideas and inventions that they have been able to get hold of. You can only build a patent portfolio if you are aware of all inventions. In deciding whether to file for patents, the following success factors for good patent management should be borne in mind:

•   Do not file everything. Remember that only quality matters, not quantity (and money is short in young companies, even with venture capital on board). It is your duty to select those inventions with the best potential for patent application. You can only file a fairly limited number of patents since the different resources required for this are all limited.

•   Ensure filings are not event driven. A typical example of an event-driven filing is where the R&D department comes up with a new idea which the chief executive officer intends to pitch to a customer in a few weeks’ time, and the patent attorney is made to file a patent application rapidly in order to protect this idea.

•   Concentrate. You want to achieve a patent portfolio full of high-quality, valuable patents, so file strategically and systematically. While you cannot say for certain which inventions will be of value in the future, attempt to analyse nonetheless. Think twice. When in doubt: file. But stick to your strategy. Money is a scarce resource and you will probably have a limited IP budget; so investing in accordance with your patent strategy is probably the wisest decision in this respect.

•   Conduct searches. Remember that the systematic use of patent information is beneficial to your company. Analyse the patent landscape and the patent portfolios of your competitors. This will allow you to find potential landmines before they find you. Explore ways to circumvent your competitors’ patents. Be well informed and do not be taken by surprise.

•   Monitor all patent publications in a certain field of interest, not just those of major competitors. Take care to narrow the focus to a level that can be supported by those responsible for reading the material (these individuals should be part of the IP meeting team). At the same time, do not overanalyse the results. There is no need to categorise all patent publications found. Patent monitoring is like reading a specialised newspaper tailored to your needs, as well as a means of uncovering imminent threats.

•   Before filing a patent application, conduct a novelty search or familiarise yourself with the prior art in some other way. You risk wasting a lot of money if a patent office can present you with highly relevant prior art that kills your application. True, it is not easy to conduct prior art searches, and those performed by the patent offices will usually be more comprehensive than your own, so the risk of surprise cannot be entirely eliminated. However, it is worth spending a few thousand euros or dollars on a prior art search before filing an application, as this may save you from spending much more on a useless application if you find highly relevant prior art. And a prior art search has another important effect: if you are familiar with the relevant prior art, you will have a much better impression of what is at the core of the new idea. With this knowledge to hand, a high-quality application can be drafted which highlights the key features of the invention with the necessary degree of detail. This should reap dividends in the form of reduced prosecution costs. Meanwhile, a higher-quality patent will have a beneficial effect on your business. So money spent on a prior art search before filing an application is money well invested.

•   Before starting product development, undertake a freedom-to-operate analysis. If you fail to do so, you may find yourself unable to sell your product and recoup product development costs because a major competitor holds a patent on what you have just developed. The money will simply be lost.

•   After filing an application, seek a quick grant. Try to obtain an office action as early as possible, to get a clearer picture of the application’s chances of success. You should also try to get an idea of the form of the claims that might eventually be granted. What scope of protection might this patent end up with? This will give you a better idea of the qualitative value of the patent. Remember that patents with a broad scope of protection will increase the value of the company, while narrow patents will not.

•   In making decisions during the prosecution process, particularly in relation to foreign filings, the application’s chances of success and qualitative value should be borne in mind. This will help you to select countries for foreign filing carefully and intelligently.

•   If out-licensing is part of your patent strategy, uncover licensing potential on a regular basis. This can be achieved, for example, by monitoring all patent applications during the examination of which your own patents are cited as prior art. It is also beneficial to investigate which patents are dependent on your patents. (Automated tools are available online; see www.ipcentury.com.)

•   Prosecute any infringement of your patents. This will increase the influence of your patent portfolio on decisions taken by your competitors: they are more likely to respect your patents and your products will face less competition. This will increase your turnover.