Intellectual Property Rights for Startup Companies
– A VC Perspective
VentureCapital Magazin, Special Issue "Start-up 2007"
By Dr. Bernd Geiger, Managing General Partner, Triangle Venture Capital Group
The whole issue of intellectual property rights (IPR), and patents in particular, is something of a problem child for many startups, and plagued by many negative preconceptions: too expensive, too complicated, too time-consuming... all bad things that no startup can afford, right? The following article is intended to explain why certain aspects of IPR are so important from a VC, and hence business, perspective and why you need to pay attention to them!
Is there any intrinsic “value” in IPR?
That IPR have value has been macroeconomically, empirically proven, especially given the impact of patents on the development of the global economy in the last 200 years1). Only the most hardheaded Marxists would question whether that which you have developed also belongs to you. The fact that “property obligates” is in reality balanced out in the market through the stringent granting requirements for patents, time limitations on their period of validity and quite natural restrictions on monopolization due to possibilities for technical evasion. This must also apply to intellectual property (IP) that is not hardware or wetware. Every software company that has developed innovative products at great expense and wants to be rewarded for it, knows that (but not, of course, the IT service provider around the corner that services their server). Internationally, the principal of IPR is generally accepted;2) economies that until recently had survived through copying are now establishing their own creativity and want to see the results of it protected. So IPR here to stay – but what does that mean for your company?
Freedom to Operate – Whether you are VC-financed or not, if someone else has a patent on what you sell, you have a problem. Not right away, just when you’re successful. Yet the problems don’t come from the Microsofts of this world, but rather from companies than are smaller than yours. Having a substantial patent portfolio is also a good basis from which to remove obstacles to a trade or cross-license.
Due Diligence – A VC doing a technology due diligence of your company can best determine if your product is well engineered and documented by looking at a parent portfolio and the patent application matrix. Since it can sometimes be advantageous not to reveal the heart of the technology because there are too many evasion possibilities, doing so is a strategic consideration that you should discuss with your patent attorney.
Activation of Development Services – The activation of R&D services on the balance sheet is always a touchy subject. If you have patented your developments, the accountant will have something to go on.
Open Source Software – If you consider open source as a big pool of freely available commodity software, then you can accelerate development projects considerably. But be careful: 1) A General Public License (GPL) must be complied with. 2) Some customers won’t accept any code that is partially bound by GPL. In critical fields, reengineering or reimplementation of the code makes sense to be free of a GPL.
Support for Product Sale, Leverage for Company Sale – If it’s not protected, everyone can have it. You are nice and offer good service, but so what? Other suppliers are nice, too. Why should the customer buy your product or the competition buy your company?
What does a suitable patent strategy look like?
Figure 1 gives you an overview of the industry best practice and what you may face as part of VC participation. For a startup, Levels 1 and 2 are inescapable, otherwise the investment, including the time you’ve invested, can turn into a bad one.
Figure 1 – Timeline of IPR Activities
How should the patent strategy be implemented?
The most challenging task is to find a suitable patent attorney. Table 1 contains the most important qualities that a patent attorney should have. Ask for references when assertions are made – if the patent attorney claims, “that that isn’t done,” or it “goes against the rules of the profession,” it won’t help your business, and you would be better served by finding someone else.
Table 1 – Checklist for the Selection of Your Patent Attorney (PA)
- Specialist expertise – Does the PA understand the technology behind what you do? Was that knowledge acquired through a degree program? Test it by asking about alternative technological solutions for your product!
- Market proximity – Has the PA had clients that operate in your market? The rules of the game for IPR in the electronic arts market are different from those in the SAP market. That is why having IT reference customers is not enough.
- Breadth of solution-finding competence – Is the PA versed in all aspects of IPR (including copyrights, trademarks, trade secrets and patents) or just patents?
- Patent search – Find out how the PA normally does this. Search topics cannot be outsourced because success is highly dependent on how much background knowledge the researcher has about your technology. This is best done by the PA (or in a second step, a specialized auditor in the European Patent Agency, EPA).
- Contract law – Licensing agreements and proprietorship play an important part in development projects with external partners. Does the PA offer consulting services for this area as well?
- International focus – As least two-thirds of business opportunities lie outside Europe, and a PA whose experience mainly lies with the EPA will be of little benefit to a startup with a global perspective.
- Experience in prosecution vs. litigation – Is the PA versed in both fields or generally only in the area of prosecution?
- Business dimension – Can the PA adapt to the needs of a startup? Speed, flexibility and creativity are more important to a startup than to a DAX 30 entrepreneur or an individual inventor who wants to patent a better mousetrap.
- Patent strategy – Have the PA explain how these are structured. Ask to see a diagram or template that will be used during your strategy sessions.
- Planning – Ask for a proposal for a year’s schedule: strategy creation, patent application, patent maintenance, patent surveillance (competition). Have the points in the offer prioritized into “must haves,” “best industry practice,” “nice to have,” etc.
- Discuss the rules of interactivity – When is the obligation to be performed at the debtor’s domicile, when at the creditor’s, during the concomitant, interactive aspects of your product development.
- Naturally, you won’t find a “jack-of-all-trades” among PAs. But it is important to find the key skills in one person and to have on-demand access to additional services in the same firm. That will increase efficiency significantly!
1) See also William Bernstein, The Birth of Plenty: How the Prosperity of the Modern World was Created, McGraw-Hill
2) See also TRIPS - www.wto.org/english/tratop_e/trips_e/trips_e.htm