A Business Purpose for the Portfolio
This is a reproduction of Investing in Patents by Russ Krajec. For the complete book, get it on Amazon.
Most large technology companies have professionally- managed patent portfolios. They typically manage a portfolio in-house, because their patent portfolio is a core competency at some level.
The integrated circuit industry, for example, has evolved to the point where they are essentially patent licensing entities. They no longer have fabrication facilities, and they only create designs and license them for manufacture.
IBM is well known for generating billions of dollars a year licensing and selling patents. Microsoft makes more money licensing their extensive portfolio of mobile phone patents to Android phone manufacturers than it makes selling its own mobile phones.
All of these companies generate significant revenue from their patent portfolios and have an in-house team who manages their portfolios.
The key difference between professionally-managed portfolios and patents that are done by startups is that there is method and purpose to the process.
A startup CEO typically outsources the patent portfolios to patent attorneys, and the CEOs do not actively manage the portfolio. As discussed in Chapter 3, there is a fundamental disconnect between the patent attorney and the business interests of the clients, resulting in the lack of oversight and management by the company.
Every dollar spent by a startup company has to be spent for a business purpose, and the patent portfolio is no exception.
In the broadest sense, the business purpose of a patent portfolio is to put the company in the best position to succeed. Success may be keeping other competitors outside of the company’s market which protect a company’s high margins. Success may be to license technologies to other vertical markets through a spin out company. Success may be to cross license technologies with a supplier to get a competitive advantage in pricing or market exclusivity.
Startup companies have a portfolio that begins with one patent and grows from there. One easy mistake to make is to try to do it all with one patent. The first patent is the riskiest, but subsequent patents will have less risk as the technology and market risks are reduced.
A good portfolio will develop on a thoughtful, deliberate roadmap that has two main pathways: a technology roadmap and a business roadmap.
The technology roadmap will foresee where technology may develop, then place patent “bets” along the way. The business roadmap may attempt to see where consumer needs and wants will develop, and place patent “bets”.
Technology Roadmap
The technology evolution may be much easier to see and forecast than the business roadmap, but the business roadmap is much more valuable – if the bet is right.
Most companies build their patent portfolio by protecting their current and future products. Often, these patents may be influenced by expected developments in the technology landscape.
Good portfolios go further.
A good patent portfolio tries to anticipate technology developed by the company, but also complimentary technology developed by other companies. A good portfolio anticipates how new technology will interact or change the company’s products.
A portfolio built on the roadmap of how products and technology will develop will be very valuable and open up many business opportunities. But there is much more to a good portfolio.
The Business Roadmap
The business roadmap is much more difficult to factor into the patent portfolio, but is where the value is. The portfolio typically starts by focusing on a defensible moat to keep competitors from directly competing, but then expands to many other purposes.
As the business grows, some of the business weaknesses may be protected by building a patent portfolio to shore up those weaknesses. For example, a supplier or competitor may have superior technology in some aspect. A patent portfolio may include patents directly aimed at cross licensing to trade for that technology.
Many large companies will have internal portfolios directed at specific competitors. These patents might be narrow, but they are very likely to be patents that are infringed by specific competitors by specific products.
This gives the company freedom to operate in the space.
Even though the big company may infringe patents of their smaller and more nimble competitors, the big company may have several patents that the smaller company infringes. Most of the time, these patents are never litigated, but they stand as a mutually assured destruction countermeasure if the smaller competitor were ever to assert their patents. This turns into a “silent cross-license” to a competitor’s portfolio.
The business’s strengths may be emphasized by the patent portfolio. When a customer-centric insight occurs, the most valuable patents will be those that cover the solution to the newly-discovered customer need.
A strong technology and business presence in a specific area may be bolstered and improved with additional sets of patents. This will allow the company to have a domineering presence when setting industry standards or negotiating from a position of power.
Startup Companies Often Fall Way Behind In Patents
Startup companies are focused on the present: making the next milestone, showing market traction before the next investment round, and getting the minimum viable product into the market. Patents, on the other hand, are assets that might be available in 12 months, but most likely are positioning the company for value in 3-5 years down the road, and maybe even 10-15 years down the road when other companies are infringing.
Portfolio strategies for startup companies tend to develop in a reactionary basis, not a proactive basis. A company gets sued by a competitor, and the company figures out that it needs patents to negotiate. Building a portfolio from a defensive standpoint can be very expensive. Facebook had virtually no patents in 2012, then famously purchased a large number of patents from AOL in a billion dollar transaction. Many startup companies experiencing incredible growth spurts wind up buying portfolios or paying steep license fees when they have nothing to trade.
Startup companies do not have the budgets to devote to patents that large companies do, and that makes the business purpose of the patent portfolio even more important than that of their big competitors.
The key things for a startup’s portfolio strategy are to forecast where the market may go and which competitors may be a problem, and then build the portfolio to address those issues. As those issues arise, spread a few patent resources around to put the company in a better position. As those resources bear fruit, repeat the process in a methodical way.
The Business Does Not Have To Spend A Fortune On Patents
Large companies spend about 1% of their research and development budget on patent protection. Companies in the earlier stages of a high growth market typically spend more than 1%.
Startups need to have an appropriate and meaningful patent strategy that does not waste money but is strong enough to be commercially useful.
The amount to spend depends on the situation and the promise or potential of the company.
For an individual invention, a best practice is to wait not just until the technology risk, but most importantly, the business risk of an idea appears to be worth the investment.
For an entire portfolio, a best practice is to map out the business uses for patents during the company’s timeline. At the appropriate stages, the company should pick the best available invention at that time to build up a portfolio.
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