Common Mistakes That Startups Make
This is a reproduction of Investing in Patents by Russ Krajec. For the complete book, get it on Amazon.
Startups make a lot of mistakes when it comes to patents. Some are due to inexperience, but many are due to poor advice.
One of the most common pieces of advice given to startups is to file a provisional application. This is some of the worst advice possible.
Provisional patent applications waste a startup’s most precious asset: time.
The purpose of provisional patent applications is to delay the patent process. This is great for Big Pharma, where the value of their patent comes at the end of the patent term, but this is not the case for startups.
Startups can get incredible amount of value from an issued patent, not just in raising the next round of investment. Many startups are able to license their technology to do all sorts of deals, such as having a vendor make an investment in exchange for a limited license to some technology.
Startup companies typically need patents fast.
Startup companies operate on a very short time horizon. They have a short runway, maybe 18 months, to reach certain goals and get to their next big milestone. Often, the next milestone is becoming revenue positive or another round of financing. Startups are not concerned about a 20 year lifespan of a patent – at least not in the early growth phase. They are just trying to live to see another day.
There are several techniques – the best of which is called the Patent Prosecution Highway – that can usually get a patent in 9-12 months.
Startups can get a lot of value out of a patent that issues quickly.
An issued patent gives the startup a huge leg up on meeting their milestones. They have cachet in the marketplace and a negotiating card to play with competitors. They also have a strong argument for why their company should have a much higher valuation, thereby making it easier to raise funds in each funding round.
Inventors who file their own patents are their own worst enemy.
Some inventors write their own patent applications. These applications are damaging in two ways.
One mistake is to disclose inventions that are purely conceptual. The half-baked discussion of an invention will come back to haunt them in three or four years when they file another patent on the fully-disclosed version of the invention.
The other mistake is to over-disclose information that has no business being in an invention disclosure. Often, the inventor will tell the world their entire business plan and the details of their technology, harming the company more than it helps.
Startups tend to cut corners on patents because of their lack of cash.
Sadly, most startup companies resort to strategies like provisional applications and other “cost-reducing” strategies that only delay their patents and actually add to the cost. CEOs often will not be able to justify the big initial investment in a patent at an early stage.
Further, expediting the patent will compress all of the patent costs into a very short period of time. Given that the average lifetime cost for a US patent is nearly $60,000, that is a huge investment.
Startups have a huge cost of capital.
Compounding the problem for the startup is that their capital costs are astoundingly high. The cost of capital raises the stakes even higher on whether or not to invest expensive capital on a patent.
If done well, the patent is likely to be the single most valuable asset for a young startup company, yet this book outlines countless ways that the asset could be worthless. By saving a couple dollars here or there, the entire value of the company can be decimated.
Because of the value of the patent assets to the company, there is no excuse not to do it well.
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