How Startups Use Patents
This is a reproduction of Investing in Patents by Russ Krajec. For the complete book, get it on Amazon.
Patents can be used in many different ways, and in this chapter, several possibilities are explained.
This chapter is not a comprehensive list of every way a patent can be used, and merely provides several examples to show the breadth of potential patent use.
Patents are business tools.
A CEO needs to be cognizant of how patents can help the business and be able to deploy patents effectively in negotiating deals with competitors, suppliers, customers, and investors.
The ways startups use patents can be thought of falling into two major categories: protecting the business and multiplying the business. In a protecting mode, patents protect an investor’s capital by ensuring more operating room for the company and therefore higher margins. In a multiplying mode, the patents transfer technology to other players, who invest their own capital.
Protecting the business is much more than suing competitors who infringe. It includes cross licensing to defend against inbound assertions, helping with employment issues, and protecting the classic “razor/razor blade” type businesses.
Multiplying the business is about outbound licensing, “franchising” the technology, spinning out technologies to new vertical markets, negotiating deals based on exclusivity, creating industry standards, and other uses.
Pending patent applications are not useful business tools.
Throughout this section, it should be remembered that issued patents are being discussed, not pending patent applications. Pending patent applications can be enforced – theoretically – but not practically.
In a startup business context, expediting a patent application through the examination process can make a lot of economic sense. Expediting a patent costs extra money and compresses the patent costs into a few months, rather than spreading them out over several years. However, the business uses of the patents can justify the expense.
A best practice would be to identify those patent applications that might serve a business purpose in the short term and spend the extra effort to expedite those patent applications. Other patent applications may not be as commercially valuable in the short term and may not justify the expense for expediting.
Before diving into the day-to-day uses of a patent, every investor wants to know how patents will help their portfolio companies get acquired.