Getting Acquired.
This is a reproduction of Investing in Patents by Russ Krajec. For the complete book, get it on Amazon.
Getting acquired by a bigger company (or going public) is usually the goal of a startup company, especially one with investors. Angel or venture capital investors usually have zero return until an exit happens, which is either an acquisition or an initial public offering (IPO).
It should be noted that having a viable business is an important step in being acquired. Without a viable business that has a solid, tested product and a track record of sales, the value of the business is based on its potential, not real economic value.
This is exactly the same criteria that was discussed in Chapter 1 about patents: the patent only has value when the technology risk and the market risk are removed.
This chapter explains how patents can make the business more valuable in several different contexts, but keep in mind that a viable company with mediocre patents will be much, much more valuable than a failing business with very good patents.
Very good patents can have stand-alone value, but rarely in the startup context, mostly because of the timeframe of the startup. A startup company, by its very nature, is bringing a new product to market and often is plowing new ground to do so.
The market has not yet accepted the startup’s new innovation and probably does not even know it exists. This means that the likelihood that anyone is infringing a patent is close to zero.
Couple that with the fact that patents can take a long time to get through the Patent Office, and the likelihood that a startup is holding a patent with provable infringement is even smaller.
However, the patents represent potential value over the next 17 years in a specific market. This speculative value of the patents can have enormous value to acquiring companies.
Pending patent applications have little value in an acquisition context.
Throughout this discussion of getting acquired, the only meaningful patent assets are issued patents. This is because issued patents have a defined scope that can be analyzed and valued.
Pending applications are rarely considered valuable in an acquisition context and are sometimes given zero or even negative value. This is because there is a large risk that the patent application may never be granted and that the scope of any issued patent is unknown, also, there may be many tens of thousands of dollars yet to spend to get the patents through the patent office.
Getting Acquired By An Infringer
An investment-grade patent is a very big stick in any negotiation. Any time that stick is wielded, the company on the other side of the negotiations will be considering whether it is cheaper to acquire the patent owner or continue negotiations.
This type of acquirer knows or suspects that they might infringe a patent, and it may make financial sense to purchase the startup company outright rather than pay a license fee or have the threat of litigation. The startup company’s valuation would include not only the value of the product and customers, but also the value of the patents from a strategic standpoint.
The strategic standpoint of the acquiring company can be to help clear out a defensible marketspace for future growth.
Part of a good due diligence analysis prior to filing a patent application can include analysis of companies who are acquiring patent assets in the same space as the startup company.
For example, the following screenshot from AcclaimIP shows the companies who are acquiring assets in the space of optical analysis of chemicals or materials:
From this analysis, we can see that Olympus Corp and Perkin Elmer have both made patent acquisitions in this space. For a startup in this space, both companies would be target acquirers.
But it does not stop there. The universe of acquiring companies is much larger.
Getting Acquired By A Non-Infringer
Patents are just as likely to be acquired by anyone who is in competition with or wants to do business with the infringer or potential infringer.
The enemy of my enemy is my friend.
Big companies that are in litigation with each other often go on a buying spree for patents that are infringed by the other party. These patents might have nothing to do with the purchasing company’s business but have value purely because someone else infringes the patent.
Patents purchased in the heat of litigation can be very expensive to the purchaser because of the imminent threat, but companies often purchase patents for possible cross licensing or other negotiation with a competitor.
This opens up a much larger pool of possible acquirers than just the anticipated infringer.
Any company who competes with the infringer would be interested in the patent, even if the company competes in a completely different space. In this case, the patent might be relatively useless to the acquiring company except in the situation where it can negotiate with the infringer. A typical negotiation may result in cross-licensing or some other agreement.
But the universe of acquirers is even bigger than competitors to the infringer.
Virtually any company who does business with the infringer, such as a supplier or customer, could use the infringed patent to negotiate a better deal with the infringer.
In all of these cases, the key to the patent value – and the likelihood of being acquired – comes from having strong, investment-grade patents. Weak, poorly written patents will not open up many of these acquisition opportunities.
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