How much should a typical company budget for patent protection?
One of the best books on IP and patents is Patent Portfolios by Larry Goldstein. In this book, Mr. Goldstein analyzes how companies build out their patent portfolios. Much of this post is derived from his book.
What is a good budget for patents? 1% of R&D
On a very macro scale, the US spends about 1% of the Research and Development budget on patent protection. This figure is only for the cost of building a patent portfolio, not for enforcing those patents.
Established companies in an average growth market typically average 1% investment in patent protection. This means for every $1M of R&D, they are spending about $10K on patents.
Established companies are much different from early stage companies in one critical respect: established companies have an existing patent portfolio to support their R&D. They have been putting patents in the pipeline consistently for years, so they typically have a meaningful IP presence before they begin focused R&D on a new product.
Huawei, for example, purchased large batches of patents from Blackberry, Alcatel, and many others before moving into the US market. Huawei needed a meaningful IP portfolio so that they could negotiate with other telecom equipment manufactures selling in the US market.
With their focus on patent portfolio development, Huawei is actively licensing their portfolio even if they are prohibited from selling products in the US. The IP licensing strategy is also one that Microsoft pursued even though it stopped manufacturing phones.
Fast growing, high growth markets demand even more patent protection.
Qualcomm is an example of a high growth company whose investment in patents exceeds 5% of R&D. They have consistently invested over 5% in patents for years, and their IP portfolio exceeds 24,000 active patent families in the US alone. They have over 120,000 active patent assets worldwide.
Startup companies are different.
Startup companies come into a market without a multi-year investment in patents. Starting from zero, a startup company has a lot of ground to make up.
Startup companies typically make investments in IP that are much more than 1% of R&D. For many startups, the patent investment might be 5% of R&D.
However, startup companies need to be much more focused on the types of patents they need.
The biggest focus needs to be quality over quantity.
Startups cannot afford to buy large swaths of patents before entering a market, nor do they have a lot of excess cash.
For a startup, the focus needs to be on quality. A smaller number of targeted, well-crafted, Investment Grade Patents can give the startup a seat at the table with strategic competitors, give them negotiating power to enter into strategic partnerships, and raise their valuation.
The concept of data-driven patents focuses on the value of the patent from the beginning. It is not enough to have a “good idea,” but it is much more important to address a customer need.
Startups face additional complications in the patent system, including lots of bad advice.
Provisional patent applications are always – always – wrong for startups.
Remember that scribbling down a bunch of provisional patent applications are never a good patent strategy. This is not building a meaningful patent portfolio. There are countless reasons why provisional patent applications are the wrong thing for startups.
A startup needs issued patents, not pending applications.
Startup companies need patents fast – not slow. The faster we can get a patent issued, the faster we can license it. The faster we can raise money. The faster we can collateralize the patent for a loan. The faster we can negotiate with a competitor.
Startups should be using the patent prosecution highway whenever possible. When done well, the PPH process should get patents issued in less than a year.
Yes, patents are expensive, especially at the early stages. But the cost of a bad patent is far, far more than the cost of a good patent.