Financing patents for pre-angel or pre-seed startups
Good patents only come from a good business
BlueIron provides financing for patents – but only when the patent makes good business sense. When we finance patents, we do extensive due diligence to make sure the patents will have value before our investment. We have skin in the game. In this article, we talk about our investment criteria and what we value as angel investors.
There is a myth that being creative means you have great ideas. Someone who is truly creative can create a good business plan to get an invention to market. Most inventions fail to make money not because they are bad ideas, but because they are bad business ideas. The *really* creative people are the ones that sell products.
If you are creative, you are creative enough to invent a good business plan, too.
What makes good invention investments?
The only useful definition of business value is money. If an invention makes money, it has value. Until the invention makes money, it does not. It all comes down to sales. It is as simple as that.
When talking to angel investors, they are not that interested in the “cool” idea as much as they want to know if you have a real business. The execution of the business is critical, far more than the great idea you have in a patent.
If you have a good business plan and can start working through the steps of building a working prototype, testing the invention with customers, and – hopefully- getting sales, you have a good shot at raising money from angel investors or venture capital firms. Their investment – and their expected return – reflects the risk of the business opportunity. The more you can reduce risk, the easier it is to raise capital.
Reducing risk of a business
The chasm between having a good idea and making money can seem daunting. As discussed below, this chasm often causes cognitive dissonance.
Nevertheless, every step of the entrepreneur’s journey is about reducing risk.
When you build a working prototype, you are starting to uncover the technical problems that need to be solved. If the invention is new, nobody has ever done it before. There can be plenty of different engineering problems that need to be solved to make it work. The prototyping phase is where some, but not all of your intellectual property is created.
When you do market research, you are beginning to test the market’s response to your business.
Market research is where a vast majority of inventors learn much more than they imagine. At the “idea” stage, everything seems so crystal clear. “Everybody would want it!” But when you struggle with the heavy lifting of identifying the customer problem, crafting the sales message, and closing the sale, then – and only then – will you know if there is a real business.
The most valuable intellectual property is the “thing” that cracks the nut and makes your business a success. The sad truth is that it is a long slog to find that invention. There has never been an invention that did not take a brutal amount of hard work to create value.
One step at a time
When individual inventors have a big idea, it is very tempting to jump to the end and imaging your idea on the store shelves, with retail store owners buying shipment after shipment and potential investors lining up to give you cash.
The best advice is to break down the journey into small steps.
My advice is to work on the marketing first, not to ramp up production.
Inventors have a cognitive dissonance when it comes to their inventions. They do not realize the gap between idea and implementation, but more specifically, they do not realize how difficult it is to sell a product.
An inventor with a machine learning, artificial intelligence, blockchain-enabled light switch (I am making this up) will go on and on about its technical benefits. But all the customer wants is to turn a light on and off. At the end of the day, the customers only want their problem to be solved, and they don’t really care how it gets solved. They do not care about your intellectual property. They care about their problem being solved.
Tim Ferris in Four Hour Work Week approached the problem this way.
When he had a product idea, he would not build a prototype. He built a website landing page. Then he would run ads against it to judge the marketplace’s reception. If there was a good response, he would continue to build prototypes, protect the invention, and ship product.
If he did not have a good reception, he would stop. He never built a prototype or considered patents until he knew there was a meaningful market.
Leave the emotions at the door
I was once criticized by an inventor for pushing back on her invention. She complained that I did not “believe” in her invention.
There is an emotional bust of energy that comes from a new idea. Inventors thrive on it, as well as potential investors. Many inventors can raise money with an appealing pitch deck, even from venture capital.
But the fundamentals of a business plan are reflected in data. Real, hard data.
Entrepreneurs need to show investors (and themselves) that the idea actually makes money.
Making money means that you are solving a customer’s problem and that the customer is willing to pay for that solution. Companies spend a lot of money and effort to try to hone in on what consumers really want, even if the consumers might not be able to articulate it.
Customers want a quarter-inch hole, not a quarter-inch drill.
Startup accelerators and incubators focus most of their energies on getting customer feedback, not developing the product. The customer feedback is far, far more important than the entrepreneur’s vision.
In other words, successful entrepreneurs need to listen to input, process that input, and make changes. It can be heartbreaking to learn that your assumptions and “vision” do not resonate with customers, but the successful businesses will innovate based on customer feedback. This is the hardest step, where the entrepreneur’s big idea is crushed, then reassembled into something else.
Don’t bite off more than you can chew.
I have talked to many inventors who are searching for investment from angel investors or venture capital firms.
One independent inventor, working out of his parent’s house, had a very complex business idea for a social media experience using virtual reality. He wanted to get a patent and then raise money. The inventor did not have much coding experience.
When I asked how much money he needed to raise, he said probably a billion dollars. He believed it would take a billion dollars to build out his vision of a virtual reality ecosystem and develop the virtual reality headsets.
I said that many very large companies, some with trillion-dollar valuations, have been trying to tackle this problem, but none have been able to break through. Why would he be successful when these other companies have not?
I suggested re-focusing his business focus and inventions on products that he could achieve. As a kid in a garage with a 3D printer, he could start designing and making 3D printed products and selling them on Etsy or eBay.
This business could be done with minimal investment, and he can get a small revenue steam going. With that as a start, he can continue to invent, invest in his business, and slowly grow it. Businesses that make low volume products do not necessarily need patent protection because their main focus is on continually rolling out new products. When a product is successful, they continually add more products to duplicate the one that is successful.
If he wanted to expand the business, maybe he could – if he chose to – take on investors.
My advice to him: find a business plan that works with his skill set and his resources. Creating patented inventions that will take a billion dollars to achieve is senseless.
Raising money is not a goal
There are endless press releases and breathless blog posts talking about some company raising money from investors, especially venture capital. Most companies cheer the arrival of capital, but it comes at a huge price.
Having been a co-founder of a startup, raising money changes the dynamics of a company. When you build a company that has a few inventions and you have reduced some risk, it has some value.
But as soon as you take investor money, you have committed to ramping your company and its sales to give the angel investor or venture capital investor their required 10X return.
This means you are getting a bigger rock and carrying it up a bigger hill with every round of funding.
I talk to a lot of inventors who state that their goal is to raise money. This is misguided. Their goal should be to build a business, and they should only take investor’s money if it will create much more sales than if they did not.
Investors are only interested in how much *and how fast* you can ramp the value of the company. Raising money is not a goal for entrepreneurs. It might be a necessary part of doing business, but it comes at a huge cost.
BlueIron’s investment thesis
My company, BlueIron, invests in early stage and growing companies. For early stage companies, our investment is in a patent portfolio for the company. For later stage, growing companies, we can do loans using intellectual property as collateral, often raising money up to $50 or $100M.
At the early stage, BlueIron’s investment is just like angel investors. We are investing at the product/market fit stage, where the company is learning about their customers. Most importantly, the company is learning how to sell to the customers.
While we love a great idea as much as anyone else, our main focus is not on the company’s inventions, but on their marketing ability.
Marketing teaches a *system* and mindset of iteration
Marketing is a brutal iterative process. You get beaten up over and over because the marketing copy does not work or the focus is wrong. Consequently, many marketing campaigns use A/B testing to uncover which one works.
This process of iteration – trying something, learning something, and changing course – is a completely different mindset from being locked into a “vision” of an invention.
Companies who have an iterative process of constantly trying, learning, and improving are one where we invest. We invest in companies who have internal systems of self-improvement, rather than companies who have it “all figured out.”
This continual iteration process might take a while before the business hits its stride and starts making money, but the *system* is reliable. It always works, given enough time and money.
Companies with this mindset are constantly improving, and that means great patents when they make the product-market fit breakthroughs.
The best patents are yet to come
Any company that is constantly improving means their intellectual property will always get better.
Ideas at the beginning of a business always suffer from lack of data, so patents on the “grand idea” of the business are worthless.
Just having a idea (or a patent) is worthless. It is the hard work of getting product-market fit that makes an idea great. With that hard work, a company learns what works and is able to capitalize on it.
This means that all future patents will be done with more data, more expertise, more knowledge of the market. An inventor who has more information will, usually, create better inventions.
The valuable intellectual property is not an invention of some vision of a business. The valuable intellectual property comes from the individual pieces that enable the vision. The meaningful inventions are the small *but essential* components that everyone in the space will need.
Companies who can capture patents on the building blocks are far more valuable (and investible). These companies can control how a technology develops, how the technology will be implemented, and can control how the technology goes to market through licensing, patent pools, and other techniques.
BlueIron does not want a patent at the beginning of the process. We want the ones that come at the end.