Investment Grade Patents Need Investment Grade Businesses

The simple fact is that patents only have value when they are infringed.  When I invest in a patent through patent financing, I need the startup company to bring their product to market, otherwise, the patent will have no value.

This is true of any patent: value comes from the market wants to use the invention.

A patent starts out by losing money.  This is the cost of acquiring the patent.  As customers are made aware of the invention through marketing, customers will begin to purchase the inventive product, and the value of the patent will increase.  Presumably, the invention is the single best solution to a customer’s problem, and competitors will want to copy the invention.  Then – and only then – does the patent start to have value.

For a patent to have value, the invention must generate revenue.  When I invest in a startup company through their patents, I need them to be successful at the execution phase, otherwise, my investment has no real value.

Almost all startup companies go through a phase where they develop a product, test the market, and iterate to make the product better.  Every successful business does this, but startups make big iterations on the product.  A startup’s pivots and iterations may be extraordinarily large and the growth process very lumpy.

Investment Grade Businesses are the classic angel and venture funded businesses.  When you talk to angel investors or venture capitalists, they will often say that they are investing in people, not ideas.  What they are saying is that they are investing in the entrepreneur’s ability to hone in on a viable business by testing, improving, and iterating. 

The process of iterating to find a meaningful product-market fit is the skill of an entrepreneur. 

As an investor in a patent, whether it is the startup company itself or me as a patent financer, we are betting that the startup company will actually bring the patented product to market.  If the company pivots away from the patented feature, the bet on the patent will be lost. 

There are countless startups who have patents on products or features that never made it to market.  As great as those ideas seemed to be at the time – or still might be appealing – the patents are not currently infringed and therefore have minimal value.

Patents for startup companies need to correlate with the actual, final products of the company.

When a product comes to market and is successful, competitors will likely pop up.  It is at this time that the patent actually has value.  In my view, the strength of the company is more important than the quality of the patentable idea when I am determining whether to finance a patent or not.  Execution is more important than the original idea. 

The timeline for this bet we are making on the patent has several big risks.  We have to start the patent process early, where we place the bet.  As the company progresses, there is a very big risk that the company will determine that the patented idea might not be as important as they originally thought, or may completely redesign to eliminate the patented idea. 

Even though we have a patent on a particular idea, it is generally not a good business idea to force the product to include the idea when there is something better.  We can usually get another patent on the better idea.

When there is a pivot, there should be a serious consideration whether to keep a patent or not.  Maybe the company will develop the patented idea later, or maybe the company can abandon the patent and save itself money.

In almost every situation that I have seen, from startup companies to huge Fortune 10 companies with thousands of patent assets, there is rarely a consideration of abandoning patents.

IBM notoriously abandons or sells 40% of their patent portfolio at the first maintenance fee.[1]  This means that IBM does not believe that those assets are worth the $1600 maintenance fee.  Put another way, they do not believe that they could realize a measly $1600 worth of value from those assets.

There are two lessons to learn from this example.

First, one of the best, most sophisticated patent portfolio managers in the world must cull the heard, and does so very aggressively.   Second, even the best managed portfolios has a huge amount of waste in it, where the “waste” are patents that are not valuable only 4 years after they issue.[2]

Startup companies do not have the resources to waste on getting useless patents that do not serve a business purpose.  Further, they are likely to have wild pivots where the product or business model may be turned on its head.

With this in mind, patents for a startup company have to be even more carefully analyzed.  It is also more prudent to wait than to rush to the patent office with a hastily prepared patent application for which we have no data to support an investment.

Note: This is an excerpt from my book “Investment Grade Patents.” The book is available on Amazon, but if you would like a signed copy, just send me an email and I will put one in the mail for free.

[1] US patents require maintenance fees at 3.5, 7.5, and 11.5 years.  The 3.5 year maintenance fee is the smallest of them, and is $800 for small entity.  In the example, IBM is a large entity and would pay $1600 for their first maintenance fee.

[2] It should be noted that large companies like IBM have very extensive patent bonus programs, where they reward their inventors for their patents.  In many cases, there can be huge pushback if a company were to abandon a patent before it issues.  It is often better to just let the patent go through the process, then figure out later if it were valuable.