(Updated 10 Oct 2021.)
IP plays a big role to sell your company, especially if you are a startup company. Most people think about building an IP portfolio for “protection.” Somehow, the patent value is that they can mystically enforce their patent on an infringer. The notion of “protection” is mostly an illusion, unless you have a patent enforcement insurance policy.
Startup companies with angel capital or venture capital investors need to sell the company. This is the only way the investors get a return on their investment.
How startup companies use patents to sell the company
IP can help sell the company, and, in some cases, be a very important component of the company’s valuation. However, it might not be in the way most people think.
When building a patent portfolio with the intent to sell a company, the main audience is not potential infringers. It is the value of the IP to an acquiring company.
This point is critical.
You want to answer these questions: What does the acquiring company want? How will they use the IP after acquisition?
Large companies use IP in much different ways than startup companies.
Entrepreneurs and investors usually think about building an IP portfolio for “protection.” Somehow, they are going to be able to go after an infringer.
Looking at IP from the lens of an acquiring company, however, is a much different view.
Large companies use IP as a negotiating lever in two different ways: express and implied.
Sophisticated companies with inhouse patent counsel use IP to negotiate cross-licenses with their competitors, suppliers, and customers.
Many large companies actively license their IP. For example, most of the larger telecom equipment manufacturers license their patents to their competitors or other players in the market. Nokia, Ericsson, Huawei, and many others routinely license packages of IP to other manufacturers.
Microsoft famously makes billions of dollars licensing their smart phone patents to all Android cell phone manufacturers. They do this even though Microsoft has not made phones for years.
Sometimes, these “cross license” agreements are “silent cross license agreements.” This occurs when two giant players in the market have IP that each company infringes, but neither company wants to initiate a lawsuit. Microsoft and Google, for example, both have giant IP portfolios but no formal agreement. Both companies are peering over the foxholes at each other, silently amassing huge amounts of IP.
Some companies with big portfolios use their IP for marketing. For example, Microsoft made a large portion of their patent portfolio available for any customer that uses their Azure cloud computing services. Any customer that goes across the street to Amazon Web Services does not get access to those patents. This big stick has caused many Microsoft customers to re-think switching cloud service providers.
Of course, an acquiring company looks at the IP to see if a startup’s product line will have a defensible moat.
Big companies don’t care about patent infringement lawsuits.
A startup entrepreneur might assume that a big company infringer would be most likely to acquire the IP. This assumes that the big company builds the product and is afraid of a lawsuit.
This is not the case.
Unless you have patent enforcement insurance, there is practically no way that a small company with less than $100M in revenue can afford an enforcement lawsuit. The big companies know this, so they engage in “efficient infringement,” which means they steal your IP and wait for you to sue.
The patents are more valuable to the competitor of the infringer, not the actual infringer.
Big companies have far more ways to put IP to use than startup companies do. Because of that, you want to take into account all the use cases that an acquiring company might deploy when crafting the IP.
Remember the basics of a patent.
Patents should not describe YOUR product, they should describe the COMPETITOR’S product.
When I am writing a patent application, I am not trying to describe your product. I am trying to describe the competitor’s product.
I am thinking of how this patent will be used in every scenario I can image, and then trying to write it in a way that makes it useful in those scenarios.
Take into account all the potential use cases when building the IP portfolio, including how an acquiring company can put that IP to use.
When trying to sell the company, position the IP in a way that the acquiring company can understand the value of the IP in their framework. Sell them on the idea that they can get a huge competitive advantage – or at least a negotiating advantage – over one of their competitors.