Patents can be part of an overall business strategy, but they need to make business sense.
In our business of investing and financing patent portfolios, we can only invest in patents that have real commercial value.
From the startup’s perspective, there are several ways that a patent can have value.
Merely having a patent pending is often enough to satisfy an investor, especially (gullible) angel investors. Angel investors are notorious for doing terrible due diligence, and I have never even heard of an angel investor who got a valuation analysis done on a patent. Venture capital investors tend to be much more sophisticated and either have the expertise or can hire expertise to do a valuation analysis.
In that vein, most venture capital investors typically ignore the patents. This is a legitimate strategy, since even the USPTO says that only 2% of all patents make money – the rest are worthless. With those kind of odds, why bother putting any effort into evaluating something with only 50:1 odds of having value?
In our business of financing patents, we see countless bad examples of provisional patents that are so badly written that they are worse than worthless. These provisional patents actually harm the company in many ways, yet the entrepreneurs and investors do not realize it. Sometimes, this will become apparent when the company enters due diligence with a VC, only to have their company valuation drop considerably when the VC realizes how damaging the patent will be.
What is the difference between having an issued patent and just a pending application?
- An issued patent can be enforced against competitors.
- An issued patent can be traded with competitors in a cross license.
- An issued patent can be licensed into other vertical markets.
- An issued patent can be spun out into another line of business.
- An issued patent can be contributed to a standards-essential patent pool for licensing.
The key here is that issued patents are used in business, not patent applications. Pending patent applications have essentially zero value because they represent only the hope that a patent may issue. When you mark your product as “patent pending”, competitors are put on notice that a patent may issue and that they might have to stop infringing when that happens. Couple the uncertainty message to the competitor and the slight advertising value to customers and investors that the product might get patent protection, and there is a minor business case for a pending patent application.
However, the real business value of a patent does not come until it issues.
Patents are well known to take a very long time to get through the Patent Office. Personally, I have had cases pending for over 10 years.
The Patent Prosecution Highway and other mechanisms, such as Track One, are programs that expedite the patent prosecution, often having the patent issue within 12 months or less. My personal record is 71 days for an expedited patent application from filing to Notice of Allowance. The biggest problem with these programs is that it compresses the costs of the patents into a very short time, rather than spreading them over multiple years. This is a huge drain on a startup company’s resources.
Because most startups fail within the first several years, getting a patent as fast as possible makes a lot of sense. A seven-year pendency is a waste of time because the only people who will benefit are the people who purchase the patent application at the bankruptcy fire sale.
BlueIron’s primary line of business is to finance patents for startups, which allows us to do sophisticated strategies like Patent Prosecution Highway that a startup could not otherwise afford.
When a startup has issued patents, not just pending applications, the startup’s valuation is much higher because the company has assets that it can use today, not possible assets that may never exist.