The Entrepreneur and the Angel Investor – The Story of Bad IP Protection.

An angel investor will ask the entrepreneur “Do you have a patent?”  The next thing the entrepreneur does is run out and gets a patent. Is this smart?

Note: this excerpt is from my forthcoming book “Startup IP Strategy.”

The calculus is simple to the entrepreneur: they think a patent will help to raise money, so they get one.  From a pure business standpoint, they are 100% correct: they need a patent so a gullible investor will give them money.

But to be clear: they need the patent ONLY so that the investor will give them money, not because the patent actually adds value to the company. To be even more clear: the patent’s purpose is merely to appease a gullible investor.

However, are they giving away their hard-earned ideas to their competitor?  Are the investors and the entrepreneur making critical business decisions – and taking big risks – thinking that they have the mythical “protection” when they actually have none?

As someone who finances patents for startup companies, I am constantly battling the tug of war between wishing we could have “strong protection” with some patents – and the reality that we might not be able to get meaningful patents with the invention we currently have.  One of the biggest lessons learned is that the good patents never come at the beginning of a project, but only after you have some data, be it building and testing prototypes or, most preferably, customer feedback in the form of sales.

It is a fantasy that a patent will magically carve out a huge area of the market so that your company will find “success.”

The siren’s call of “owning” a marketplace with a patent causes a knee jerk reaction where entrepreneurs get patents that hurt their businesses.

Bad Patents Hurt Your Business

Most patents are worthless. Most patents hurt your business more than help.

Less than 5% of all patents actually make money for a company.

The 95% of patents that don’t make money represent two losses. The first loss is the money, time, and opportunity cost that was devoted to get the patent. The biggest loss are the trade secrets that you give away.

The angel or VC investor (or Shark Tank personality) who asks “do you have a patent?” is doing a huge disservice.

Every word in a patent hurts you.

A patent has two parts: the part you give away to the public and the part the public gives back to you.

The part you receive is the claims. The claims are your rights that the public grants you in exchange for the specification.

The specification is the part you give away.

The specification contains all the details of your trade secrets: the inner workings of your product, the logic and reasoning for how it works, your ideas and plans for future products. Essentially, everything that gives you a competitive advantage – you give away in a patent.

95% of all patents are worthless, meaning that the inventor lost in that bargain 19 out of 20 times. In other words, the inventor gave away their hard work and received nothing in return. Having a patent actually pushed the company backwards, not forwards.

The lesson here: do not do the knee jerk reaction of running out and getting a patent. It needs to be a thoughtful, carefully considered business decision that balances what you give away against the risk-adjusted possible benefit of what the claims will give you.