The dynamic nature of start-ups and IP strategy: When is it right to register a patent?

By: Kingsley Egbuonu

Are you a start-up currently contemplating on spending that cash on a patent application?  Have you recently been advised to file a patent application? Well, I hope you have had a deep thought on how that patent application would fit into the uncertain nature of your venture as well as the sector you operate in. The piece below titled, 'When Should a Start-Up Seek Patent Protection?' by Neil Wilkof, originally published on the IP Finance and reproduced here, seeks  case studies on the connection between the dynamic nature of start-ups and timing of their patent applications. Mr Wilkof writes:

"In carrying out due diligence, how many times have I heard this refrain from a start-up: "Oh yes, we have a couple of a patents or patent applications, but they don't really address our current activities." And so I ask--"so what about seeking patent protection for the current activities?" The answer tends to be: "We have not gotten around to it" or "it is not really within our current budget." Being told that the company can always try to sell the patent, especially if things don't go well, is beside the point. Suggesting that the patents can be licensed looks good on paper, but less so in the marketplace for technological transfer. The problem is that the patent no longer matches the start-up. 

I thought about this disjunction between the patent position of a start-up and the nature of its current business activities while listening to a recent podcast about a survey conducted at Stanford University on the impact of the university and its graduates on the world of entrepreneurship here. One of the salient points made was that around 60% of start-up ventures alter their business model[Jeremy notes: Neil asked me to guess how high this figure was: in my own experience it has been very much higher, possibly because I only get to speak to start-ups after they have hit a problem] and around 80% change the definition of their target audience. Since these are aggregate figures, the correlation between the change of a business plan or a target audience and the ultimate success of the start-up will differ, depending upon the specific industry involved. However, generally speaking, these results mirror those that I have frequently heard in connection with entrepreneurial activity.

In considering these results, the question crossed my mind: what is the relationship between the likelihood that a start-up will alter its business plan and the capacity of the company to plan an effective patent strategy? A useful way to understand this interaction is in terms of David Teece's influential notion of "dynamic capabilities". Teece describes "dynamic capabilities" ("Dynamic Capabilities & Strategic Management", Oxford University Press), as follows: 

"For analytical purposes, dynamic capabilities can be disaggregated into the capacity (1) to sense and shape opportunities and threats, (2) to seize opportunities, and (3) to maintain competitiveness through enhancing, combining, protecting, and when necessary, reconfiguring the business enterprises's intangible and tangible assets. Dynamic capabilities include difficult-to-replicate enterprise capabilities required to adopt to changing customer and technological opportunities. They also embrace the enterprise's capacity to shape the ecosystem it occupies, develop new products and processes, and design and implement viable business models" (p. 4).

In a more pithy form, as set out on page xi of the Preface to the paperback edition to the book, it is "the managerial capacity to engage in sensing, seizing and transforming ..."

As described by Teece, managing "dynamic capabilities" in general, and in particular, "reconfiguring the business enterprises's intangible ... assets", is a tall order for any company, no matter how established. A fortiori, given the likelihood of a substantial (and often early) pivoting of the business plan of a start-up, the challenge is dramatically increased. Here, the question is how to align any potential patent program with the likelihood that the overarching business model of the company may well shift. here seems something fundamentally at odds between the swirl of the entrepreneur's "sensing, seizing and transforming" and the (presumably) more measured process by which an invention is identified and a corresponding patent application is then drafted and filed. 

Under such circumstances, should the start-up even consider engaging in any type of patent registration programme, at least until the company has a relatively firm notion of what its ultimate business is likely to be? Whatever the inventor's imagined clairvoyance about his or her ability to comprehensively embrace all the possible preferred embodiments in the patent, the likelihood of successfully doing so seem daunting. Or should the patent applications wait until it is more clear whether the start-up will need to change its business plan and, if so, in what direction? Guidance from readers who can point to empirical studies that have sought to analyze the connection between the especially dynamic nature of a start-up and the nature and timing for seeking patent protection would be most welcome."

My Comment

With various advisory support and networking opportunities available these days, most technology start-ups are becoming savvy to the observation that filing a patent application, or having a registered patent, should neither be a means to an end nor an end in itself. This issue or debate does not just revolve around the costs involved in obtaining a patent, it also touches on others such as: risk of litigation (as your invention is now published for all to see); the fast-moving nature of technology and delay in obtaining a patent registration; and the burden (monitoring and enforcement of your patent), which are all worth considering. This poses the question whether obtaining a patent registration, at an early stage and/or for the sake of owning one, will end up becoming one of the best or worst decisions you have ever taken as a technology entrepreneur.

The reasons and strategies for patent registration will differ from one start-up to another based on different business goals. But generally speaking, a patent can/is obtained in order to: 

(a) extract revenue from it through selling and/or licensing the invention; 

(b) act as a potential bargaining tool and to ensure freedom to operate around already protected inventions; 

(c) prevent competitors from entering a segment of the market; and 

(d) for reputation purposes; for example, to impress an investor or to make you feel safe disclosing your invention to third parties.

Mind you, most investors would not often require to see a patent certificate or an application for one before he/she decides to invest in your venture. In fact, it can be seen as a sign of strength - and indeed, an IP strategy- if you can explain why you have decided against obtaining a patent at your current stage (for example, because it would not align with your business model and plan or that the invention is yet uncertain to be commercially viable). 

Start-ups are less likely to have the resources and time to build enough patent portfolio to block competitors or fight legal battles; therefore, it may well be beneficial to concentrate, in terms of IP, on the following but not limited to: 

(1) structuring your business plan and choosing the right business model for your venture; 

(2) perfecting an invention which will end up generating revenue i.e. a commercially viable product or service; 

(3) doing a thorough market research which includes, seeing which inventions are already protected by patents so as to save effort and resources working on what already exist; and 

(4) ensuring, where possible, that the IP including confidential information/trade secret created is owned by your business. This can be done through assignment and confidentiality agreements in case an employee or former business partner leaves.

Ultimately and from your experience, when is the right time to file an application to register an IP right (in particular, patent)? Please share your story.

NB: The information provided on this website is not intended as legal and/or financial advice and does not create any relationship between you and Amoo Venture Capital Advisory. Please do not submit questions or comments seeking legal advice or submit confidential information through this blog and seek appropriate legal and/or financial advice from a suitably qualified professional.