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The Top 10 Reasons Why Your Startup Needs Patents

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This article is by David Pridham and Brad Sheafe, the chief executive officer and chief intellectual property officer, respectively, of the patent advisory and optimization firm Dominion Harbor Group.

The patent system has gotten a pretty poor reputation of late, especially among startup businesses that have been targeted by patent trolls hoping to extort quick settlements. But entrepreneurs would be well-served to remember that even if the occasional troll can game the system to harm a vulnerable young company, patents themselves are often quite valuableif not criticalto a startup’s success.

Here are the top 10 reasons why your startup needs patents.

1. Patents facilitate venture capital investment. According to The Role of Patents in Venture Capital Financing, a study by Haussler, Harhoff, and Muller, “Patents are a signal of quality that facilitates access to financing and helps startups overcome the liabilities of newness.” This finding was confirmed by the 2008 Berkeley study Patenting by Entrepreneurs: An Empirical Study, which found that 67% of venture-backed startups reported that patents had been vital for them in securing investment. While 40% of all startups held patents, 80% of those receiving venture capital investment owned patents.

2. Patents can help a startup defend itself against attacks by incumbent rivals. Shortly after intelligent home products startup Nest introduced its first product, a smart thermostat, it was hit by a patent infringement suit from the industry giant Honeywell. In the words of one analyst, Honeywell used its patent arsenal to try to “run the upstart competitors out of town simply by exhausting them and their limited resources.” But Nest was prepared. It had already begun patenting its innovative products (and eventually would own several hundred patents and patent applications), and it also acquired 60 third-party patents relating to its product line from the patent aggregator Intellectual Ventures, which helped buttress its intellectual property position. The lawsuit is still pending, but if Honeywell’s goal was to litigate its upstart rival Nest out of business, Nest’s patents have made that impossible. Nest’s patents were also a key attraction in the company’s eventual acquisition by Google, as you’ll see in reason No. 7.

3. Patents can help a startup stop the theft of its innovations by larger rivals. Nowadays Amazon decries patent litigation. But what the company doesn’t mention is that only 23 days after it obtained a patent in 1999 for its “one-click” online purchase system, it filed a patent infringement suit against its then-larger competitor Barnes & Noble over the latter’s use of a similar system. The judge granted an injunction ordering B&N to stop using Amazon’s one-click, giving Amazon the edge in online book retailing.

4. Patents can ensure a startup’s freedom to operate. Google is another industry heavyweight that complains about patents today. But as a startup, back in 1998, Google deemed its seminal PageRank patent No. 6,285,999 so vital it filed for it before it had a business plan, venture funding, or even a domain nameand then paid Stanford University, to which it had been assigned the patent, $336 million in shares to exclusively license it. Without that patent, said one analyst, “Google would have been trampled by copycat search engine offerings from Yahoo, Microsoft, and other big players who once dominated the market.”

5. Patents can help a startup rapidly increase its market share. Carles Puente, a 2014 finalist in the European Inventor Awards, invented a mobile phone antenna based on principles of fractal geometry, which allowed it to be much smaller. If it weren’t for Puente, we’d still be carrying around cellphones as big as shoes. But his Spanish startup, Fractus S.A., couldn’t possibly manufacture enough fractal-based antennas for the 1.5 billion smartphones sold each year. Thanks to its patents, however, Fractus was able to license its technology to 90% of the world’s smartphone makers. “Patents were very important to us,” Puente says, “not only in protecting our innovative technology but also in expanding our market share.”

6. Patents can help startups form joint ventures and R&D partnerships. According to a 2014 National Science Foundation-backed study, 49% of manufacturing and service firms have used inventions obtained from external sources to develop their most important new products and services. In 14% of these cases, the source was a startup. In many cases, the patents on those startups’ inventions served as the legal scaffolding around which joint ventures and research-and-development partnerships were constructed.

7. Patents can increase the chances that a startup will be acquired. We have already discussed Nest’s use of patents to defend itself against bullying by a larger rival. But the company’s intellectual property also was a major reason for Google’s acquisition of Nest in 2014 for $3.2 billion in cash. As an article in USA Today reported, Bernstein Research analyst Carlos Kirjner advised investors that “we believe Google would not have purchased the company if it did not have substantial and valuable intellectual property.”

8. Patents can help a startup get ready for an IPO. Even the tech giant Facebook felt the need, when preparing for its initial public offering, in April 2012, to shell out $550 million to buy 650 former AOL patents owned by Microsoft. That was in addition to 750 patents Facebook had bought a month earlier from IBM. The purchases were partly a response to a then-pending Yahoo patent suit against Facebook. But experts say Facebook's larger objective was to reduce investor concerns over Facebook’s legal risk in advance of its IPO, as well as to protect itself against further litigation down the road, given that patents are increasingly the weapons of tech company competition. Twitter made a similar patent purchase from IBM shortly after its IPO.

9. Startups with intellectual property achieve greater long-term success than startups without it. In their 2015 study Patents, Innovation, and Performance of Venture-Capital-Backed IPOs, Cao, Jiang, and Ritter found that “patents strongly and positively predict the long-run performance of VC-backed IPOs.” Indeed, “VC-backed IPOs with patents substantially outperform other VC-backed IPOs. The same holds true even for non-VC-backed IPOs.” Or as Cockburn and Wagner simply put it in their 2007 study Patents and the Survival of Internet-Related IPOs, “Firms without patent protection are much less likely to survive.”

10. Patents can help a startup launch a billion-dollar empire. As IPfolio chief executive Rupert Mayer recently observed, patents have helped at least 10 major startups launch billion-dollar empires. These include Dropbox’s network folder synchronization patent, Zynga’s asynchronous challenge gaming patent, Square’s patented system and method for decoding swipe card signals, GoPro’s patented harness system for attaching a camera to a user, and of course Google’s breathtakingly valuable original PageRank patent.

These are only 10 examples of how intellectual property can help a young startup company build a successful growth business.

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