Startup founders face unending challenges from all directions. It is not possible to counter and address every single one of them, yet, knowing which ones to prioritize is important. One area of critical importance to young technology companies is setting up an Intellectual Assets (IA) strategy from the earliest days of the company. Intellectual Assets are far and away the largest value component of any company, be it seed-stage company or Fortune 50. Some have estimated that Intellectual Assets (IA) comprise more than 80% of the value of most companies on the planet, thus setting an IA strategy is critical and prudent.
Many startup founders assume incorrectly that they will be able to figure out IA strategy later. This can lead to major strategic mistakes that will lose significant value for the company in the long run, and worse, could kill the company.
What specifically are Intellectual Assets?
IA comprises codified knowledge such as specific know-how, business processes, customer databases, and specific customer relationships. Knowledge that can be legally protected is called Intellectual Property (IP). Trademarks are symbols or words that legally represent a company or product. A copyright gives the owner of a work (for example, a book, movie, picture, song or software) the right to say how other people can use their works. A patent gives its owner the legal right to exclude others from making, using, selling and importing an invention for a limited period of years. And trade secrets are the crown jewels of codified knowledge that are a significant value driver for the business.
IA Strategy Rationale
Developing an IA/IP strategy, including processes for creating, protecting, and growing IA/IP, is a critical responsibility of a company’s CEO and the broader leadership team. Companies wouldn’t leave their doors open so people can steal their computers and thus it is even more important that companies protect their innovations. Companies with valuable IA/IP increase their chance of funding and can receive a better valuation during financings and exits.
At a high level, specific and coherent IA/IP strategies can help many areas of businesses including:
- Competitive Advantage
- Improved product definition
- Protect R&D
- More effective marketing with patent-pending status
- Increased revenue and profitability
Failing to be thoughtful about IA/IP strategy can also bring significant risks to startup companies. Engaging with 3rd party developers or potential corporate partners without the proper NDAs and other protections can lead to loss of innovations, and future litigation. Litigation can be very costly and a potential company killer for startups. Another important piece of an IP strategy is understanding who might sue you for IP infringement. Entering a market with large and small competitors with significant patent portfolios should not be taken lightly. Another patent litigation risk is non-practicing entities (AKA NPEs or Patent Trolls) that do not have an operating business but hold patents for licensing and litigation. Founders can get very emotional when hit with an NPE lawsuit and overspend on legal costs. I have personally worked with many startups to mitigate this risk including using insurance and other tactics.
Most startup companies will hire an outside practitioner to make IP filings. However, founders and management should understand the broader concepts. It is critical to have a deliberate approach to building an IA portfolio that maintains value and will be there when you need it. IA strategies evolve over time with changes in available company resources, market dynamics, and technological advances.
Some of the key steps in building an IA portfolio include understanding:
- The key value drivers of your technology/products/service
- Key players and technologies in its market(s)
- Expectations of where the market is going
- Opportunities for strategic advantage
One key decision within an IA strategy is determining which innovations will be protected as trade secrets versus IP filings. Some pros and cons of trade secret protection include:
- Trade secrets are not limited in time
- Have no registration costs
- Have immediate effect
- Other companies may reverse engineer your products to discover your trade secrets and then implement the secrets in their own products
- Trade secrets must be diligently protected and are more difficult to enforce than patents
The type of IA/IP protection a company uses typically depends on its industry. Technology intensive industries such as biotech, pharma, and semiconductor typically prefer patent protection for their innovations. Data assets increasingly make up the core value of software companies. Yet, patents cannot protect data and other forms of IP protection must be used. Trademark protection is critical to consumer product companies given the significant proportion of their corporate value that is attributable to their brand assets.
When developing a patent portfolio, it is important to have patent assets that not only cover your company’s own innovations but also current and future innovations of your competitors. To save money and time, some early-stage startups file provisional patents which buys them 12 months of patent-pending status. They can then decide to file a more expensive non-provisional application and keep the earlier priority date.
In general, the highest value patents have claims with broad applicability. However, overly broad claims run the risk of later being ruled invalid. Claims should also be drafted with future assertion in mind versus simply protection. Many capital-constrained startups decide to file one broad patent with many claims. Then, over time build out a family of related assets. International patent applications can be costly. Therefore, it is important to prioritize filings based on near and long term market opportunities for the company.
Purchasing patents is another tactic for building a patent portfolio. Depending on available capital, a company can build a quality portfolio quickly. Companies purchase patents for various purposes including for counter assertion when threatened by a competitor, or to ensure freedom to operate when entering a new market.
Innovation and technology are the cornerstones of successful companies in an increasingly competitive global market. Startup founders feel pressure to grow market share quickly, but sometimes cut corners on developing an intellectual asset strategy in the early days which can prove costly. We make sure that our clients understand that to build sustainable growth and market leadership it is critical to protect and leverage your core intellectual assets. A good first step for a startup is to build an inventory of its intellectual assets which will be the basis for its broader IA strategy.
About the Author
Before joining Advantary, Andy launched multiple high growth startups across various industries. Within the IP realm, Andy co-founded a leading patent strategy and brokerage firm, as well as was an early executive at RPX which went public three years after inception and built multiple businesses to help companies manage patent risks. Andy was named as one of the ‘Top 300 World’s Leading IP Strategists’ by IAM Magazine.