When deciding whether to patent, it can be common for first-time founders to be dissuaded by aphorisms such as “patents are only as valuable as the budget to defend them,” “investors don’t care about patents,” or “in x industry, patents are irrelevant.”
While any aphorism may have a grain of truth, understanding patent value is of course more dynamic. Patents can create both revenue-generating and revenue-protecting opportunities, diversify risk and become as valuable as other forms of intangible assets.
Suffice it to say, an informed approach to evaluating patents, like any other aspect of business, is best guided by an experienced professional who is familiar with the legal and business territory of your innovation and how to plan the most value from it.
In this article, we will counter a few popular myths about patents, explore the value of the patent as a legal and business tool, and outline practical considerations to bring into your next IP consultation.
In a recent discussion, Edward Steakley, Managing Shareholder of Cognition IP, explored these topics and more with Michael Houck of Houck’s Newsletter.
The Costs of Patenting
When learning about the strategic benefits of the patent, it’s useful to keep in mind the cost of this potential investment. Through this lens, one can benchmark with other investment costs in R&D, insurance, legal, marketing and other areas where the patent might be relevant, and have a substantial impact.
You may find quotes can vary considerably across firms, so obtaining a customized quote and understanding what’s included is essential. The efficiency of our firm enables us to significantly reduce costs compared to other firms.
The Value of Your Patent as a Legal Tool
The primary value of a patent as a legal tool is in establishing the right to defend one’s technology from competitors who may attempt to commercially exploit the same, or similar, technology. While this is the pillar in legal theory, let’s consider how it can play out in the real world.
Infringement & Litigation Defense
Suppose you’ve brought your technology to market with raving success. In your rise to the top, you’ve caught the attention of a large competitor who fears diminished market share on account of customer demand for your product rather than theirs. The competitor threatens infringement claims and potential litigation based on their patented technology.
Worth noting, without a patent, you may not have much of a defense. This scenario could be over quite quickly, with a competitor almost certain to win, forcing you to cease the marketing, manufacturing and distribution of your technology, or worse, close up shop entirely. Note here, how the patent as a legal tool helps to protect crossover business investments including marketing, manufacturing and distribution.
With a patent, you stand a better chance of defending your business from the risks of infringement claims and potential litigation. One would have to demonstrate prevailing IP rights, so filing early and crafting strong claims is key. Litigation is a tough road, but smaller companies have won against larger competitors in defending their patent.
Infringement & Litigation Negotiation
In an ideal world, having the patent in place should create a viable defense to competitor infringement claims. In the real world, however, it may only present an initial defense. With litigation, things can become more complicated, much more expensive and a contest of resources might be more determinative of an outcome.
We’ve all heard the saying ‘patents are only as valuable as the budget to defend them.’ It’s true that larger competitors may be more assertive about infringement claims. Yet, be reminded, this often feared possibility is still costly to both parties. With an average of $2-4M spent in an infringement litigation case, large companies are not rushing to spend on litigation if it’s not necessary. More commonly in the real world, a larger competitor would prefer solving a dispute before litigation.
Consider now, there might be a silver lining. It may not be all that bad to have courted the attention of a larger, more financed and resourced competitor who is interested in your patent. Negotiating and settling out of court could still yield profitable outcomes such as licensing the tech to the competitor, collaborating on a spin-off or joint venture, or crafting an outright acquisition.
The circumstances may force an untimely pivot, or an unconventional exit but the patent can still provide even lucrative value here which outweighs the initial patent cost.
Blocking Competition
Flipping the script, the patent is also a legal tool to block your own competitors. Imagine again you’ve brought your technology to market with raving success. In your rise to the top, you’ve discovered an infringing copycat manufacturing and distributing a similar innovation. Naturally, you fear a diminished market share on account of customer demand for their product. To make things more interesting, let’s say the competitor has a newly announced promotional partnership with a major media outlet in which they stand to gain even more commercial exposure.
It’s worthwhile to mention again, without a patent and the right to defend your innovation, there isn’t much recourse. With a patent, you could take action and potentially block the competitor.
Ideally, you can block a competitor before they enter the market. When your patent is published, it puts potential competitors on notice that you’re entitled to exclusivity, serving as a warning and barrier-to-entry.
Once a competitor is underway, there are other ways to minimize their impact. In this example, you may be able to block both the ongoing business activity of the competitor and their upcoming promotional partnership with infringement claims.
If the infringing competitor is courting partners, distributors or other stakeholders, a well-timed and properly guided strategy could discourage the new stakeholders from moving forward. After all, they could be considered willful participants if they follow through with the arrangement and infringe on your patent. This could result in a highly elevated risk with exponential damages for their involvement.
What about blue ocean innovations without existing competition? If this is the case, it’s the ideal time to consult an IP professional for an evaluation. For founders with limited bandwidth, it can be an all-too-typical mindset to “cross that bridge” once it arises. However, this would be the antithesis of wise IP planning, opening the door to highly elevated risk that’s almost certain to arise. More likely than not, it’s much too late to solve IP matters without advanced and adequate preparation. With an open market opportunity, patents can become even more valuable in protecting commercial opportunities. If the blue ocean market is valuable, count on competitors showing up. Better to dissuade them early and secure the path forward rather than being caught off-guard later.
*Note: infringement and/or cease and desist efforts should always be handled by an experienced attorney.
The Value of Your Patent as a Business Tool
So far we’ve explored the value of the patent as a revenue-protecting legal tool. What about the potential of the patent as a revenue-generating business tool? Consider the following for a more direct correlation of the patent investment to ROI.
Generating Customer Stickiness
To link the concepts of the patent as a legal and business tool, let’s recall the primary legal value of a patent is having the right to defend one’s innovation in commercial activity.
In this sense, the patent protects revenue-generating differentiators which keep customers coming back. If customers choose you because you can provide something others cannot, revenue naturally follows. Think of your favorite tech companies and products. Immensely valuable companies are built upon products which stand in the marketplace as ‘the product from the company.’ Talk about valuable patents!
Is it too far to suggest customers make choices based on a patent? Not at all when considering exclusivity. Of course, customers are concerned with factors such as price and convenience, yet exclusivity can be just as relevant in decision making. In some cases for vanity. On more practical levels, customers want to know they can rely on the company behind their product. If a company exclusively owns their tech, they have a continued incentive to stand behind it, to service and improve it, to provide relevant supplementary products or services, and to value their customers over a longer lifecycle. This provides extended value to the customer and more confidence when making longer-term or more costly purchases, especially when customer loyalty is deliberately in focus.
If customers have an informed choice between a patented product and a copycat, they may be more likely to choose the patented product if it’s an important purchase. Instinctively or intentionally, we tend to avoid riskier copycat businesses which deliver perhaps a substandard quality and are more likely to close operations.
It shouldn’t be the only factor for patenting your innovation, of course, but when considering how quickly the same costs are spent on marketing and building customer confidence, the cost of a patent can be a worthwhile investment to support your unique position in the marketplace.
Winning Investor Confidence
Before winning the confidence of your customers, there’s an equally important cohort to win over, your investors. For any round raise, whether it’s pre-Seed, Seed, Series A, Series B or onward, investors want to know their investment is on some level, protected. In other words, they want to know your business planning is well-founded, the road ahead is clear for commercial pursuit, you’re going to generate a predictable ROI, and there is as little unnecessary risk as possible.
Do investors care about patents? Put yourself in their shoes. Considering two identical companies, one with a strong patent, and one without, which would you fund with your hard-earned capital? Patents don’t guarantee success but can provide a sense of confidence with investors, which could be the difference between raising your round or missing out.
A recent report by PitchBook suggests “Startups with patents and patent applications in progress raise larger VC rounds on average. They also raise capital at much higher valuations than startups without such protection on their ideas, especially when it comes to angel investors, and achieve higher exit values down the line.” (Source: Q1 2023, PitchBook Analyst Note: Introducing PitchBook Patent Research, February 6, 2023)
When discussing investment and confidence, it’s also worth noting that like other property owned by the business, patents can also serve as collateral for securing loans and financing.
A Revenue-Generating Asset
The patent can open various doors for generating revenue including strategic partnerships, spin-outs, licensing, an outright sale of the patent and M&A.
It can be a lucrative position to be in, to decide how, when and where your technology is commercialized. Consider potential collaborators who may stand to benefit from your great idea. Strategic partnerships can exploit prolific distribution networks, expand market reach and accelerate a competitive edge, all of which have direct revenue-generating implications.
If your patented innovation is strong enough to stand on its own, yet a distraction to your other commercial priorities, a spin-out can attract new investment and develop additional revenue streams.
For a more direct path to generating revenue from the patent, licensing can earn royalties or other ongoing fees for another’s contracted use of the technology. Consider who would benefit from your technology and what it could be worth to them. A patent valuation may be wise before going down this path. Whether licensed to one or more licensees, patent owners can multiply their opportunities for revenue, rather than keeping the innovation siloed within one’s own venture.
A Transferable Asset
While licensing a patent can generate ongoing revenue with retained ownership, it’s also possible to sell the asset outright. For innovators whose R&D yields patentable tech which isn’t of immediate business interest, the asset may be valuable to others who wish to pursue it with their own ventures.
If you’re entertaining M&A, patents play a key role in the company valuation.
Conclusion
In the right legal and business context, the value of a patent can protect your venture, reinforce your competitive advantages and even generate revenue, yielding an exponential ROI when comparing the costs to procure it.
For founders deciding whether to patent, we encourage you not to disqualify yourself from patenting via hearsay. It is easy enough to begin with a professional evaluation. Choose an experienced patent attorney who understands your industry. They should be able to evaluate the general patentability of your technology, possibly help ideate on extending the patentability and help you plan to get the most value from your innovation.
