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For You Patent Dreamers


The first or maybe the second thought of most product entrepreneurs I encounter is the instinct to patent. Hence I've had a bunch of requests to expand my thoughts on patents over what I've presented during several recent Executive MBA program events. So here's a couple quick (and incomplete) observations. They are directed to you mid-career managers seeking corporate exits and pondering Caribbean vacation homes (fueled by patent royalties). And for gosh sakes I am not a lawyer. So get some real advice if you are taking action here.

1. Patents are not products (unless your new gig is that of a patent troll). This is an important philosophical starting point. Focus your energy first on making products and getting customers to buy them. However. I walked into a technology industry conference breakout session recently and I heard a panelist say: "You really must run your business as two companies. One company must develop technology and the other develops patent portfolios" This statement was made by an intellectual property lawyer who benefits from this reality. Natch! But his comment is not without some merit and it illustrates the resource disadvantage technology entrepreneurs have in the world of patents. But my core message is that the value of a patent will be driven by the value of your product in the marketplace. Focus there first and foremost.

2. Breaking free first. First take no patent action while you are employed by others. If you are working for a technology company today you have an implicit or explicit employment contract. Somewhere In that contract is an implicit or explicit assumption that your employer owns your intellectual work. This is fair in that you are being paid for the purposes of creating or advancing the company's intellectual property in the marketplace. They own it (research the fancy legal term "work for hire"). But know that this claim often extends to your efforts both in and out of the office. This 24x7 extension is prevalent in big technology companies who are skilled at intellectual property protection. Some may even own you for a year after departure. Bottom line: yes your employer can make an intellectual property claim against your evening and weekend projects. Look hard at your employment agreement.


3. Should you publicly announce your strategy?  You are indeed making that announcement (or you are at least leaving interesting clues) if you pursue patents. Patents and the patent process are public matters. A patent therefore signals your business strategy to the marketplace and specifically to competitors and partners.  This public signalling can trigger reactions from competitors (and trolls). So your business decision is this in a nutshell: should I patent my efforts (move toward "first to file") and thereby increase my visibility and risk triggering blocking patents and other unhelpful behavior by competitors, or should I get my product to market or at least sufficiently in existence and then argue defensively the existence of "prior art" to void someone else's future patent attempt. Does a patent start a fight or prevent one? Tough call. (especially in my world of software.)

4. Sustained return on the investment. Patents only have value if you can afford to leverage them. Intellectual property lawyers will tell you (of course) that you need to reserve money each year for patent activity. Maybe. But here is what can drive the cost: First you must develop, research, and then file the patent, and then for the life of the patent you must defend it several ways. Your first defense is from other patent holders who might claim infringement when you file (and seek to invalidate the patent or seek that you license their patent). Then once issued, you must continuously monitor for infringement by others and initiate action, or you must defend from rent seekers (holders of related patents who will seek a piece of your action.). In theory a patent allows you to profit from a novel invention. In practice, patents and patents lawsuits are a competitive strategy by which a company blocks competitors, extracts rent, or freezes the marketplace buying decisions. So do patents have a return on investment? Good ones do. The tough part is knowing if you have a good one.

5. Equity value and the long run. You can argue that a patent improves your company's valuation. But I would counter that this is often at the margin (especially again in my world of software) in that the value can be diluted. The value of your company is again ultimately driven by the collective decisions of customers in buying your product or service. That value can be marginally protected by the existence of a patent. But. The moment you have this patent in place, then something else starts to happen (again double-especially in software).You start to see patents emerging with slight variances to your patent, or you get patents that begin to block the advancement of the product within which your intellectual property was embedded (silly example: you patented the power plug and somebody else ran a patented the power chord, you patented a square corner box and somebody else patented a round corner box.). The net effect is an effective erosion of your patent's value in protecting your product or service. The lesson: a patent could be necessary but it's not a sufficient to sustain a total product solution in the marketplace. Hence you start down the road of expensive and time consuming patent portfolios. A patent lawyer will see this positively as a company spreading its intellectual property reach and expanding its ability to extract rent from the world. Correct I suppose. But also a daunting task for an entrepreneur with a still evolving and not yet accepted business model.

You may detect a level of skepticism in my patent comments. You would be correct in that assessment. Entrepreneurs are not in a strong position in today's technology related patent world. The big technology companies are great big patent vacuums. And more than a few of my peers have taken the hit. That said, you should still start your new business because as an entrepreneur your mission is to do something new and not face off with existing multi-billion dollar patent portfolios. Stay clever. Find the open space.


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