If you are active in the startup space, then you are all too aware of the importance of patents in seeking financing from venture capitalists and via other investment channels. But why? Of course, we all know one reason – venture capitalists want to feel comfortable that an innovation forming the foundation of a business cannot be copied by competitors. But, there exist other, less obvious (and equally important) reasons why venture capitalists like startups with robust patent portfolios.
Obtaining Patent Protection Communicates Business Savviness
Many startups are inspired into existence from core, innovative technologies conceived of by their founders and believed by them to hold intrinsic value divorced from any business developed around them. These startups tend to focus most if not all of their time and resources developing the underlying technology, and then pitch the technology to venture capitalists hoping that they will share in the vision and invest.
Unfortunately, many of these startups will fail to obtain the funding they so desperately seek for one simple reason — venture capitalists do not invest in innovation or technology; they invest in businesses. When a startup focuses too much time and money on developing the “idea,” while neglecting the business (such as failing to take steps necessary to ensure that the idea is protected in a marketplace of well-funded competitors), it is likely that the startup will ultimately fail as a business no matter how innovative the idea. Venture capitalists understand this and are rightfully turned off, often times devaluing the company significantly as a result (which translates into a higher cost of capital for the startup) or outright refusing to invest.
When a startup focuses too much time and money on developing the “idea,” while neglecting the business … it is likely that the startup will ultimately fail as a business no matter how innovative the idea.
On the other hand, a startup that devotes significant energy and resources to the business, such as preparing and implementing a detailed business plan and taking steps necessary to patent foundational innovations, is far more likely to succeed. Indeed, with respect to patents in particular, “across all sectors a significantly higher percentage of venture capital backed winners (companies that have been acquired or have gone public) have patent portfolios as opposed to losers (companies that are out of business).” These startups exude business savviness and, as a result, are perceived by venture capitalists as less risky and more stable investments.
Obtaining Patent Protection Communicates Commitment
Since venture capitalists invest in businesses, they want to ensure the people running them are motivated and incentivized to push their businesses to succeed. This is why venture capitalists love throwing money at startup founders who come to them having already invested substantial time and capital into their ventures, as personal investment demonstrates a belief in and commitment to the business. Investments in patents are particularly indicative of a startup’s drive and commitment, as the process of seeking a patent is both expensive and valuable to the company only if the underlying idea proves successful. In other words, seeking patent protection of your idea is a great way to communicate to a venture capitalist that you are serious and committed to making your business a success.
Investments in patents are particularly indicative of a startup’s drive and commitment, as the process of seeking a patent is both expensive and valuable to the company only if the underlying idea proves successful.
Obtaining Patent Protection Provides Preliminary Market Intelligence
Unless the business of a startup is based on a disruptive technology or one that is truly foundational, it is likely that a venture capitalist will need to understand how a startup’s innovation differentiates its business from competitors in the marketplace, and whether the innovation offers a long-lasting advantage that would likely result in a significant and less risky return on investment. Much of this market intelligence can be gleaned from the process a startup undertakes to obtain patent protection. For instance, a patent application often includes “background” and “summary of the invention” sections that describe problems in the market and how the invention solves them. The U.S. patent examiner assigned to the patent application will also conduct one or more prior art searches, the results of which will provide a better understanding of the patent landscape in the market of concern. Further, any art asserted by the Examiner against the claims will likely be the most relevant, thereby forcing the startup to better understand how its innovation differentiates from the closest and most concerning competitive technology.
Bryan DeMatteo is the founding member of DeMatteo Law, PLLC — a full service intellectual property and litigation law firm based in New York City. Mr. DeMatteo and his firm specialize in helping entrepreneurs and small-to-mid sized businesses nationwide grow and succeed by procuring, monetizing and enforcing their intellectual property, as well as protecting their rights in court.
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