How a Patent Portfolio Benefits an Early-Stage Company
Written by Ben Esplin
As was discussed in a previous blog post, start up companies with patent assets tend to raise more money than those that do not. I believe the presence of a patent portfolio of at least one filed utility patent application (or very complete provisional patent application) materially benefits a start up during pre-seed and seed fundraising, and this causative relationship, at least in part, accounts for the statistical fact. The advantages of at least a nascent patent portfolio in early-stage fundraising are not limited to the potential monopoly that eventual patent protection can bring to the company, but include being able to adroitly address questions regarding an attribute I have heard referred to most often as “defensibility.”
With each and every investor at the pre-seed and seed stage (and in later stages as well), a start up CEO and her team will face questions about the relative advantage the company has or will have over competitors and potential competitors who would mimic the start ups product. One of the keys to closing investors, in fact, is to slip quickly past these questions related to “defensibility” so valuable time spent with potential investors can be focused on the quality of the innovation, the size of the market, the strength of the team, how investment capital will be used, and the other issues typically raised by investors who shows serious interest.
No single response or tactic will reliably move investor conversations past “defensibility,” which typically comes up early in the tire-kicking. Founders should always be prepared to discuss their specific first-mover advantage, the quality of the team (e.g., founders and/or early employees), intellectual property of the company that is not protectable via patent (e.g., trade secret, trademarks, copyright, valuable data currently or prospectively proprietary to the company, etc.), and other factors which will help the company to win over a direct competitor, if and when one emerges. However, when a founder can respond the company owns one or more patent applications directed to core aspects of the product and/or business, prospective investors will typically accept the founder’s strategy for defending the company’s competitive advantage and move straight on to another topic.
When a potential investor learns of the patent portfolio, and perhaps asks a follow up question or two, and then moves on to other aspects of the investment opportunity, it should be scored as a victory. Not only because the potential objection regarding “defensibility” has been overcome, but also because it has been overcome so efficiently. If one of the primary functions of fundraising is overcoming objections, and I submit it is, then the value of elegantly moving past a potential objection that will come up with virtually every investor should not be underestimated.
Of course, patent protection will ultimately provide a founding team with far more value than an efficient talking point. A patent portfolio will provide a business with tangible assets embodying the core value of a technology start up (its innovation), and can be used in a variety of circumstances with partners, competitors, and customers to manage risk and enhance the value of the business. But, in the beginning, when raising money is a necessary condition for success, the talking point a patent portfolio provides can justify its cost.
If you have questions about potential patent protection for your start up company’s innovation, please contact us to arrange a free consultation.