Patent Coverage and Portfolio Strategy

Picture this: you’ve poured your blood, sweat, and tears into your startup company. It started as nothing more than an idea and has grown into a highly successful venture. In fact, your company is so successful that you’re looking at an upcoming IPO.

But wait… now that your company is so valuable, it has become a prime target for lawsuits. At the last minute, a competitor has come out of the woodwork with a lawsuit alleging infringement of dozens of their patents. With an enormous exit on the horizon, your acquisition is in danger of being derailed.

Investors are now demanding that you fix the situation and resolve these impending lawsuits ASAP. For whatever reason, you did not prioritize investing in a patent portfolio up to this point, and the number of patents in your portfolio can be counted on two hands. The solution to this problem generally involves acquiring hundreds or thousands of patents to use as negotiating tools in a settlement. These newly acquired patents have questionable value beyond settling the lawsuit and likely cannot be utilized afterward.

This was the reality for Facebook in the early 2010s. Leading up to an IPO for Facebook in May of 2012, the number of patent infringement suits against the social media giant nearly doubled to 22. These impending suits threatened to disrupt the IPO and forced Facebook to quickly purchase around 650 AOL patents from Microsoft to shore up the size of their patent portfolio. Even though Facebook was working on new features, it couldn’t acquire patents in time for the IPO as the average patent takes 3 to 4 years to grant.

In all likelihood, Facebook paid a premium for these patents and needed to acquire them without a clear plan for how to monetize them. The patents may relate to Facebook’s core business model, but likely did not cover core features offered by Facebook’s services. As a result, the value of these patents outside of their use for the IPO is questionable.

With the Facebook example in mind, your next question may be how to avoid this fate. Let’s start with what a patent does and why they are important to a budding startup. A patent is a type of intellectual property that gives rights to a new and useful invention. Patents grant a “negative” right, which means it prevents others from making, selling, or using the claimed invention. A patent does not, by itself, give you the right to make, sell, or use your invention. Other laws or regulations may prevent you from making or selling your invention even if you have a patent on it.

Patents are assets that can be bought, sold, gifted, licensed, used as security interests, and more. Patents may be used proactively to improve the valuation of a company, protect features of products and services, and license or sell technology. Leveraging patents as a fundraising tool helps companies demonstrate valuable assets and lower risk, both factors that raise the valuation of the company and make the company an attractive investment opportunity. Patents also show progress on new products or features, and that the company is not a “one-hit wonder.”

On top of simply wanting a large numbers of patents, a tech startup company’s goal should be to have a patent portfolio that includes multiple patents which collectively protect the company’s core products and features. Ideally, a company would have many high quality patents to provide excellent coverage. This can be expensive, and most tech startups have a limited budget to spend on patents. Nonetheless, even at a very early stage, a startup can still get effective patent coverage by prioritizing 1 or 2 applications with core features and building upon those over time.

As highlighted in the example with Facebook, companies can’t afford to wait until they are close to an acquisition or IPO to invest in patents. There may not be time to start investing in patents later when an urgent need for patents arises. Even while the company is still small, a patent portfolio can deter lawsuits by competitors and help the startup establish a foothold in the market. The patents can be used defensively to encourage settlement or help the company develop relationships with partner companies through licensing.

More importantly, investing in patents can be an invaluable tool that ties into the core startup strategy. The patent portfolio covering the core technology can synergize directly with the company’s funding. Previous investments in the company’s technology and the patents on that technology lead to higher valuations and more opportunities for investment. Additional funding raised allows the company to further develop its products and features as well as reinvest in its patent portfolio, leading to bigger and better valuations as fundraising continues. This process continues until the company is ready to exit.

Through continued investments in new products and features as well as the patents to cover those products and features, a company can both secure its funding and its future. Companies in need of patents can either start investing now or pay more down the road.