Do You Really Need a Patent?

Back in June 2008 I attended a seminar on intellectual property rights (IPR). A lot of the hype around entrepreneurship seems to centre around the idea that one must have patents to protect a company's IPR, otherwise the sky will fall, or at least, the company won't be worth anything if and when you want to sell it. Here are my notes on why that isn't necessarily the case, what you can do (other than patenting) to protect your IPR, and what role patents do have to play.

Patents protect functional designs by granting a monopoly to the holder, ensuring that no one is permitted to produce a product that carries out the same function in the same manner, regardless of whether that invention was independently conceived (see Out-law's article "Patents: the basics"). In principle, this means that the holder has a 20 year head-start on their competitors. The downsides are that when a patent is granted, the details of the invention are publicly disclosed, and that registration and maintenance of patents costs huge amounts of money, particularly if one wishes to hold the patent in multiple countries. Asking a friendly lawyer to waive their fees on the promise of future profits may help with drafting the document, but not with the Patent Office fees.

Do you need a patent?

Firstly, it's important to realise that there are rights for which there is no need to register. These include:

• Copyright: prevents exact copies of your work (literary, film, software) being made. Note that this does not prevent against quite similar designs, provided that these were the product of independent creativity. In the UK, copyright is automatic, i.e. there is no need to assert your claim via a legal message (though many people choose to, for clarity). See Out-law's article "Copyright law: the basics".


• Design Right: unregistered design rights cover aesthetics qualities, such as the form, colour, look and feel, or texture of a product. For software, look and feel is hard to protect with copyright (though logos can be), whereas it can come under design rights. Registered design rights (fee required) allow the holder to enforce a monopoly, i.e. even an independently created identical design would be an infringement. In contrast, unregistered design right only prevents direct copying. See Out-law's article "How design rights can add value to a business".


• Semiconductor topography right: design rights protect aesthetics, whereas semiconductor rights protect the layout of integrated circuits that are used within a product. The main reason for this is that the different layers of such circuits can be easily photographed, and then copied, but the investment required in initial design may be enormous. See ESA's article "About semiconductor products", and Mewburn Ellis' article "UK & EU Unregistered Design Rights".


• Database right: a database is essentially a systematically ordered collection. The items within the collection may or may not be subject to other protection, but the effort/costs in amassing and organising the collection is what is protected by database rights. It is important to note that such costs are solely those of collecting and verifying the data, rather than those of creating the data. See Out-law's article "Database rights: the basics".


• Trademarks: the goodwill associated with any design that can be represented graphically, such as a name or a shape can be protected against a competitor "passing off". This takes place if they use the trademark in such a way as to take advantage of the goodwill associated with the mark. Registering a trademark does cost a fee, but additionally ensures that the mark is protected more widely, in areas you may not yet be trading in. Not registering may mean that another party does register it, and later prevents you from using it. See Out-law's article "Trade Marks: the basics".

The key point is that all of these are IP rights, but they don't cost anything (at least, the unregistered versions). It might well be that you're actually better off registering (or not) one of these rights instead of trying for a patent. Note that all rights are time-limited.

Secondly, is the patent registration actually worth it? Patent ideas can (hopefully!) be commercialised, but they must generate enough cash to defend the patent! If the value of the invention (or subsequent inventions that might depend on it) isn't high enough, there's little point in patenting.

Thirdly, 18 months after filing, the idea will be revealed. Do you actually want to reveal anything, rather than relying on keeping the mechanisms of your invention secret? Competitors can catch up fast after your public disclosure! Even if you decide to patent, when is the right time to reveal? Waiting longer may mean your competitors develop a similar technology and file a patent, but may also mean that you can develop the details further, and hence file a broader and more detailed patent, which may be more defensible. Dragging out the filing process as long as possible will mean you have the protection of a patent application, and yet are not liable for maintenance costs.

General Patent Advice

As regards working with another company, the received wisdom is to never give another company joint ownership of your patent. If this happens, questions of how revenue is to be shared, or who dictates the territories that the patent is registered in, arise. Licensing to the partner company is by far the best way, particularly if your partner subsequently wishes to sell their portion of the patent (rather than having a license) to one of your competitors!

Note that a single patent may not be enough. Again, the advice is that defence in depth is a definite advantage, which guards against a "bad" court judge ruling in your competitor's favour. Of course, the more patents, the higher the costs...

Prior art constitutes any expression of the proposed invention that is already publicly known about. Hence, if you are the first to invent, prior art will, by definition not exist. The concept of "first to invent" is particularly significant in the United States. There, one possibility is to use lawyers to store date-stamped ideas in their safe, thus acting as witnesses to the statement of when the invention was created, whilst not releasing the idea publicly. Several ideas stored in such a way can later be included in a single patent, thus reducing costs.

When drafting a patent application, you could of course attempt it yourself. However, if you seriously intend it to be useful for later enforcement, it is far better to bite the bullet and contract a good lawyer. Failure to invest at the beginning may well mean a far greater loss later on.

Finally, it's worth asking why patents are regarded as so important. One reason is that investors are keen to ensure that their stakes will appreciate in value. This will not happen if the company's core product is able to be copied by a competitor. Because patents grant a monopoly, provided that the invention is in demand, the patent holder has a guaranteed revenue stream.
Hence, when, for example, a venture capital firm invests, their due diligence procedures involve checking that the source of the company's core business is patented. One corollary of this for startups is to ensure that all employees and contractors are contractually obliged to cede any IPR they generate to their employer, thus clearly stating the ownership.

Views from VCs: Notes from The Investors' Forum

Yesterday evening I attended The Investors' Forum, an event jointly organised by CUE and CUTEC in Cambridge, aiming to show that there is still investment available for start-ups. On the panel at the event were Reshma Sohoni (SeedCamp), and Laurence John (Amadeus Seed Fund), who talked about (pre-angel) seed funding; Kerry Baldwin (IQ Capital) for injections of around £1.5 million; and Simon Cook (DFJ Esprit) and Sitar Teli (Doughty Hanson Technology Ventures), for investments of £10 million or more. Alex van Someren (nCipher) moderated and gave the entrepreneur's viewpoint. Here's my notes on what they said:

• The economic downturn has affected some funding decisions. Seed funds are asking companies to try to do more with less investment, and to have working demonstrations in less time. Larger funds have been used to their companies not being able to obtain bank loans, hence there has always been a sort of "credit crunch" in that area, thus no effect. However, Sitar Teli pointed out that some businesses (such as semiconductor manufacturing) would need to take on debt at some point, and at present that type of company would not be a good investment.
• Software start-ups were more likely to receive seed funding than hardware start-ups, due to their need for smaller amounts of money. However, hardware is still an option (Laurence John).
• Proposals seeking VC investment need to show both a strong business case, but also a robust customer base. Previously investors would not have checked as rigorously as now how strong the market is (Kerry Baldwin).
• Investors did not believe that they were using the economic downturn to drive down the price they offered entrepreneurs for equity stakes.
• When coming with a proposal, it was emphasised that the amount being asked for should be planned to result in a real step change in the company. Similarly, a plan of what funding will be needed at which points in the business, and what the end dilution and valuation will be, is hugely important in order to ascertain whether an investor will even consider the company. If the end valuation means that the investment does not gain very much value, evidently investors will not be interested.
• Getting to know VCs before asking them for money was recommended. This allows them to be more confident in you at the point where you ask for investment.
• Select which VC to court carefully. There is little point going to one that invests £10 million minimum if the company only needs £250k.
• Try to court multiple investors, in order to allow the market to set a fair price for a stake in the business. Otherwise one investor can effectively set as low a price as they wish.
• The relative importance of teams versus ideas was debated. For seed funding, where ideas are at a malleable stage, the quality of the team was regarded as most important (Reshma Sohoni). For larger investments it was less obvious which was most significant.
• Experience was regarded as hugely important in obtaining large investments at the start (unsurprisingly). First-time entrepreneurs should normally start with seed funding. The exception was if there was significant, patentable IPR behind the business idea.
• In any presentation, get to the point, and explain how much investment is needed, and what it will be used for.

All sounded sensible, though valuable as it goes to show that some investor attitudes have changed, whilst others have not.

Lessons from Hermann Hauser

Another interesting Enterprise Tuesday lecture by serial entrepreneur and angel investor Hermann Hauser (Amadeus Capital Partners). He talks about the mistakes he has learnt from in five of the 62 companies that he has been involved with: Acorn, ATML, Harlequin, ART, and Polight. Here are my notes and thoughts:

• Acorn spent its first five years not being able to produce enough computers to meet the demand. It therefore signed long-term agreements with manufacturers, and eventually met demand. Unfortunately, at this point the market crashed. Inventory piled up, and the company had to be rescued by Olivetti. Corollary: understand the variations in your market, and plan inventory sizes appropriately.


• ATML's initial product was (probably) the best 25 Mbit/s ATM switch on the market. This did not sell, as 100 Mbit/s switched ethernet soon arrived on the scene. Larry Ellison (of Oracle fame), invested in the company, and hence kept it afloat. However, the company began to make significant sales of its ATM to IP "conversion" chip to manufacturers of DSL modems. The business model was then changed, resulting in real growth. A merger with American company Globespan was proposed, but this turned out to be a bad move, as their management team was not as strong as ATML's (by this time Virata). Corollaries: product strategy needs to be correct (and malleable); don't assume that as a British company you need to be bought by an American company to succeed.


• Harlequin's aim was to build the world's greatest AI company, by producing a LISP interpreter. But this wouldn't be profitable, as it would be a small market. In order to obtain revenue, the company produced PostScript technology for printers. The founder refused to raise cash through selling equity, but wanted to raise debt. Natwest gave him a £5 million loan. That increased to £10 million. The difference between banks and VCs is that banks can call in the loan. Harlequin was sold for £1. Corollary: in a fast growing, high-tech company, you need equity, not loan, finance.


• ART (Advanced Rendering Technology) made a break-through in hardware rendering technology. Genereated photorealistic images for car companies. But there were only so many car adverts that needed making! Corollary: market size matters!


• Polight produced holographic storage technology. Unfortunately, a very gifted physicist on the team showed that it was in fact impossible to produce the technology that they were working towards. Corollary: sometimes the technology itself may be at fault.


• Time estimation: whatever you estimate, multiply by Pi to get a realistic estimate. Similarly, market size estimates tend to be very overstated.


• People-related issues are common: people fall out with each other surprisingly easily.


• Finally, keep making mistakes, but make new mistakes.

Personally, I think that much of the above is obvious in hindsight. In other words, I'm sure that ART were aware that they needed a big enough market in order to generate sales growth long-term, or that Acorn would not have signed manufacturing contracts if it had known that demand was going to fall. Perhaps the most interesting conclusions to be drawn centre around how ATML was nimble enough to change their strategy (i.e. that they were willing to sell that one chip that was a tiny part of their much more complex core product), and that they would probably have done better not to merge with Globespan.

So how to avoid the "obvious" mistakes when starting out? Clearly it's not easy. Here's my take, for what it's worth:

• Market trends & inventory: of course, the ideal company is one that has no inventory, and yet can keep up with demand. If you're selling pure IPR, like chip designs (e.g. ARM), that's great, because inventory becomes someone else's problem. In the case of a software company (assuming its products are sold for download, or online use, rather than on shop shelves), inventory perhaps becomes synonymous with how much server capacity you have, plus possibly support staff. Hence, using cloud computing services such as Amazon's EC2, (or their content distribution network, CloudFront) and outsourcing non-core work to contractors (as suggested by Seedcamp's Reshma Sohoni) provides much greater flexibility to respond to demand. Of course, reading market trends hopefully means that you're aware of what proportion of your services are "base load" and hence could be performed in-house.
• Product strategy: be prepared to admit that your first idea didn't work, but that a part you never envisaged could be valuable actually might be. Concentrate on your core competencies.
• Market characterisation: talk to your potential customers! I find it incredible that there are so many web sites that make it so hard to give good feedback once they're selling (and that's after they've decided on their product!). As David Langendries pointed out in a comment on my post "The Dangers of Online Feedback", companies would do well to pick up the phone. Most successful products are preceded by good marketing (distinct from advertising), says Seth Godin. Which to me, means that technologists need to be very sure they can convince the customer that their product solves a problem that the customer (maybe) never realised they had. And convincing means talking, rather than yet another online survey.

So there you have it: terribly simple, right? ;-). Then again, you'll find plenty of other conflicting advice elsewhere. Over at OnStartups, Jason Cohen suggests that instead of trying to figure out which strategy is best, given that conflicting ones have produced equally successful companies, perhaps you just need to buck conventional wisdom (and hence not copy 37signals or Fog Creek)... Thoughts?

The Dangers of Online Feedback

Business Week has a very interesting book excerpt from "What Would Google Do?" (Jeff Jarvis), titled "Detroit Should Get Cracking on its Googlemobile", which caught my eye, in part, because I'm currently reading Tom Vanderbilt's "Traffic: Why We Drive the Way We Do (and What it Says About Us)". Jarvis points out that at present auto manufacturers don't really communicate with their customers about what they would like, or allow them to customise their cars in any meaningful fashion. If they had, he argues, we would have had ways to interface our iPods with our car radios long ago. In the future, if they treated cars as a platform that allowed users to create their own cars, we might see unpainted cars being sold, then taken to local graffiti artists. All hail "open-source" (?!) cars, apparently, not to mention open-source urban planning.

That got me thinking. Many large corporations are today accused of not listening to their customers. Meanwhile many are trying to use the Internet to change that (take a look at Get Satisfaction). It used to be that to listen to your customers involved conducting telephone or paper surveys, or paying people to be in focus groups. Now you can just set-up an online forum, or blog about your ideas and see what comments come back. In many ways that's good: the cost of soliciting feedback is minimal, so even one-person startups can do it. The bad bit is that the company has to take the time to actually listen.

Whilst older companies have a reputation for not asking for feedback, it seems to me that the newer technology companies have a bad history of actually listening to feedback that concerns policy. That's distinct from feedback on software bugs, which are effectively win-win for the company and the consumer. Google, for example, is great at releasing its products in beta versions, and fixing them up in response to feedback. However, looking at the upset surrounding its retention of search logs, and it's the opposite. Similarly, Facebook's introduction of its Beacon technology, for publicising what purchases users had made, didn't really go down that well either, though they at least made the service an opt-in feature after about three weeks. (Any other examples?) The point is not that users aren't eventually listened to, but more that they're listened to quickly or completely only when the company considers it to be commercially sensible.

"So what?", you might ask, "Isn't that obvious?" Well, to a company, yes. Pandering to users whilst potentially cutting your revenue or effectiveness doesn't seem commercially sensible. But if consumers now expect this easy-feedback channel to be taken notice of, then when it's not, a revolt occurs. On the web, where the switching costs tend to be lower, customers might just decide to go elsewhere. Even with companies who produce more tangible products (cars, say), users can still make a fuss very publicly, and very quickly. Worse, they'll accuse the company of "not listening". Suddenly the feedback channel isn't so great any more. Particularly since a lot of that feedback is public for all the world to see.

So, as a small company, online feedback can be great for understanding how to shape something new. But it's perhaps important to manage users' expectations. Otherwise you might end up like Face Party, who closed shop for a while after users complained that they hadn't been given what they'd been promised. Moreover, dedicating time to making sure that the online feedback channel is tended to, so that you at least appear (!) as though you're listening will probably pay off.

Welcome to a brave new world, where goodwill is generated by listening, rather than another PR campaign. Oh, and where trying to fake reviews to gain goodwill will probably be discovered.