When Should a Start-Up Seek Patent Protection?

By Neil Wilkof

In carrying out due diligence, how many times have I heard this refrain from a start-up: “Oh yes, we have a couple of a patents or patent applications, but they don’t really address our current activities.” And so I ask–“so what about seeking patent protection for the current activities?” The answer tends to be: “We have not gotten around to it” or “it is not really within our current budget.” Being told that the company can always try to sell the patent, especially if things don’t go well, is beside the point. Suggesting that the patents can be licensed looks good on paper, but less so in the marketplace for technological transfer. The problem is that the patent no longer matches the start-up.

I thought about this disjunction between the patent position of a start-up and the nature of its current business activities while listening to a recent podcast about  a survey conducted at Stanford University on the impact of the university and its graduates on the world of entrepreneurship here. One of the salient points made was that around 60% of start-up ventures alter their business model [Jeremy notes: Neil asked me to guess how high this figure was: in my own experience it has been very much higher, possibly because I only get to speak to start-ups after they have hit a problem] and around 80% change the definition of their target audience.  Since these are aggregate figures, the correlation between the change of a business plan or a target audience and the ultimate success of the start-up will differ, depending upon the specific industry involved. However, generally speaking, these results mirror those that I have frequently heard in connection with entrepreneurial activity.

In considering these results, the question crossed my mind: what is the relationship between the likelihood that a start-up will alter its business plan and the capacity of the company to plan an effective patent strategy?  A useful way to understand this interaction is in terms of David Teece’s influential notion of “dynamic capabilities”. Teece describes “dynamic capabilities” (“Dynamic Capabilities & Strategic Management“, Oxford University Press), as follows:

“For analytical purposes, dynamic capabilities can be disaggregated into the capacity (1) to sense and shape opportunities and threats, (2) to seize opportunities, and (3) to maintain competitiveness through enhancing, combining, protecting, and when necessary, reconfiguring the business enterprises’s intangible and tangible assets. Dynamic capabilities  include difficult-to-replicate enterprise capabilities required to adopt to changing customer and technological opportunities. They also embrace the enterprise’s capacity to shape the ecosystem it occupies, develop new products and processes, and design and implement viable business models” (p. 4).

In a more pithy form, as set out on page xi of the Preface to the paperback edition to the book, it is “the managerial capacity to engage in sensing, seizing and transforming …”

As described by Teece, managing “dynamic capabilities” in general, and in particular, “reconfiguring the business enterprises’s intangible … assets”, is a tall order for any company, no matter how established. A fortiori, given the likelihood of a substantial (and often early) pivoting of the business plan of a start-up, the challenge is dramatically increased. Here, the question is how to align any potential patent program with the likelihood that the overarching business model of the company may well shift. here seems something fundamentally at odds between the swirl of the entrepreneur’s “sensing, seizing and transforming” and the (presumably) more measured process by which an invention is identified and a corresponding patent application is then drafted and filed.

Under such circumstances, should the start-up even consider engaging in any type of patent registration programme, at least until the company has a relatively firm notion of what its ultimate business is likely to be? Whatever the inventor’s imagined clairvoyance about his or her ability to comprehensively embrace all the possible preferred embodiments in the patent, the likelihood of successfully doing so seem daunting. Or should the patent applications wait until it is more clear whether the start-up will need to change its business plan and, if so, in what direction? Guidance from readers who can point to empirical studies that have sought to analyze the connection between the especially dynamic nature of a start-up and the nature and timing for seeking  patent protection would be most welcome.

[This post originally appeared at the IP Finance blog.]

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