By Jackie Hutter
Entrepreneurs seeking to maximize their company’s value must think beyond the “Usual IP Suspects,” that is, patents, trademarks, copyrights and trade secrets. I call these forms of IP the “Usual Suspects” because they are what entrepreneurs and their advisers invariably focus on when questions arise about protecting a company’s value. While these forms of IP may seem like the best way to prevent competitors from knocking off a successful product or service, this might not actually be the case. Like in the movie classic pictured above, choosing the most familiar options–that is, the “Usual Suspects”–can frequently lead to disastrous outcomes. In relation to IP, while the recognized forms of IP can be valid ways to create value for many business models, often they are only part of the picture–or they should not even be in the picture at all. Indeed, incorrectly thinking that a patent, trademark etc. will protect your company and ignoring less obvious forms of protection can result not only in a waste of money, but can make it virtually impossible for an entrepreneur to realize the value of her successfully validated business model.
By way of background, as a patent attorney at a prestigious IP law firm, when an entrepreneur came to me to see if they needed a patent or other form of IP protection that my firm handled, the mere act of contacting me was somewhat of a self-fulfilling prophecy. An IP lawyer like I was then holds only a few tools in her tool box of solutions, so when a client asked me what they could do to “protect their company,” I immediately reached for the tools that I knew about–my “Usual IP Suspects.” (And, candidly, those were the only tools I got paid to deploy in a traditional law firm setting.) Only when I left the law firm to practice in a corporate environment did I realize that, unless a business is specifically an IP law firm, only a small part of what a business does to make money has anything whatsoever to do with IP. In other words, when I was at an IP law firm ALL of our business was IP; whereas, when I was at a corporation, only a SMALL PORTION of the business involved IP. This experience opened my eyes to the fact that often much of a company’s value can exist in places other than the “Usual IP Suspects,” which are harder to visualize, but nonetheless critical for entrepreneurs to understand. In other words, for many–if not most–companies, “intangible assets” can form the greatest portion of value. Failing to actively manage the full scope of a company’s intangible value will undoubtedly lead to a lower valuation when investment is sought or at exit.
So, how do entrepreneurs determine what form(s) of intangible asset protection are appropriate for their specific business model? Quite simply, entrepreneurs must ask 2 basic questions:
- What aspects of my business model differentiate me from my competitors?
- Would I find it difficult to meet my revenue projections and desired exit payback if someone copied the differentiated aspects of my business model?
The first answer will hopefully elicit a few important distinctions from competitors that collectively make up the company’s overall value proposition. In other words, the list will provide a set of product features that the customer cares about and for which they will preferentially select the entrepreneur’s company. (As an aside, the absence of an answer to this question should make one question whether she really has a viable business venture.)
After the list of differentiated aspects is generated, in question 2, the entrepreneur must then work to protect any and all aspects of the company’s business model that comprise a competitive differentiation if their business would suffer when competitor elected to provide one or more of those same features to customers. That is, if one has not protected a competitive differentiation, it is not “stealing” if a competitor copies that aspect to provide to its customers. To the contrary, the Free Market demands that competitors appropriate successful business models.
Once the list of competitive differentiations is generated, the question then becomes how best to protect these valuable aspects of the business. Fortunately, the nature of the identified competitive differentiation will typically dictate the appropriate form of protection for each aspect. Operationally, this is a different process than entrepreneurs normally conduct because it does not require the one to first decide that they need to protect their company by obtaining a patent, trademark etc. Instead, the appropriate protection strategy will follow when the nature of the competitive differentiation is identified.
Of course, some forms of the identifiable business model differentiation that create value are no doubt protectable by deploying one or more of the “Usual IP Suspects.” For example, the entrepreneur may determine that her company’s technology may be a strong form competitive differentiation, which will dictate that patent protection may be a good option for her. Alternatively, it may be clear that customers value the company as a source of goods or services, which signals that trademark protection is appropriate to protect that source designation.
However, other types of competitive differentiation will not lend themselves to protection with the “Usual IP Suspects,” and will more properly fall under the broader rubric of “intangible assets” that must be protected outside of the traditional IP law context. Some examples of competitive differentiation that can create significant company value include:
- Contracts with customers or suppliers
- Customer relationships
- Employee specific knowledge or other institutional expertise
- Business processes that add efficiencies or lower costs
- Brand equity (as opposed to brand names)
- Vertical or horizontal integration
If business model aspects like those listed above give rise to true competitive differentiation, the company’s business team must work to diligently protect them. As one example, a relationship with a large customer can create a significant amount of revenue, perhaps even more than ever could be achieved from obtaining patent protection. Certainly, the company’s lawyers can generate a strong contract to memorialize the rights and responsibilities of each party, but it is up to the parties to protect the relationship itself. It is therefore the “relationship” and not only the contract that creates intangible asset value. Moreover, this relationship creates differentiation in the marketplace because the customer buys the company’s product and not that of other companies as a result of this relationship. The loss of this revenue created by the relationship and the attendant contract could prove financially devastating and, as such, both the contract and the relationship unquestionably comprise valuable intangible assets. Once the contract and the relationship itself are identified as intangible assets that matter to the company’s longterm value, the business team must see that these assets are “protected” so that this revenue can be maintained over the long term. How this these intangible assets are protected will vary according to the situation, but the fact that the overall value of the contract to the company is identified makes it possible to maintain.
It should be apparent that the value generated by intangible assets like those set out above are not within the purview of an IP attorney or perhaps that of any attorney beyond the initial contract preparation or the like. The responsibility for identifying, capturing and protecting such intangible assets, and the value that flows from them over time, must therefore be the responsibility of the business team. If the entrepreneur ignores intangible assets, it is highly unlikely that this important form of business value will make it onto the company’s balance sheet with the result being that the value cannot be realized. Or, as the B-school folks like to say: if it is not measured, it cannot be managed.
[This post originally appeared on LinkedIn Pulse.]