Picture this: you enter a meeting with a prominent VC fund to pitch your revolutionary idea, with your non-disclosure agreement (NDA) in hand… and they refuse to sign it! One of the worst fears many entrepreneurs have is that someone will steal their idea. However, a recent Kauffman Firm survey of close to 5,000 companies that started in 2004 shows that only about 2% of these companies have any form of patent protection! What most start-ups don’t realize is that it is relatively easy and inexpensive to establish some basic intellectual property (IP) best practices that would protect their innovation when dealing with investors, competitors, and employees.
IP can be a mystery to most people since they don’t think they have a direct hand in creating it. The first thing to realize is that virtually all employees within a company participate in creating, managing and maintaining IP. Even sales and marketing personnel are involved in tracking competitor’s products and may be the first to learn about possible infringement of the company’s patents. So, beginning on Day One, start-ups need to establish a strong IP Culture and develop a cradle to grave workflow process for establishing their IP position. Below are seven steps in getting the process started:
1. Don’t let your IP walk out the door. You need properly drafted contracts that assign IP rights to the company. Everyone needs to sign one, from company founders to employees. And don’t forget the contractors… If an agreement is not in place, an independent contractor typically owns the work product.
2. Manage your IP holistically – Competitor intelligence from the sales team, or method improvement from the manufacturing floor, are all forms of IP. Although most employees may think they do not have a hand in directly developing IP, it is a smart idea to take a “holistic” approach and teach employees across all functions about the importance of IP. In addition, create a centralized depository for ideas and innovation from all departments
3. Be like Coke – Protect your Trade Secrets. Since 1886 the formula for Coke has been protected by a trade secret. Identify your company’s information that constitutes trade secrets. Ensure that the information is recorded, filed away and secured against unauthorized access. Mark all documents with “classified” or “confidential”.
4. Codify your innovation. It is absolutely critical that researchers and engineers keep journals and documents to track their R&D work: research notes, product plans, etc. This establishes a paper-trail for the company which may be needed in case of defensive or offensive legal action in the future. This will also facilitate the invention disclosure process when it is time to file patent applications.
5. Know your IP landscape – It is recommended to run a patent landscape search to gain an accurate assessment of what patenting activity is going on in your industry. Information concerning competitors' IP should be updated on a regular basis and shared internally so that informed decisions concerning IP strategy and product development can be made. There are several patent landscaping tools available to conduct the search, and many service providers have special rates for start-ups.
6. Don’t jump the gun on provisional applications – Many start ups rush to file a provisional patent application that establishes a priority filing date for a year, without properly planning their IP filing strategy, or “roadmap”. However, if you file a provisional application prematurely, before the scope of your invention is clear, you may find that the provisional was a waste of time and money because it did not disclose the correct claims.
7. Plan for the long term– Even if your start-up venture fails, the venture’s IP is still a valuable asset. Investing in IP creates a long lasting asset that survives most intangible assets in case of bankruptcy. Today’s IP marketplace is very dynamic, with patents, trademarks and other types of IP being transacted regularly between companies, through brokers, in auctions, and in various other venues. Think carefully about your IP filing strategy with that long term asset in mind.
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FVG just sponsored the Licensing Executives Society (LES), Silicon Valley Chapter’s 10th Anniversary event, held at Hewlett Packard in Palo Alto. The day-long event presented a host of speakers on topics ranging from the new direction of the USPTO to the challenges facing start ups in the current funding environment, and was well attended by over 100 participants.
Below is a list of 10 lessons that we have learned at the event – one lesson for every year that the chapter has been around…
1. The USPTO is working hard on reconnecting with its stakeholders. It was interesting to get two perspectives on the state of affairs at the USPTO under the new leadership of David Kappos. One was by Todd Dickinson, the former head of the USPTO under the Clinton administration, who gave a comprehensive overview of the last decade in his keynote address. Andrew Hirshfeld, USPTO Chief of Staff (standing in for David Kappos who unable to attend at the last minute) gave a hands-on view of the various initiatives taken by the office to improve contact with stakeholders, including: increasing examiners’ productivity, addressing backlog and churn problems, and so on.
2. Public Debate over IP Reformis heating up. After the release of two studies on IP, one by the National Academy of Sciences and other by the FTC, there is growing debate over how to bring laws up to date and how to be more forward thinking. Todd Dickinson has participated in sessions “inside the beltway” and seen how different groups have presented their views, including congress, industry, lobbyists and public interest organizations, such as the software alliance. Needless to say, there is a lot of work ahead.
3. Accounting for intangible assets is completely misunderstood. From a sample of audience questions and private conversations, we conclude that there is a high degree of ignorance when it comes to understanding accounting for intangibles. …we plan to address this topic in one of our future blogs, especially since the US GAAP accounting rules for intangibles are about to change with the introduction of IFRS (international accounting standards) over the next decade.
4. IP valuation is still a vague concept for many people. Todd Dickinson characterized IP Valuation in his keynote address as “notoriously difficult”. I have spoken to over 30 people throughout the conference (mostly attorneys), and the 2nd question I consistently got (after asking what FVG does…) is – how do you value patents? This is another topic that will be addressed in our future blogs
5. Engineers are not trained to succeed as entrepreneurs. Several panel discussants voiced their dissatisfaction with the curriculum at US universities and how it stifles innovation. While we disagree with the generalization inherent in such statement, it seems like it might have some merit when it comes to engineers. As summarized by one of the panelists, engineering graduates usually lack the three most important requirements for starting a company: (1) Understanding a business model; (2) Evangelism; (3) Teamwork. That explains why so many engineers end up in business school to get an MBA…
6. University role to grow in entrepreneurship & innovation. In the panel “The Crystal Ball: A Perspective of the Future”, Katherine Ku, Director of the Office of Technology Transfer at Stanford University gave her overview of University – Industry relations. She emphasized that when it came to education, there is great demand for classes on entrepreneurship from both students and faculty. She sees the role of research growing at universities as funding for R&D shrinks in the private sector (especially pharma) and there being a healthy mix of “open innovation” & “proprietary research”. As a result, she predicts the growth of licensing activity at universities
7. The “Value” of IP has grown immeasurably over the last decade. Todd Dickinson, in his overview of the last ten years, spoke about how the “value” of IP has grown immeasurably - its uses have expanded and its role in acquisition deals has grown. He noted the rise of trolls and the role of patent auctions, such as Ocean Tomo.
8. IP is still not driving VC funding. When asked about the role of IP portfolios in securing start-up funding, a distinguished panel of entrepreneurs and investors unanimously recommended start ups to “get a customer first, and the patents will follow…” We thought that this was a very eye opening comment!
9. Consensus is in; there will be a Venture Capital shakeout. As panelists discussed the role of startups, naturally discussion veered to funding and the question arose whether “VC’s were a dying breed”. All five panelists agreed that there will be a shakeout in the upcoming years. Of the 800 plus VCs, perhaps a half would disappear. The strong, well established firms will still be around, investing, but there is change ahead.
10. You must have a great team and a pretty darn good product to have a successful startup. When you have a panel full of successful entrepreneurs and funders, including Bill Reichert, Managing Director, Garage Technology Ventures, you know someone is going to ask “How do I get funding?” Well the answer is unchanged. You need an a team of talented entrepreneurs and a pretty darn good product. The two are linked, since if your market changes or your product needs to change, you need a nimble, smart team to roll with market conditions.
Foresight Valuation Group, LLC (FVG), based in Palo Alto, California, is a boutique intellectual property (IP) consulting firm that provides a full suite of analytical services related to the management and commercialization of intangible assets.
We help our clients understand the value of their intellectual property, by thinking strategically about how to manage and extract value from their intangible assets.
