Far too many of my angel colleagues are fixated on patents as the source of sustainable competitive advantage. While these are often the source of competitive barriers they are by no means the only effective method for generating high growth. In fact, there are many situations where the patent itself provides little growth momentum.

We need to see a potential investment in a business in more holistic terms and especially we need to focus on the way in which the business interacts in the marketplace with its customers and competitors. If you want to drive high growth then you first need a combination of a well defined large niche market, a robust channel to market and a product or service which satisfies a compelling need. The next critical component is to have something which give you a strong competitive advantage. It is this combination which drives high growth. A patent alone, which provides some level of competitive advantage is somewhat meaningless without the other attributes.

Competitive advantage is anything that gives you an advantage against others attempting to satisfy the same need. But there are many points along the supply chain where you can gain such an advantage. You can control the point of purchase by ensuring yours is the only product offered. You might have an exclusive right to a geographical region for the only product which satisfies the need. If there is a unique component, ingredient or area of knowledge required to produce the solution, you might own or control the supply. Your objective is to own the customer solution and there are many ways in which that can be achieved of which patents are only one of many possibilities.

There are of course a number of more obvious barriers to entry including brands, copyright, licenses and patents. But being able to take advantage of significant economies of scale or learning curve effects might give you a cost advantage.

Patents are useful because they are an obvious source of competitive protection, but in themselves really don’t drive growth potential. If we focus too much on the patent element, we are in danger of missing the real growth drivers which are resident in the problem being solved and access to willing and easily addressable customers.

Given that most of the Angel exits are via a trade sale, our focus on competitive advantage and growth potential should be from the viewpoint of the buyer not the venture itself. It is the ability of the buyer to take advantage of the competitive advantage position which results in the higher exit values. This is especially relevant where the venture itself is not able to fully exploit the advantage. For example, a weak open market competitive position may change dramatically for an acquirer which can position the acquired product alongside a strong complementary product or inside a product portfolio. Similarly, a product which can be sold directly into an existing customer base may be very attractive to an acquirer even if it not the best stand alone product in the market.

In evaluating a venture, especially for a strategic value exit, we need to take a broad view of competitive advantage and look at the revenue possibilities of the acquisition from the buyer’s perspective given the buyer’s ability to exploit the underlying potential. In this regard, the ability of the buyer to rapidly deploy and scale the acquired asset or capability is of much more importance than the strength of any underlying patents.

Interesting post on Jason Calcanis’ blog this week (also picked up by Ben Kuo and SocalTECH) with further thoughts on Angel groups charging startup companies to pitch. All of his posts on the topic are not only good reading, but accurately describe what goes on within some Angel groups (e.g., These pay-for-play scams remind me of the “modeling agencies” that charge people for representation, acting lessons and to have their headshots done.). Although I’ve written on this topic and share Jason’s ire,  I’m not yet at the point of ‘jihad’ (crusade maybe) or calling out particular Angel groups. Other than what Jason and I have already mentioned, the only other advice I can give is beware of for-profit angel groups based on a franchise model–as those are typically the ones that charge companies. If they don’t make money the old fashioned way and exclusively through investment returns, then they aren’t worth talking to.

As I was writing another installment on what the Pasadena Angels look for in company pitches, I came across a good post from Steve Blank about sufficiently understanding your customer and target markets and decided to use that instead. Steve’s observations are pretty representative of what we regularly see when companies pitch.

Lastly, Jeff Sheldon, a longtime member of the Pasadena Angels and well respected IP attorney and litigator put together a good reference on Patenting Inventions.

Have a great weekend. Patenting Inventions

Patents, trade secrets, know-how, copyrights, and trademarks can be crucial to your business. Managing this intellectual property can make the difference between fortune and failure. This brochure presents ten recommendations for protecting what belongs to you. In the spirit of David Letterman, here’s my Top 10 List.

#1

Obtain written assignments of all inventions and copyrights from employees and third-party vendors including consultants, advertising agencies, and photographers, and have these assignments reviewed by your attorney.

#2

When adopting anything new, such as technology, a trademark, or software, contact your attorney about conducting a right-to-use study to avoid infringement.

#3

Assume that any disclosure to a third party, including a customer, a vendor, a consultant, or a competitor, will not remain confidential. Confidentiality agreements offer some degree of protection, but they are not guarantees against improper disclosure.

#4

Discussing an idea in the presence of others, such as actual/prospective customers, vendors, or consultants, can result in a claim of co-ownership of your idea. Avoid this situation by listening to the challenge presented, and then by conducting your problem-solving in private.

#5

When negotiating an agreement, avoid terms that may limit your ability to compete. Terms that require careful scrutiny include:

- An agreement stating that ownership of an invention does not belong to you
- A software or website development agreement that does not explicitly provide for your ownership of the software
- Prohibitions against reverse engineering by you
- Confidentiality clauses
- Unreasonable restrictions on the use of deliverables
- Continuing obligations to use the vendor, e.g., for software modifications or hosting
- Limitations on the other party’s indemnification obligations, e.g., no indemnification for infringement of patents, copyrights, or trade secrets

#6

Protect your inventions by documenting all improvements and promptly disclosing potentially patentable inventions to your patent attorney. Do not offer to sell the improvements and do not publicly disclose them until your attorney has considered the feasibility of patent and trade secret protection.

#7

Protect your copyrights by using a proper notice on all copyrightable works, including software, advertisements, brochures, and artwork. Check with your attorney to determine if the copyrights should be registered.

#8

Before adopting a trademark or service mark, have a search conducted to make certain that the mark, and the corresponding domain name, are available. If the mark is available, register the mark and use it properly. Do not allow third parties to use your mark without a written license agreement.

#9

If you have a claim against another party, proceed promptly. If you delay, you could lose your rights.

#10

Contact your attorney promptly if you receive a cease and desist letter. Your attorney may lessen the possibility of a lawsuit being filed against you, and failure to consult with your attorney may expose you to increased damages for willful infringement. If actually sued, contact your attorney promptly. Failure to timely respond to a lawsuit can have serious, and costly, ramifications.

Intellectual property litigation can be the death knell of a startup.  Not only is the litigation costly, it distracts the company founders from operating and growing the business, and  it makes it a lot it harder (if not impossible) to raise capital.  If the litigation turns out really badly, an injunction can be issued that shuts down the business and there can be a substantial damages.

It’s impossible to completely protect a new business against an intellectual property lawsuit.  However certain steps can be taken, including:

1. Have trademark clearance searches conducted on all trademarks adopted, the name of the business, and the domain name used.

2. Have a right to use study conducted for any new products and methods.

3. Confirm ownership of all intellectual property of the business.

Even if these steps are taken, litigation can still result.  The diagram below can be helpful and gives you a rough overview of what happens if litigation occurs in a Federal Court. Hopefully this graphic also provides good incentive for avoiding it. I also have a good summary that compares patents, trademarks, copyrights and trade secrets, Send me an email at info@pasadenaangels.com if you’d like a copy.

As promised in my last post, here’s a brief checklist and some rules of thumb to determine if a patent is right for your business. Before you go through the time and expense of filing a patent application, go through the following checklist and honestly answer the questions.

Question 1:  Is the invention (product or process) different in any way from information that has been available to the public for more than a year (e.g., described in a printed publication, offered for sale, used to produce a product)?

Significance:  “The public” means anyone who does not have a confidential relationship with you.  The information can be in any form, for example a product, a written publication (including for example, a U.S. or foreign patent, a scientific or trade journal, or a trade brochure), a publication on the Internet, or a display at a trade show.  A sale, or offer for sale, of the new product, or of a product of the new process is also “information”.

Question 2:  Does the invention provide us a competitive advantage?

Can it do something not done before?

Can it do it cheaper?

Can it do it better?

Significance:  If the answer is no, it’s not worth filing since a competitor can practice an equally good option.

Question 3:  How large is the potential market?

Significance:  If the market is less than $50,000 per year, then it is possible no one will compete.

Question 4:  How long will the market exist?

Significance:  If the market will not exist two years from now, patent protection may not make sense since it generally takes at least two years to get a patent.

Question 5:  How likely is it that there will be competitors in the market?

Significance:  If there will be no competitors, there is no reason to file.

Question  6:  Can I contractually prevent all customers from doing it themselves or purchasing from a competitor?

Significance:  If the answer is yes, there may be no reason to file.

Question 7:  Is this an invention that can be licensed to third parties?

Significance:  If the answer is yes, then most likely file since royalty rates are generally higher for a patented invention.

Question 8:  Can I protect this as a trade secret?

Would it take considerable effort to reverse engineer the invention?
Will disclosure to the customers be unnecessary for them to use the invention?
Will disclosure to the government be necessary (which may destroy trade secret protection)?
Does anyone already know the invention such as consultants or university researchers (which may destroy trade secret protection)?
Can I protect the invention from ex-associates and partners and ex-spouses?

Significance:  If the answer is yes, trade secret protection may be the way to go.  An option is to file a patent application, and reserve the trade secret vs. patent decision for later.

Question  9:  Will filing a patent application and satisfying the “best mode” requirement require disclosure of valuable trade secrets

Significance:  A “yes” answer may mean no filing.

Question  10:  Can I protect this with a copyright or trademark or trade dress rights?

Significance:  If the answer is yes, there may be a cheaper and easier way to obtain protection than through a patent.  Consult an attorney regarding these options.

Question  11:   Is this invention unobvious compared to what came before it?

How different is the invention from the prior art?
How long have people been trying to solve the problem?
How much effort and time did it take to solve the problem?

Significance:  To actually receive a patent, it is necessary that the invention be unobvious.  However, I recommend that a patent application be filed for any commercial product that is “different”, even if “obviousness” is problematic.  The “patent pending” notation generally slows down competitors enough to more than justify the cost of a patent application.

Question  12:  Has anyone who does not have to assign his or her rights to me contributed to the invention?

Significance:  If third parties will have the right to practice the patented invention, it may not be worth filing.

Question 13:  Can I obtain an enforceable patent? Can I detect if someone is infringing?

Significance:  If the patent is not enforceable, there may be no reason to file.  For example, if the invention is a new process for making a product, but the product is indistinguishable from products made by the old process, it may not be possible to detect infringement.

There are multiple types of applications for patent protection that are available.  Two of the more common are Utility (Provisional and Regular) and Design.  The difference between design patents and utility patents is that design patents only protect the non-functional appearance of a product, while utility patents cover how your invention works.  For some products both patent types may be available.  The main advantage of design patents is they are relatively inexpensive to obtain.  The main disadvantage of design patents is the scope of protection is generally narrow – they only cover the appearance of the product shown in the drawings, and not the product’s function.

If a utility patent is appropriate for your invention, then you need to decide whether to file a regular application or a provisional application. Because of their lower initial cost, provisional patents can be more attractive to start ups. Some of the more significant pros and cons of filing a provisional patent include:

ADVANTAGES OF A PROVISIONAL APPLICATION

1. Slightly Lower Initial Cost. The initial cost of preparing and filing a provisional patent application generally is lower than that of preparing and filing an actual patent application. This is because of the lower PTO filing fees and the more limited requirements of a provisional application.

2.  Delay of Examination Costs. Since a provisional application is not examined by the PTO, examination costs are delayed during the pendency of the provisional application.

3.  Shift of Patent Term. The end of the patent term can be shifted one year into the future, an important advantage for inventions, such as drugs, whose commercial value may be at the end of the patent term.

DISADVANTAGES OF A PROVISIONAL APPLICATION

1.  Delay in Issuance of a Patent. A provisional application cannot result in a patent— an actual application will eventually have to be filed.  Accordingly, the initial filing of a provisional application, instead of the immediate filing of a regular application, necessarily delays the issuance of any resulting patent.

2.  Higher Total Cost. The overall cost of initially filing a provisional application and then following up with the filing of an actual application will necessarily be more than the immediate filing of a regular application.

3.  Accelerated Foreign Filing Costs. Filing a provisional patent application starts the one-year period within which foreign patent protection must be applied for.

In next week’s post I’ll provide an entrepreneur’s checklist for determining if a patent application is required (or appropriate for your product or invention.

A patent may not be the appropriate type of protection to seek for your invention for multiple reasons. First, not everything invented qualifies as patentable subject matter– thus a patent may not even be available. Second, there are other types of protection available that may better suit your business goals or may be less costly than a patent.

One alternative type of protection to consider is copyright protection. Copyright protection is available for original works of art, software code, books, fabric patterns and the like. Copyright protection is automatic, registration is inexpensive, and copyright protection lasts much, much longer than patent protection. So if your invention is something like a new doll with an original appearance, a copyright may be a viable alternative. Similarly, if your invention is implemented with software, a copyright on the software code may provide adequate protection. Although the copyright in software does not protect the method implemented by the code, no one can copy the protected code.

Another type of protection that’s available is trade secret protection. Maybe you can keep your invention secret. How many decades has the formula for Coca Cola been maintained as a trade secret? Trade secret protection is only useful if you can maintain your invention secret. If your product can be reverse engineered once it’s on the market, trade secret protection is not effective since there’s no “secret.”

Don’t consider using a trademark for protecting an invention. All that a trademark protects is the name or logo under which you market your product. It provides no protection for how the product works or appears. Thus any trademark you have will keep others from selling your product under the same name; it won’t keep others from selling the same product under a different name.

Another type of protection to consider is trade dress protection. If the appearance of non-functional features of your product becomes recognized by consumers as distinctive, i.e. they come only from a single source, trade dress protection is available. The problem with this type of protection is that it takes many years in the marketplace and high sales volume to accomplish. It doesn’t keep someone from copying your product right after it is introduced to the marketplace. Also, it doesn’t protect how your product works; it only protects what it looks like.

Also consider whether multiple types of protection can be used. Maybe you can use a combination of patent protection, copyright protection, and trade secret protection. There may be aspects of your invention that are suitable for all types of protection. As an example, a computer implemented invention might have copyrightable code, copyrightable screen shots, and the invention as a whole may also be patentable.

Not all inventions are worth patenting, and there are alternative types of protection for inventions that may make more sense than a patent.

When deciding whether to patent your invention, don’t become the victim of a common misconception - YOU DO NOT NEED A PATENT TO MARKET YOUR INVENTION. That’s because a patent only gives the owner of the patent the right to keep others from practicing your invention. It gives you absolutely no rights to bring your invention to the marketplace (although it can make it much easier to obtain funding). For example, if you developed a new method of making bourbon during Prohibition, you could patent it, but you could not market the bourbon. Similarly, patenting a new drug for curing cancer gives you no right to market the drug in the United States – FDA approval is required.

The first issue to address before beginning the patent process is whether your invention can be sold at a profit. Just because something is new or better doesn’t mean it can be sold at a profit. If your invention will not foster a viable business, then a patent is unnecessary – chances are high that no one will copy it anyway.

So before starting a patent application you should answer the basic business questions:

- What price will the ultimate customer pay for the invention?
- What will it cost to sell the invention, including raw materials, labor, packaging, marketing, overhead, shipping, etc?
- What will be the markup of those in the distribution chain?
- What sales volume is expected?
- Is there enough left over for a profit at that volume?

A common mistake made by inventors to determine the value of their invention is asking friends and relatives. This method usually does not work because friends and relatives don’t want to hurt your feelings, so they are not always the source of an honest appraisal. A preferred method is to ask, “How many will you order at a price of $____?” To that question you might get an honest answer, particularly if you let the person know you are asking now so that when the product is available on the marketplace, you will come back with an order book in hand.

In my next post I’ll talk more about the specific alternatives to patent protection.