“The gap between book value and market value of companies today is huge, and some people attribute it entirely to intellectual property.”
On day two of the IPWatchdog LIVE conference in Dallas, Texas earlier this month, a panel of experts advising startups and passionate about licensing business models discussed the challenges and opportunities presented by intellectual property.
Panelists started the discussion by describing their experiences with the biggest mistakes startups made with patents.
Ian McClure, vice president for research, innovation and economic impact at the University of Kentucky and AUTM president, identified two common mistakes made by the roughly 1,200 startups in the U.S. that spin off university research each year.
From FTO failure to “all wrong applications”
First, the freedom to search until it’s too late because they’re expensive. Instead, only patentability searches. Can the original discovery be patented? Usually, yes. However, almost all of these early-stage companies will have to go through an extensive “de-risking process” with “many, many, many” pivots and many improvements – which will require filing more patent applications, McClure Explained. Another mistake early stage deep tech startups make is not including anyone on their board who understands IP strategy.
Inventor and author Stephen Key, one of the co-founders of inventRight, explained that founders make their own inventions by publicly disclosing their inventions after a one-year grace period at the U.S. Patent and Trademark Office (USPTO). Problems. Then, during patent prosecution, their own actions were used as prior art against them. The second big mistake he sees startups make is not searching for existing technology enough, which leaves them clueless in terms of roadmaps. The third is that their patent claims are inconsistent with their business strategy, which makes their patents essentially worthless.
Efrat Kasznik, president of the Foresight Valuation Group and a lecturer at the Stanford Graduate School of Business for more than 10 years, agrees with Key and McClure that startups need to better understand how to use intellectual property. Startups are being misled in two extreme ways, she said. Either the founders procrastinate and don’t file in time, meaning they don’t have enough intellectual property to support their business, or they have too many patents. For example, she describes a “preanything” company with 300 patents (the advice they get from patent advisors is to file in every country).
“I’ve had clients come to us and they have 75 patents, 72 of which are design patents and only two or three utility patents,” she said. “You see a lot. Startups think patents are good. They take advice from outside lawyers and spend too much money on the wrong documents.”
She completely agrees with McClure: Startups do need someone who aligns with their interests to guide their documents, not the interests of outside law firms.
Licensing and Customer Discovery
The group then began discussing how licensing business models can facilitate the commercialization of intellectual property, which they agreed is often overlooked by startups.
The key describes strategies to increase the value of your patents, such as understanding your points of differentiation from a market perspective and the importance of including manufacturing know-how. Adding variants and workarounds expands the scope of the claims, which can lead to uncertainty about what exactly they cover, which is useful from a negotiating point of view.
The general trend for university startups, McClure said, is that more and more startups “will be tech companies” — meaning they’re “completely dependent” on intellectual property to get off the ground and eventually be acquired or licensed.
One way to make university startup patents more valuable is to do customer discovery earlier, before filing a provisional patent application, he suggests. Customer discovery is the process of determining if a potential customer is interested in the technology and how far it needs to be developed for them to find it attractive.
“In many cases, the customer discovery process will completely change the direction we’re going in terms of de-risking processes or technologies,” McClure said.
But, of course, there are barriers to prioritizing customer discovery early on, because university researchers don’t like being told what to do. McClure describes an evolution that is taking place. More and more scholars want to do “inspirational research”.
Working outside of patents
Kasznik noted that more unicorns today are less reliant on patent assets than when she originally researched the issue. Do Software Vendors Need Patents? That’s a question that many of the companies she works with are asking. The reality is: you can raise a lot of money in the software industry these days with few or no patents.
In terms of what startups need to license their technology, intellectual property is part of the equation, Key said. Other assets—including having the right team and creating market demand—are essential. He tells the story of how he struck a licensing agreement with North America’s largest privately held packaging company for Fishbone, a sustainable innovation that replaces plastic rings, before any patents were issued.
“I can’t stress enough the importance of market demand in order to get people to move mountains to invest,” Key said. “At the end of the day, [licensing] It’s really about good business, which requires removing risk. “
Panelists acknowledged that there is a significant difference between using intellectual property to facilitate licensing agreements to enter the market and seeking a license to enforce a patent after an invention has been adopted across the industry. A panel on the first day of the conference called “The Future of Monetization” explored the latter phenomenon.
IP Valuation Gap
McClure then relayed that he published in Berkeley Business Law Journal On whether tech companies attribute value to their non-core intellectual property assets when they merge or are acquired.In short, they are not – this violates Revlon Duties. Because startups pivot so frequently, they usually have at least some non-core IP assets that can be monetized, but not.
This prompted Kasznik to explain that from an accounting point of view, intangible assets are not included on a company’s balance sheet, which many people don’t know. When an M&A deal is in place, it is indeed the first disclosure of the value of a company’s intangible assets. The gap between a company’s book value and market value today is huge, and some attribute it entirely to intellectual property.
The group concludes with strategies for mitigating the risk of new technologies, including the benefit of selling an idea first and using angel investors to fund university startup product development initiatives. Instead of trying to use patents to capture value, universities are starting to generate more positive financial benefits for startups spun off from their research. That’s where the real value lies, McClure said — not early patents that weren’t licensed in the first place.
He stressed the need for IP professionals to contribute their IP expertise to the Technology Transfer Office, an issue that was addressed by the CHIPS and Science Act signed into law on August 9.