Intellectual property still commands respect from angel investors. Although, it can be intangible, it still has value in the eyes of the investor. The reality is a patent is only as good as the company’s ability to defend it. But, it seems to create an air of permanence and accomplishment when a company can create a patent position. This is often very difficult in software and almost impossible in the app world. Where we see most IP being generated is in product-based companies. All patents are not created equal as the saying goes. And, the true value of a patent is rarely quantifiable on the front-end of an investment, at lease as far as startups are concerned. The best ones are a mixture of science, art, and trade secrets. If you are concerned about jeopardizing your ability to file a patent, then file a provisional patent. You can do so yourself for $125. They are not worth much, if anything, in the eyes of an investor. But, they do allow you to put a stake in the ground for one year and give you the ability to talk about your IP to investors.
It is fascinating to start a discussion with an entrepreneur regarding IP. The smart ones know how to talk about the IP, how it benefits the company, and how it creates acquirer value to facilitate an exit of the company. For every one of these, we see at least one IP narcissist.
You don’t have to talk about the proprietary bits and bytes of your IP position to convey the value it provides and the features and attributes that create your competitive advantage. We all understand the need to protect proprietary information, but there are some trends that entrepreneurs need to be aware of:
- Companies that are too much in love with their own IP won’t discuss their product with their customers, advisers, etc. By failing to talk to customers at the earliest stages of the product development cycle, they create a product no one wants. We see this all the time, and it is a disaster. A company can only take product development to 80% completion in a vacuum. The last 20% must be customer driven or no customer will buy it. This is the “flying under the RADAR” trap. When I hear companies say this, I politely walk away. I have never seen one of these companies come out from under the “RADAR” yet.
- If you truly have a unique, novel, disruptive technology, you will have to shove it down the throats of your clients. No one is out there looking to repeat your expensive and difficult product development just to compete with you…especially if you have filed a patent on the IP. This is the “tell you, but have to kill you trap.” Again, it leads to introspectively driven product development based on what you believe the client wants, not in depth knowledge of their actual requirements. My experience is these two things can be radically different, and I am not willing to take the risk you are wrong.
- Once you have filed your patents, you should be talking to anyone that will listen to you. The IP is either going to get issued or not. There is not much you can do to affect that positively or negatively. Unless you have paid for nonpublication of your patent application, you should prepare a nonproprietary summary of your IP for investors to review freely without a Nondisclousre Agreement (NDA). The idea that disclosure of novel information subsequent to filing a patent will invalidate it is misguided. That is not the way the USPTO operates and anyone having gone through this process knows it. I have 7 patents filed in my name, three have issued and the rest are still pending. I will be happy to discuss any of them.
- What you are essentially saying is “we need to protect our IP.” What an investor hears is “I am naïve enough to think someone will invest in this company without thoroughly researching my market advantage created by the IP.” Talking to customers and advisers and crafting your marketing and sales plans around this feedback is the single most important thing you can do to both secure investment and customers. Failing to do so is a disaster-in-the-making and we have seen it too many times to repeat old mistakes.
Professional investors don’t sign NDA’s except under exceptional circumstances. We are in the business of picking the winners. We must be able to go out into the world and talk to experts in your market to validate your competitive advantage(s). We can’t create a liability for ourselves by doing our job. And, we simply can’t take your word for it. The alternative is for you to pay for a true, independent IP review and get a statement from an authoritative IP attorney that the IP is truly novel and you have freedom to operate in your space free from infringement. BTW, no lawyer in his right mind will issue this letter without a substantial amount of money ($5000 – $50,000).
So, my advice to you is simple. Find a way to discuss your technology in a nonproprietary way or don’t bother asking for capital. It won’t be successful if you can’t talk about the value the IP creates and the resulting competitive advantages. In other words, talk about the resulting benefits to the client, not the technology that delivers these benefits if you must protect details of your IP.
I have been through this personally several times. I have worked with some of the best and brightest engineers in the world. I have licensed their technology, taken it to market, and have raised capital under strict nondisclosure agreements with government agencies. I was able to raise $7.5M for that company and I never violated my nondisclosure agreements. It can be done and done well. The private equity market is very competitive. You are competing with a herd of other ventures with great potential that are willing to share knowledge and assist in diligence. Who do you think will get the investment? Complexity and avoidance of these issues makes you less competitive for precious capital resources. If we can’t reasonably evaluate your IP, we simply move onto the next company. It is a target rich environment for us.
Please take this as it is intended, to help you capture the capital you are seeking and to ultimately reach your true potential.
Copyright Eric L. Dobson, 2016