3000 to 1

An interesting article titled “3000 Raw Ideas = 1 Commercial Success!” appeared in the May-June 1997 issue of the Industrial Research Institute’s Research-Technology Management journal. Written by former Dow executive Greg Stevens and Professor James Burley, the article put together evidence from institutional patenting activities, industrial product developers, venture capitalists, inventor groups, and other sources demonstrating that for every 3000 raw ideas, just three to five percent got written into patent applications—about 100-150 applications. Of that number, 112 could be expected to issue as US patents. Nine of those issued patents would eventually be considered to have commercial value; only four would become major development efforts involving pilot plant R&D, product definition, customer trials, and test marketing. A paltry 1.7 (statistically) received a commercial launch with a full-scale plant, sales force trained, and a market roll-out achieved. Only one of 3000 new product ideas is eventually called a commercial success.

The economic value of most patents is not great. Patent applications are costly to file; issued patents are expensive to maintain and defend. And value drops precipitously once an issued patent gets half-way to its expiration date. I’ve known entrepreneurs to spend tens of thousands of dollars creating an intellectual property estate, then to discover that investors are not interested in reimbursing “sunk costs” such as patenting. Research institutions also may attempt to recover patenting expenses as part of a technology licensing deal. “Nuts to that!” licensees should say. The economic value of any patent is only in the size of the patent‘s projected market. If by using commercially available patent valuation tools, you find that an issued patent with—say, 15 years’—life remaining protects the dominant portion of a $100+ million market, then such a patent may be valuable. I say “may be” because there are other considerations: If involved in a licensing deal for the patent, does the licensor grant a broad enough “field of use” to allow the licensee to build a viable business? Or is the patent grant sliced into such narrow fields of use that many licensees end up competing in small market segments, creating what some call a “Tragedy of the Commons” problem? Or if a patent is based on “composition of matter” claims, has another assignee been granted “method of use” claims that create a “Mexican standoff” wherein neither side can manufacture and sell a product based on the patented invention?    Here I’m describing issued patents. Economic value for patent applications or provisional patent applications is much less, as it’s impossible to know what claims may be granted if a patent is eventually issued.

Should securing patent protection be important to an entrepreneur? Is it important to investors seeking to manage risk? The answer to both questions is “yes,” so long as a patent contributes to a business’ having a proprietary technology position, and so long as the patent has demonstrable economic value. A patent is not the only way to achieve protection—intellectual property law also covers trade secrets, which are sometimes more valuable than patents (particularly when reverse engineering is difficult-to-impossible). Either way, having unique, proprietary, valuable technology can help distinguish true entrepreneurial “growth startups” from companies that will turn out to be “lifestyle” businesses.

(Cross-posted from http://www.theangelpreneur.net )

Copyright Scott Ewing, 2016

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