Investing in high-tech start-ups often implies investing in patents, but if the patent should fail, the investment is most likely lost as well. It will be a natural thing for most investment managers to require proof of the patent viability and coverage.
Quite often investment managers put a pressure on the inventors raising questions like:
- How can we know that the patent will be granted / what is the likelihood for obtaining a patent grant?
- How can we know that we are not infringing on somebody else’s patent?
- Are we sure that the patent will prevent others from making a similar product – and how well does the patent cover the technology?
In order to answer these questions, a lot of activities may be started, but as valid as these questions are, they are often impossible to answer. Of course something can be said about the likelihood of success, but it’s often difficult to really quantify this. It’s not like a car moving through traffic, where the likelihood of an accident depends on things like the amount of traffic, the weather and your own speed. It’s more like inventing a new type of vehicle and trying to determine the likelihood of an accident without knowing anything about your vehicles performance in traffic. So, in this case, it’s most certain that you will have to make improvements and repairs – or that it may even fail completely.
So why would any one even consider investing in new technologies? The answer is probably the same as to why anyone would bet money on a horse – because occasionally you get lucky. Striking luck with a high-tech company may repay the original investment more than 100-times over, thus paying for all the failed investments as well. It’s a high-risk game for those who can afford to lose money until they get lucky.
Some investors, however, are not aware that this is a game of high risk and with no guarantees. They tend to believe that if people are smart enough, they can prevent the accident. In our analogy, the accident would be that the patent is not considered novel or it cannot prevent others from working around the patent to develop a similar product. Sure, you can destroy the protection of a perfectly good invention by making a terrible patent application, but a good patent application is no guarantee for a good protection. Here are some reasons why:
- When a technology becomes successful, it also becomes more exposed. Companies that are already in the market with competing products will try to defend their marketshare regardless of whether they only have a vague chance of winning. Once you get into a patent court, anything can happen. It will be argument against argument, and everything will be twisted and distorted. Even the placement of a comma can determine a case's outcome.
- Even though patents are public, it is not easy to get a clear picture of the novelty. A patent for an entirely different product, may contain claims that covers a more generic implementation, thus potentially destroying the novelty of the patent in question. It’s impossible to find all those underlying patents, since you would then have to read through millions and millions of patents.
- Simultaneous invention: Even though it may sound improbable, inventions are routinely made by two different people within the same timeframe. Hence, the time of filing may be important, but it may take some time, maybe even years, for the patent content to become fully published.
So, how can investors deal with the risk? Typically, investors seek to take actions designed to minimize what is left to chance: Here are some ideas of what to do and what not to do:
- Some insurance companies sell infringement-policies to cover the cost of defending a patent or for counteracting infringements. However, the cost of such insurance is probably not worth the expenditure. Investors should, however, always be prepared to defend a patent, because winning a case in court may prevent others from attempting to challenge the same patent again.
- Make more novelty-searches: It is of course possible to increase the likelihood that the patent is novel by searching through literature, but it’s never possible to say that it is 90 or 99 percent certain that it will not encounter any counterclaims, because there are a lot of coincidences related to this probability. The more successful a product becomes, the more exposed the patent will be, which again increases the likelihood of counterclaims. Instead of conducting a lot of searches, it’s better to make a few smart searches - identify the novelty in places where it’s more likely to be found.
- File more patents: A lot of big companies are making a fence around their technologies by filing lots of related patents. This is not only increasing the likelihood that some patents will provide the required coverage, but it also has a preventive effect. The more patents filed, the less likely it is that somebody will try to challenge your position. More patents, however, lead to higher costs for maintaining patents.
- Share the risk: The concept of sharing IP is controversial to some investors, but it shouldn’t be. If you can make partnerships for developing the technology that operates in a different market area, you will be able to share the risk and benefit from co-inventions. This will both decrease the cost of development and increase the protection coverage of new patent applications.
Investing in high-tech start-ups and patents is not like betting on a horse – it’s not possible to look back on previous wins to predict the likelihood of future wins. But, on the other hand, a position can be strengthened by increased investments in development, and by sharing the risk through partnerships. Patents can be important assets when such partnerships are made.