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1 posts from April 2005

April 08, 2005

Patents Don't Matter

"And the best part of all," says the entrepreneur with a big smile, "is that our unique process is patent-pending, which will provide us with tremendous upside and great defensability".

Right.

The sad truth is that when it comes to the VC process, patents don't really matter.  There is simply so much more to the company-building process - management team, market dynamics, competition, just to name a few.  Maybe, if all else fails, you can recoup some of the investment by selling off your IP.  But patents are so tertiary to the VC decision process, that it's really a bit silly to spend more than a nanosecond on them when pitching VCs.

How could this be, earnest entrepreneurs will cry!  Aren't patents at the core of creating value through innovation and invention?  First of all, having a patent pending is like kissing your cousin - it simply doesn't count.  Anyone can file.  Getting a patent issued is what really matters.  But even when you have an issued patent, 95% of the time it is too narrow to be relevant as a blocker, and so typically a competitor can find a way to design around you or have other patents in the same field that will cause a standstill to occur.  That other 5% of the time, a start-up will simply not have the legal resources to properly prosecute a patent strategy that could yield the investors any return.

Let me give you a case study I've lived through.  At Open Market, the founding technical team came up with incredibly fundamental inventions in 1993-94 that were filed and then granted in the form of three seemingly powerful patents in 1998.  These patents essentially covered secure credit card transactions over the Internet and the use of shopping carts.  On the day of our announcement, we made A-1 of the Wall Street Journal and and our stock jumped 2x that day (we did our IPO in 1996).  But after 3 years and a fairly focused effort, the company failed to extract any tangible value from those patents and the stock went back to being valued on more important metrics, such as revenue, growth, etc.  When Open Market was acquired in 2001 and its acquirer later went bankrupt, the patents were purchased out of bankrupcy court by an entity that then sued Amazon.com (see article).  So far, nothing has come of it.  Thus, despite nearly 12 years since these fundamental e-commerce inventions were made and filed, investors have nothing to show for it.

Call me jaded.  But ask your other VC friends and they'll most likely agree.  Patents just don't matter.