Patent AMA

How much significance do you attribute to the existence of filed patent applications when assessing a potential new company investment? Do you evaluate the presence and/or potential for protectable IP (patents/designs/trademarks etc) as a part of the decision whether to invest or not?

The short answer is IP is important to our investment decisions, the long answer is it's complicated.Deep Tech startups often take 5-6 years to develop their product and require significant investment. Investors need confidence that their patience will be rewarded with strong returns, to achieve this, the company needs a durable competitive advantage and patents are often seen as validation that the invention can be protected. In some cases trade secrets, trademarks, or copyrights might be more appropriate means of protection, though generally not considered equal.

The short answer is IP is important to our investment decisions, the long answer is it's complicated.Deep Tech startups often take 5-6 years to develop their product and require significant investment. Investors need confidence that their patience will be rewarded with strong returns, to achieve this, the company needs a durable competitive advantage and patents are often seen as validation that the invention can be protected. In some cases trade secrets, trademarks, or copyrights might be more appropriate means of protection, though generally not considered equal.

This drawing is from my favorite patent. It proves that you can patent almost anything but that doesn't mean you should.

By way of contrast, this drawing is from the very valuable 069 CSIRO WiFi patent and resulted in $400m+ of WiFi royalties being paid to CSIRO, some of which helped fund Main Sequence (as far as I can tell, blocks 47 & 48 are where all the Fast Fourier Transform magic happens).

As you can see, not all patents are created equal and while it might be possible to get a patent, it might be worthless. Patents like the CSIRO Wifi patent may have broad claims that cover large or important areas and if granted are likely to be valuable, however, it's rare to find a startup with a broad granted patent, and patent claims often end up being narrowed to avoid existing patents and perhaps are not that valuable or are easy to avoid or the subject matter is just not that important.

It can take 4-5 years before a patent gets granted or rejected so startups often die before the patent even gets to this stage, or their startup or University doesn't have the $50k they need to pay for patent drafting and filing. So even if a startup has a patent application in process there is a low certainty that this will result in a granted patent.

So, while patents are not mandatory at launch, we are seeking startups with differentiated technology that are likely to be able to file patents. Developing a working product is a continuous series of solutions to problems, and many of those solutions create new IP, frequently the final product and resulting patents will often only bear a passing resemblance to the original research and new patents will be filed on new inventions while developing the IP into a product.

In some industries developing a patent portfolio is a critical defense strategy against entrenched companies who will seek to attack you and restrict your ability to compete. Semiconductors, pharmaceuticals, electronics and medical devices are all areas where significant patent enforcement occurs and results in settlements between companies with patents to cross-license with each other and avoid lawsuits, it’s effectively sort of a nuclear standoff, so founders in these spaces need to understand the risks and have a preemptive strategy on IP. 

Another aspect to consider is that filing and prosecuting patents is expensive, in most cases startups cannot afford to file patents in every country. Key considerations for where to file include where the product is sold and where it is made. If you can stop someone from making and shipping a product in the country it is made and/or stop them from selling it into the primary market this gives you a reasonable level of coverage rather than paying legal fees for many countries where the product may not ever have significant sales. Also, some countries are not known for enforcing valid patents or the market is so small as to be a waste of time.

Finally, if you win the golden ticket and are granted your patent, you may need to take legal action to defend your invention. You should understand that a granted patent won’t physically stop someone from using your invention, it merely gives you the right to take legal action to stop them using your invention (but only after its granted). The difference between the two points is often millions of dollars in legal fees and years of legal proceedings in a foreign country to enforce your rights, the reality is that most startups cannot afford the distraction or costs. 

So investors think about IP when evaluating startups, and while granted patents are unusual and not required when we first fund a company, we have to believe the technology is likely to be patentable and an IP strategy should be part of the company's business plan as they mature.

The final thing to consider is that the best entrepreneurs in the world generally often don’t care much about patents, Elon Musk open sources most of his, what they care about is extreme execution and shipping great products, speed is their protection and fantastic product is their competitive advantage, the best patents in the world are mostly worthless without extreme execution by the founders to build the product and the business.

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