Patents are an Investment for IT Start-ups for Future

A patent is a business asset and an expensive one at that. A patent provides a benefit to the owner to the extent that it has value or can create value. This article examines the benefits of patenting from the perspective of early-stage technology start-ups and growing businesses.

HOW PATENTS WOULD MAKE A DIFFERENCE?

Competitive Advantage & Return on Investment: Patent gives owner the right to keep others from making, using, offering for sale, selling, and importing the claimed invention, and thereby provides a meaningful exclusionary right. This provides the owner a competitive edge and can act as an effective market entry barrier to the competitors. If your company has invested a significant amount of time and money in R&D, patent protection of the resulting inventions would help in recovering costs and obtaining higher returns on investments.

Additional Source of Revenue – Licensing or Assigning the Patent: Patents not only give a company the right to preserve the use of its innovation but can also bestow higher profits, for example by licensing of the patented technology to others. In return of the license, the patent owner can get lump sum payments and/or royalties. Alternatively, the patent owner can also assign or sell their patent right to someone else.

Access to technology through cross-licensing: Patents also enable the owner to enter into agreements for utilizing another’s patented technology of interest, and in return allow use of their own patented technology – increased scope of collaborations.

Broaden your horizon: Getting patent protection in foreign markets of interest can provide access to these markets as well by licensing, in case you directly do not want to enter a foreign market. As per annual report of the Indian Patent Office for the year 2013-14, ~75% of the patent applications filed last year in India were filed by Non-Resident Entities.

Obtaining Funding: Companies having a strong patent portfolio are taken much more seriously by other Business enterprises and Capitalists, thereby making it easier to obtain funding to enter the market. Patent portfolios are given positive consideration during mergers and acquisitions.

HOW PATENTS CAN HELP AN IT START-UP INCREASE ITS VALUE?

In today’s marketplace, the value of a company is determined not only by the tangible assets but also by the intangible assets owned by the company such as brand name, IP, Goodwill etc. The patent portfolio is considered to be a very vital part of a company’s intangible assets. IT Start-ups should build upon their company’s patent portfolio along with other IP, from the very inception, in order to gain a good standing in the market and to be able to effectively compete with other market players. If theirs is a disruptive innovation, it can also provide them a competitive edge and monopoly for a longer run – which makes it even more crucial to protect the innovation by patenting.

Further, in the high-tech industry the strategic window as well as the future possibilities of a company can also be determined by the current and future patent portfolio. By analysing a company’s patent portfolio, it is possible to get a deeper insight into the products and the industrial edge of the company. But that is just the beginning; a patent portfolio, gives evidence about the future direction to which companies are heading to. Without a patent portfolio the development of the company becomes directionless to the investors. Patent portfolio is often known as the cornerstone for every company’s strategies.

As a result the investors become more attracted towards a company with strong patent portfolio. Thus, it is advantageous to maintain a patent portfolio.

PATENTS DRIVE MERGERS & ACQUISITIONS

As per a recent trend large enterprises are putting strong emphasis on acquiring IP assets from other parties, since, the IP assets as well as the patent portfolio is paramount for the development as well as the survival of these enterprises. In this context, the series goes from the acquisition of a few strategic patents up to complete IP driven company take-overs - including their patent portfolios.

Google’s recent take-over of Motorola is a well-known example of the so called “IP driven M&A”. Even after the flip-sale of Motorola Mobility, Google kept all the patents. Without information leaking out to the public many smaller but similar deals are carried out every day.

TO PATENT OR NOT TO – COST FACTOR

Unlike other business investments, the economic rationale of patents is very straightforward: ‘A patent protects inventor’s interest by vesting them with an exclusive right over the use of their patented invention for a limited time’ – thereby allowing the inventor to recover ROI costs and also make profits.

At the same time, it is also advisable to evaluate whether your invention would be commercially viable – since the costs associated with obtaining and maintaining a patent can be high. This business decision should be taken after due consideration of the pros and cons.

In terms of filing patents, India lags behind major countries. As per WIPO statistics of 2012-2013, India ranks at no. 6 in terms of patent filings by Non-Residents, while it ranks at no. 11 in terms of patent filings by residents. This indicates the low contribution of India to global patent filing.

THE ROAD AHEAD

Patents are like nuclear weapons - something you hope to never use, but you can always have them to defend yourself. They shield the company from unfair competition and provide opportunity to recover R&D costs as well as gain profits. As can be observed from the trend stated above, obtaining Patents is still a matter of great dilemma in Indian context; however the Experts and Investors usually recommend start-ups to file them as early as possible. In earlier days, patents were just a tool for a good reputation but today, it has become a necessity.

Authored by Tarun Kumar Bansal, Founder & Director, Sagacious Research