No, You Don't Need Patents To Raise Money

from the exaggerations dept

Wed, Jun 5th 2013 8:06pm — Mike Masnick

One of the common "defenses" of patents that we often hear is that "investors require them." That's simply not true. There are, certainly, some short-sighted investors who require patents, but more and more of the most respected investors have spoken out against the patent system, acknowledging that it does more harm than good. The latest example of this comes from Rob Pegoraro, who spoke to a bunch of startups presenting at a "Demo Day" and asked each of them about their patent strategy.

While some of them are filing for their own patents, a key point was that their investors definitely didn't require it or push them in that direction.

None said their investors had pushed them to file for patents.

Even more to the point, investors seem to recognize that patents can take a big chunk of money out of early investment if startups file for a patent. Fortify Ventures managing director Jonathon Perrelli pointed out:

“When they’re raising $50,000 to pay for ramen and hosting services and their desks, $15,000 doesn’t have to go to intellectual property.”

The article also asked the startups if they were worried about patent trolls, and, unfortunately, many of the startups seemed fairly naive about the whole thing, suggesting that they're okay since they're not copying anything. That's not how patent law works, of course. Patent trolls pop out of the woodwork claiming you violate some tiny thing all the time. The one company that Pegoraro spoke to that insisted it was impossible that they violated a patent is likely in for a big surprise if it ever gets big enough to attract patent troll attention.

Filed Under: entrepreneurship, investment, patents, startups, venture capital

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horse with no name, 5 Jun 2013 @ 11:35pm

Need versus desirability
I think the problem you are having is that you are trying to put patent in an absolute sense, where it is not the case. You don't need it, and some venture capital firms may not want companies to go through the patent process as it might at the outset slowdown their move to market.

You also don't need an office or need other things in the process, but many of them are desirable. Venture capital companies are often in it for the short run, they want to get the process from zero to either public company or purchased by Google in the shortest amount of time possible, while trying to minimize risk of others getting into the market first with a similar product or concept.

Saying need as if you are argument against a absolute is nothing more than a strawman in this case. Few people will say that in absolute terms you need a patent. It may be desirable for longer term profitability, and there may be more benefit in some industries over others to have a patent. It all depends. It's not an absolute.
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Richard (profile), 6 Jun 2013 @ 1:51am

Re: Need versus desirability
Few people will say that in absolute terms you need a patent. It may be desirable for longer term profitability, and there may be more benefit in some industries over others to have a patent. It all depends. It's not an absolute.

History shows that if a field is to advance quickly there is an absolute need NOT to have a patent.

Look at the stagnation of the US aircraft industry between 1906 and 1917 and compare with Europe and you will see what I mean.

Look at the rapid development of the Jet engine - where Frank Whittle abandoned his patent just a few months before he obtained funding.

In fact what you do need is quality of ideas and the drive to see them realised. To quote one of the financiers who backed the patentless Whittle:

"The impression he made was overwhelming, I have never been so quickly convinced, or so happy to find one's highest standards met... This was genius, not talent. Whittle expressed his idea with superb conciseness: 'Reciprocating engines are exhausted. They have hundreds of parts jerking to and fro, and they cannot be made more powerful without becoming too complicated. The engine of the future must produce 2,000 hp with one moving part: a spinning turbine and compressor.'"

(from the Wikipedia article http://en.wikipedia.org/wiki/Frank_Whittle)
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horse with no name, 6 Jun 2013 @ 2:23am

Re: Re: Need versus desirability
You understand that Whittle didn't abandon the patent, you need to read more closely:

"Still at Cambridge, Whittle could ill afford the �5 renewal fee for his jet engine patent when it became due in January 1935, and because the Air Ministry refused to pay it the patent was allowed to lapse"

Basically, he didn't have 5 pounds to his name to pay for it. He had already patent it and just could not afford to keep it in force.
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Anonymous Coward, 6 Jun 2013 @ 5:00am

Re: Re: Need versus desirability
And let's not forget the massive damage to innovation James Watt did with his patents.

https://en.wikipedia.org/wiki/History_of_the_steam_engine#High-pressure_engines
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madasahatter (profile), 6 Jun 2013 @ 6:20am

Venture Capital
A point that is very clear is that smart venture capitalists are not interested in patents per se as much as in the business plan and model you have to implement your idea. If you have a good product or service idea and a reasonable business plan they are willing to listen. Patent rights and issues are a secondary issue. If your business plan is unworkable the patent status is irrelevant.
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Lord Binky, 6 Jun 2013 @ 6:20am

No you don't need patents to raise money, but you better have a lawyer on speed dial after you raise that money.
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Anonymous Coward, 6 Jun 2013 @ 6:55am

Re:
That goes whether or not you do have patents.
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Anonymous Coward, 6 Jun 2013 @ 6:57am

Re: Re: Re: Need versus desirability
And why the patent was dropped makes no difference as to the effect it had on innovation after it was dropped. Missing the forest for the trees, there.
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Richard (profile), 6 Jun 2013 @ 8:24am

Re: Re: Re: Need versus desirability
You understand that Whittle didn't abandon the patent, ...

Of course I knew the immediate cause of the patent lapsing - and as the other commenter said, the reason for the lapse is irrelevant. I also note that the only reason he filed for it in the first place was the influence of a former patent examiner.
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vic kley, 6 Jun 2013 @ 9:22am

No respected investor would be seen dead with you Masnick
There may be some field and subject like iPhone game APPs where the turn over is high and patents (for the creator) are less important then copyrights.

However in a field where the invention/innovation makes hundred million dollar power plants more efficient and the installed lifetime is decades not months patents are very important. Especially so when the competition has huge budgets and won't hesitate to litigate it's theft of a start-ups technology.

So Masnick tell us the names of the "most respected investors" who in semiconductor capital equipment, or nanotechnology say they don't require IP of their disruptive tech investments and include it in their due diligence.
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Not an Electronic Rodent (profile), 6 Jun 2013 @ 9:29am

Re: Re: Re: Need versus desirability
And let's not forget the massive damage to innovation James Watt did with his patents.
The man who, more or less single-handedly, delayed the industrial revolution? A good one to pick up on and a brilliant example since the before and after is a more obvious contrast than the gazillion similar instances of delayed innovation since.
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Anonymous Coward, 6 Jun 2013 @ 9:36am

Our investors did want patent applications, but didn't want to pay cash for the patent applications, so we found a patent attorney who works for equity. Yeah, we gave up equity, but only 8%
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Anonymous Coward, 6 Jun 2013 @ 9:38am

Re:
Besides - who gets only $50K in initial funding from outside investors. Whoever thinks that small doesn't sound like a good founder. In Austin, I hear the starting amounts are $250K; no one wants to talk about $50K.
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Anonymous Coward, 6 Jun 2013 @ 9:44am

Re: Re: Re: Need versus desirability
"As the 18th century advanced, the call was for higher pressures; this was strongly resisted by Watt who used the monopoly his patent gave him to prevent others from building high-pressure engines and using them in vehicles. He mistrusted the materials' resistance and the boiler technology of the day."

Under current patent law, Watt could not stop others from using his patent, they could use it, but would have to pay a "reasonable royalty" (that means what you can convince a judge is reasonable).
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Anonymous Coward, 6 Jun 2013 @ 9:47am

Re: Re: Need versus desirability
"As the 18th century advanced, the call was for higher pressures; this was strongly resisted by Watt who used the monopoly his patent gave him to prevent others from building high-pressure engines and using them in vehicles. He mistrusted the materials' resistance and the boiler technology of the day."

Under current patent law, Watt could not stop others from using his patent, they could use it, but would have to pay a "reasonable royalty" (that means what you can convince a judge is reasonable).
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Anonymous Coward, 6 Jun 2013 @ 9:50am

Re: Re: Need versus desirability
OK - as long as you can convince investors that you are a "genius" like Frank Whittle, you don't need patents either !
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Not an Electronic Rodent (profile), 6 Jun 2013 @ 10:32am

Re: Re: Re: Re: Need versus desirability
they could use it, but would have to pay a "reasonable royalty"
Hmmm, so now one can pay several hundred thousand in legal fees to determine a "fair fee" that may also be on the "impractical for anyone trying to get a business off the ground" level? Yes, I can see how that would be far less hindering...
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Anonymous Coward, 6 Jun 2013 @ 11:54am

Re: No respected investor would be seen dead with you Masnick
What did you invent?
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Anonymous Coward, 6 Jun 2013 @ 11:57am

Re: Re: Re: Re: Need versus desirability
Under US patent law, he is only required to license it if it is a FRAND standards essential patent, no?
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Rob Pegoraro (profile), 6 Jun 2013 @ 12:15pm

Thanks for the shout-out; further context
One detail that Mike didn't mention in his summary: the startup that seemed most engaged with the patent system and most cognizant of its exposure to trolls had also paid the IP law firm Dow Lohnes to write and file its patent application. That's a seriously expensive way to buy some certainty.

There was an interesting thread about the post in a private Facebook group afterwards. Most of the respondents -- almost all but me veterans of startups, investments in same or both - were pretty cynical about the long-term utility of patents for non-biotech tech startups. But one guy did get some affirmative responses when he suggested sticking to provisional applications as a cheaper way to keep your options open.
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John Fenderson (profile), 6 Jun 2013 @ 1:19pm

Re: Re: Re: Re: Need versus desirability
Under current patent law, Watt could not stop others from using his patent, they could use it, but would have to pay a "reasonable royalty"

Are you referring to RAND patents? That only kicks in when the patent covers something that is mandated by a standard. Watt certainly could deny others the license to use his patent.
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horse with no name, 6 Jun 2013 @ 1:42pm

Re: Re: Re: Re: Need versus desirability
Nothing missing: You cannot prove in any way at all that the same would not have happened. You do not think that a penniless Whittle would not have gladly licensed his technology to anyone and everyone for a small fee? It would be in his interest to get things done, rather than just sit on a piece of paper.

For that matter, as others have mentioned, the "sitting on it" patent process no longer works. So the concern expressed has long since seen addressed and killed.

Back to the original point, this all seems to be more of something driven by the money people wanting a faster return, rather than wanting the business to do something that is good for it in the long run.
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staff, 6 Jun 2013 @ 3:31pm

more dissembling by Masnick
It�s about property rights. They should not only be for the rich and powerful. Our founders: Jefferson, Franklin, Madison and others felt so strongly about the rights of inventors that they included inventors rights to their creations and discoveries in the Constitution. They understood the trade off. Inventors are given a limited monopoly and in turn society gets the benefits of their inventions (telephone, computer, airplane, automobile, lighting, etc) into perpetuity and the jobs the commercialization of those inventions bring. For 200 years the patent system has not only fueled the US economy, but the world�s. If we weaken the patent system we force inventors underground like Stradivarius (anyone know how to make a Stradivarius violin?) and in turn weaken our economy and job creation. Worse yet, we destroy the American dream -the ability to prosper from our ingenuity for the benefit of our children and communities. Who knows who the next Alexander Graham Bell will be. It could be your son or daughter. It could be you. To kill or weaken the patent system is to kill their futures. Show me a country with weak or ineffective property rights and I�ll show you a weak economy with high unemployment. If we cannot own the product of our minds or labors, what can we be said to truly own. Life and liberty are fundamentally tied to and in fact based on property rights. Our very lives are inseparably tied to our property. Large multinational corporations are on the brink of destroying the American dream -our ability to pull ourselves up by our bootstraps from the working classes by building our own companies while making better futures for our children and our communities.

Prior to eBay v Mercexchange, small entities had a viable chance at commercializing their inventions. If the defendant was found guilty, an injunction was most always issued. Then the inventor small entity could enjoy the exclusive use of his invention in commercializing it. Unfortunately, injunctions are often no longer available to small entity inventors because of the Supreme Court decision so we have no fair chance to compete with much larger entities who are now free to use our inventions. Essentially, large infringers now have your gun and all the bullets. Worse yet, inability to commercialize means those same small entities will not be hiring new employees to roll out their products and services. And now those same parties who killed injunctions for small entities and thus blocked their chance at commercializing now complain that small entity inventors are not commercializing. They created the problem and now they want to blame small entities for it. What dissembling! If you don�t like this state of affairs (your unemployment is running out), tell your Congress member. Then maybe we can get some sense back into the patent system with injunctions fully enforceable on all infringers by all patentees, large and small.

Those wishing to help fight big business giveaways should contact us as below and join the fight as we are building a network of inventors and other stakeholders to lobby Congress to restore property rights for all patent owners -large and small.

For the truth about trolls, please see http://truereform.piausa.org/default.html#pt.
http://www.hoover.org/publications/defining-ideas/article/142741
http://ssrn.com/abstract=1792442
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Gene Cavanaugh (profile), 6 Jun 2013 @ 4:00pm

Don't need patents?
Actually, when this first came up, I was persuaded. However, I checked on it further.
It strongly depends on WHAT is patented. If it is for the things the opposition homes in on, true. But that is like saying some pottery doesn't need firing in a kiln. VERY true, but very misleading.
There are industries and products where a patent (or trademark, etc.) needs the protection offered.
I talked to a client today. He made it clear that for most of the products his company works with, they MUST have patent protection, otherwise they will do a pass on the product - and he emphasized that comes from experience.
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Anonymous Coward, 7 Jun 2013 @ 5:39am

Re: Re: Re: Re: Re: Need versus desirability
Nothing missing: You cannot prove in any way at all that the same would not have happened. You do not think that a penniless Whittle would not have gladly licensed his technology to anyone and everyone for a small fee? It would be in his interest to get things done, rather than just sit on a piece of paper.

So why wasn't everyone and his mother licensing the patent before Whittle let it expire?
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Not an Electronic Rodent (profile), 7 Jun 2013 @ 9:00am

Re: Re: Re: Re: Re: Need versus desirability
For that matter, as others have mentioned, the "sitting on it" patent process no longer works.
Really? You're referring to the mandatory licensing of patents "for a fair fee" mentioned elsewhere? If "sitting on it" no longer works, why do we have a boatload of patent trolls and a gazillion lawsuits (e.g. the smartphone thicket) going on over patents that haven't been licensed?
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Not an Electronic Rodent (profile), 7 Jun 2013 @ 10:00am

Re: more dissembling by Masnick
It�s about property [...snip, because it's basically all the same...] children and our communities
I congratulate you, sir, on the finest piece of meaningless hyperbole this side of an election campaign. I stand in awe of someone who can type so much and say so little and take my hat of at your skills at obfuscation too.

Prior to eBay v Mercexchange, small entities had a viable chance at commercializing their inventions. If the defendant was found guilty, an injunction was most always issued.
See, right there you contradict your own point - either that or you have a strange definition of "small entities". It's always been pretty unlikely that a "small entity" can afford to fight a patent battle so the patent system has always been vastly in favour of large corporations no matter what the outcome in court.

Speaking of paying people for what's "theirs"... isn't it traditional to pay for advertising space?
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Jull (profile), 10 Feb 2014 @ 4:25pm

To my mind the procedure of getting patents will soon become very difficult and possibly will go west finally. Nowadays the speed with which information and consequently innovation grow is overwhelming. All this data becomes difficult to follow and to track, while the value of it is important for the further development.
I am sure they day when we'll stop bother ourselves with patent matters is not far off.
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Neymar, 17 Nov 2015 @ 1:38am

It doesnt lose anythings
As the above posts and comments say, start-up dont need it, but do you want to be a start-up forever? Any things you do it as soon as possible, it doesnt lose anythings and you will have benefit or competitive in the future
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tjoe, 14 Mar 2016 @ 8:14am

Re: Need versus desirability
What you do not need is the actual patent, what you do need is everything else before it. You need to know what has been invented in the art and what are "obvious" adaptations of something that exists. You need everything that leads to the patent, just not the patent....or the lawyer (except for research advise).

It should require a trip to DC.

Eventually, after exhausting on-line resources for prior art and existing patents, etc. to determine your products "uniqueness" requirement, you should make a trip to the US Patent Office to do your own research, up close and personal.

While there, look at the people busily going from the copy machine to the files, using the required listing of prior art to make a tree of information from the researched patent. I thought I saw 30 Asian countries with teams.

So the moral of the story is; first, you have to know the intellectual property required to get a patent and that your wigit is truly unique and second, if you get a patent, all your research becomes publicly available. Unlike in "applied for" state, it's confidential.
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