Valuing Patents: The Importance of a Patent Strategy for Business of all Sizes
March 5, 2021
By Cameron Gale
Patents play an important role in establishing and solidifying a competitive market position for many businesses. Patent strategies can vary by industry and will depend on the size and stage of a business. However, having a robust patent strategy can help businesses of all sizes secure their market position and avoid potentially damaging setbacks.
A recent experience with a company, which we can call XYZ Corp., highlighted some challenges businesses face when dealing with patents. XYZ had initially approached us some years ago to investigate patenting several innovative processes. We met a few times, but no patent applications were ultimately filed. As often happens with smaller businesses (and early-stage companies), the inventors were also managing operations, sales, and client retention for the business. Ultimately, they were unable to devote sufficient time and energy to provide us with the details necessary for a patent application.
Resource scarcity is an issue we encounter frequently, particularly with small businesses and start-ups. Whether due to limited time or limited funds, patenting can at times seem like an unaffordable luxury for a start-up or small business. However, patents can contribute directly to growth and development of a company even at the early stages. Taking time to think about the role patents can play and establishing a patent strategy from the very outset can provide immediate, and long-lasting, dividends to the success of the business.
At the very early stages, patents and patent applications can help businesses attract funding. Investors usually evaluate a business’s patent position when considering whether to fund the business. By filing a patent application, a start-up creates an asset that protects the start-up’s underlying business proposition before establishing a foothold in the market. This can reassure investors that the company has an idea of substance beyond the elevator pitch they’ve just heard.
Patents can also help businesses make inroads with distributors and customers. Products that are patented or patent pending can help a business attract customers and secure contracts by promising exclusivity—that this is the only business able to provide the advantageous features protected by the patent. As the business gains traction, having patents in place can help ward off competitors who might otherwise replicate the product or service being offered and try to undercut the relationships the business has developed.
Even for businesses that do not file patent applications early on, it can still be important to establish a patent strategy. In the case of XYZ Corp, they more recently refocused their attention on patents. This newfound attention and appreciation for patents came because a small business working in the same industry was providing a service that appeared similar to processes used internally by XYZ—including the very same processes XYZ had considered patenting many years before. XYZ was interested in acquiring the company because they had one important asset—a granted patent. On its face, this patent appeared highly relevant to the internal processes that XYZ was using. Looking to make an offer for the target company, XYZ wanted to understand how to value the patent when approaching the target with a purchase offer.
The target company appeared to be failing and did not have many assets of value beyond the patent. As such, the owners of the target company were interested in being acquired, since they had not been able to develop and implement a viable business model for the service. Nonetheless, the patent provided the target with a tangible asset that XYZ was willing to pay good money for. Even though the target company had not become a successful business, having the granted patent in hand ensured they were not left with nothing when the business was failing.
Here, XYZ was lucky that the target company was failing and could not afford to enforce their patent. If a better funded competitor owned the patents at issue, XYZ may have been forced to change some of their long-established processes (or pay a higher price to license the patent). This could have negatively impacted the quality of the products and services, or perhaps even caused XYZ abandon some of their successful products. At a minimum, this would also entail additional costs for assessing their legal risk, and if a technical workaround was found, then modifying their existing procedures, educating customers about their new products, and retaining market share.
This experience also caused XYZ to revisit patenting some of their own innovations. Now that some years have passed, the window for protecting their earlier innovative solutions had passed. However, XYZ (like most tech companies) is constantly innovating and improving their systems and processes to provide new and improved products and services. Although patents may not be able to protect the core features of their current systems, there is still an opportunity to protect recent and future innovations that can differentiate their products, build market share, and protect their profit margins.
Obtaining patents for innovations throughout the operation of the business can help businesses maintain a competitive advantage, even for companies who are late to the game in terms of patenting. This can be particularly useful when developing or launching new product lines or new versions of existing products. Promising exclusivity can help businesses justify charging a premium on their services. Alternately, patenting systems and processes that enable the business to achieve cost savings can help businesses compete on price—for instance, by forcing competitors to engage in more costly workarounds.
For more mature companies, a lack of funds to implement a good patent program is generally less of an issue than for early-stage companies. However, it remains important to establish and maintain a robust patent strategy that aligns with the core goals of the business. This can help target resources to protecting innovations that are most likely to provide value to the underlying business. Patent strategies for more mature companies can vary more widely, depending on the nature of the business and the expected volume of innovations. A formal process for identifying and protecting key innovations can help simplify the way a business engages with patents and ensure that meaningful innovations do not go unprotected.
At the other end of the spectrum, companies with mature intellectual property have another set of issues to contend with. Many companies with mature patents may begin to consider how best to use or monetize their intellectual property to ward off competitors or generate new lines of revenue. Again, the strategies for actively using mature patents can vary significantly based on the underlying goals of the business and the resources the business has available to invest in monetization. Once again, it remains important to take the time to establish a formal monetization strategy that aligns with the broader goals of the business to make patents work for the business in an advantageous and cost-effective manner.
Figuring out how best to approach patents is a challenge for businesses of all sizes. Although the considerations for a patent strategy will vary as a business grows and develops, maintaining a robust patent strategy can help all businesses grow and secure revenue.
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