Patents · Open source

Are patents important for startups and entrepreneurs?

Keegan Beljanski Community and Marketing Intern at FounderDating

June 16th, 2014

In the wake of Elon Musk opening up his patents to the automotive manufacturing community, I'm wondering: How important are patents and intellectual property rights to a startup's success and future growth potential? Article here: http://guardianlv.com/2014/06/tesla-motors-releases-its-patents-to-the-public/

Mitchell Portnoy Healthcare Information Executive

June 17th, 2014

You ask an interesting question.  To start, it would be helpful to remember that a patent is in essence, a social contract between the inventor and society.  

Since it has long been understood that new invention stands on the shoulders of older invention, a system is needed to encourage an inventor to share his secrets so society (other inventors) can learn from them and innovate further (and faster).  Yet in a capitalist society where monopolies are not considered beneficial to a free market system, it is also understood that without protection from the risks of experimentation and innovation, the inventor will not share his secrets.  Hence, patent law provides a term of legal monopoly in return for full disclose of innovation.  But this point is also important to remember:  A patent is tool to prevent others from using your invention.

The case of Tesla is interesting and I don't necessarily agree with the comment above regarding "good faith".  Musk's comments invite others to use (license) Tesla patents without benefit of payment and relying upon that, a company might successfully use this in any infringement proceeding.  As a result, while Tesla is not giving away it's patents (they can sell these and a purchaser may decide on a different strategy) Tesla is inviting others to use its patents license-free.  

Tesla's motivation for this action may be quite simple, assuming the patents in question rely on electric propulsion etc.  Encouraging additional competition into the electric vehicle business necessarily creates more electric vehicles on the roads.  More electric vehicles means more charging stations and perhaps the encouragement of faster charging techniques.  This in turn will create greater demand for electric vehicles and Tesla stands to benefit,  i.e., "a rising tide lifts all boats".  

But Tesla is not a start-up.  Those that may wish to invest in a start-up want every advantage possible, including intellectual property that might be quantified.  Those that want to innovate do not relish sharing their secrets freely and want the protection that a patent affords.  In my opinion, IP protection in the form of a patent remains important for a start-up.  Perhaps more so.

Simon Bain CEO SearchYourCloud Inc.

June 16th, 2014

Hi, in my experience patents are important for getting finance in. However the flip side is, that you may need finance to get a patent. They will help increase your valuation if you are looking for an exit, even if you give them away, as you still hold the license. A patent does prove to possible investors or purchasers that what you have is unique and protectable. However: They can be expensive to get and could take up a lot of your time in getting. Then you may find that you cannot afford to protect them. So do not just go for a patent. Work out what it can do for you once you have one. Simon

Rob G

June 16th, 2014

They can be used for both offensive and defensive purposes.  good to have in your tool box IMHO.  i am a big fan of Elon.  Notice that he didn't give away their patents or agree not to apply for more.  what Tesla committed was:  "Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.” the qualifier "in good faith" is important.  If Tesla decides that you are a competitor and they decide you are infringing their patents in a manner other than "good faith" you could be in for a law suit. It would be nice if more patent owners would commit to only defensive use.   

Dimitry Rotstein Founder at Miranor

June 17th, 2014

Like the other commentators said, having patents scores you nice points with many (but not all) investors. Also, since big companies need patents as a kind of a nuclear deterrent, they may acquire you just for your patents, although you'd probably need a portfolio of dozens if not hundreds of patents to get a big company really interested. Motorola was apparently acquired only for its patents, but it had something like 20000 of them.
One thing patents CANNOT do for a startup is to defend it against competitors. If your product is worth stealing, then it's going to get stolen. Patents or not, you won't have the resources even to identify all the thieves, let alone sue them. I've heard real stories about startups that tried to "act like grownups" and sue the thieves, and they all went bankrupt even before the trial was over. Better to invest all this effort (including the one needed to apply for a patent, which is hardly trivial or cheap) into getting more users, developing the product further, and thus staying ahead of the competition.
Anyway, I'm with Elon Musk on this one - worrying about patents too much is stupid, and using them to fight off competition is the sign of desperation (sorry, Apple fans).

Nadia Shalaby Entrepreneur

June 17th, 2014

Mitchell Portnoy put it really well -- in fact beat me to every point I was going to make. Tesla is NOT giving up its patents. This is a large PR for those who do not understand how the patent system works. Instead, the goal is to encourage the growth of the electric vehicle infrastructure, which will take off faster and at larger scale if the industry and demand are much bigger. So this is a strategy for Tesla's growth, vs an ultruistic "we are giving up profits" stance. 

As Mitchell said, startups start out at such an inherent disadvantage in everything, that they need any advantage they can get, at least as a protection mechanism. 

Brad Bertoglio Attorney and Senior Executive

June 17th, 2014

I love seeing people do creative things with patents, and what Tesla appears to be doing here just illustrates how versatile patents really are as company assets.  In the early stages, Tesla could use the prospect of controlling access to its technology to help make a business case for massive investment in R&D. Now, when the company decides it would benefit more by stimulating the overall market for electric vehicles, Tesla can selectively open up its portfolio to do exactly that. 

And even now, it doesn't look like Tesla is simply giving up its patents.  There is a statutory provision for dedicating a patent to the public, and I haven't yet seen any Patent Office filings showing Tesla to have exercised that. Program details remain to be seen, but I would expect the patent release terms to include some kind of cross-license or mutual non-assertion obligations.  So even after patents are "released" they will probably still be creating value for Tesla by eliminating threat of competitors who "accept" Tesla's patents from enforcing their own patents.  By building a dominant patent position and superior technology, it's not inconceivable that Tesla could steer the entire electric car market away from the smartphone path, where even the leading players expend lots of resources licensing and litigating.

One can easily imagine a different world though, in which global automakers flooded into the electric car market and triggered a technology development race.  The same patents could have been valuable for maintaining competitive advantage in that kind of environment too.

Other companies are able to use their patents as an economic asset in times of need.  One friend's company failed but subsequently recovered 7 figures selling its patents on the secondary market -- a gesture much appreciated by his investors.  Another sold its patents with a license back to raise enough funding to continue operations through a cash crunch and save the company. The secondary market for patents has never been more active, with some getting a 10-20x return on their patent investment dollars.

There are just so many ways that companies can get value from a strong patent portfolio, regardless of the circumstances they find themselves in.