When should startups pursue a patent strategy?

[Editor’s note: This is a guest post by Bob Stratton and Andrew Currier of PCK IP  about patents and patent strategy for Canadian startups. And while “traction is the new IP”, this is one very cost effective strategy for startups, but is it the right one for you? ]

Seriously, patents? Are patents really an effective strategy for startups? It’s an almost Shakespearean dilemma for founders, to patent or not to patent.

There is a real tension between the long term benefit which must be balanced against the short term need to manage cash burn carefully and the management time required for a successful patent program and the immediate need for focus on getting product out the door.

Understandably, early in the corporate development lifecycle most startups choose to focus on building and shipping product and growing traction and revenues. We’ve heard that traction is the new IP. There are unintended consequences to this decision, that founders need to be aware of that have impact on the business down the road.

The refusal to even consider patents can be left for another conversation.

We present an analytical approach for founders to consider performing an upfront analysis of: “Are patents an important part of my business plan?? and “When do I start pursuing a patent strategy?”. Here are some starting points.

Timing is Critical

There are a couple of unpleasant patent facts that we must be considered:

  1. If you disclose the invention before filing a patent application, you lose the ability to patent it in most of the world.  (A short list of countries, including Canada and the US, forgive your prior disclosure for as long as a year, and let you still file a patent application before the expiry of that year);Prior disclosure is an issue because you may have to disclose your invention to a variety of people such as investors, potential customers, suppliers, etc. – who refuse to sign a non-disclosure agreement.It is also an issue because your successful launch of your product/service is a disclosure.
  2. The first inventor who files an application at the patent office blocks any subsequent inventor who files for the same invention.First to file is an issue as someone else can beat you to the patent office, at best blocking you from filing your application and at worst blocking you from running your business.  It actually happens that two or more people independently invent the same thing at roughly the same time, especially in the tech space wherein technological advances may suddenly enable a new product or business.

In view of (a) and (b), pretty clearly the correct answer is to file “as soon as possible”, but patents cost money and start ups, in particular, should defer expenditures as long as possible until their valuation has increased, to make raising money less expensive.  Again the short term and long term are at odds with each other.

Patents Cost Money, Defer or Spend?

So, what do you do?  It depends? Or there is no easy answer. It requires a founder to be able to use their experience and interpret the market signals to make informed decisions about spend.

Our suggested set of analytic steps is:

  1. Determine which aspects of your product/device/system/business might be patentable.
  2. Determine which of those aspects might be worth patenting from a business perspective.
  3. Determine when those patentable aspects will be first disclosed.
  4. Determine when you can afford to file patents.
  5. Compare 1, 2, 3 and 4 to identify critical dates (disclosure of invention vs. available funding) and decide what to file and when.

Unfortunately steps 1-5 sound simple, but of course there is a fair amount of dependency upon specific fact situations.

For example, you may have several possible inventions identified at step 1, but whether they provide a commercially significant advantage to your business (step 2) will vary widely and can be hard to predict given that your goal is to create an entirely new market and how that market unfolds is not predictable with complete confidence.   You may also require some professional advice to help with step 1, as it is not always straightforward to identify developments which are patentable from those which are merely clever.

For step 2, some inventions may have a limited useful lifetime: e.g. the first implementation is web-based, but you expect that most of your revenue will be generated from a custom mobile app – once you can build and deploy it.  So, you may forgo protecting the web-based version to save the expense, knowing that you are leaving the possibility of web-based competitors in the future. Other fact-specific scenarios abound.

Depending on the outcomes of steps 1, 2, and 3, step 4 can be made somewhat easier by deciding upon an appropriate filing strategy to manage the trade-offs between expenditures and protections.  For example, you may decide to limit the countries in which you file for patent protection and/or you may decide to “beat” a disclosure by filing a provisional patent application, rather than a complete application, to reduce immediate costs.

You may also identify, at step 2, different classes of inventions: i.e. – those which are fundamental to your business and which should be patented as broadly as possible/reasonable and those which are mere “nice to haves” which can be deferred or allowed to be lost to manage costs.

Seek Informed Advice

We believe that the patent analysis is really just an adjunct to the kind of big-picture business case analysis that is necessary to achieve long term success.  Founders must know their market and have the vision to see that their startup investment has a real potential of a long term payoff.

Founders are already faced with complex crystal ball gazing business decisions such as: What is my product road map? What investment do I need? Who should be on my management team? How can I monetize my product? Who is my competition?  Where founders don’t know the answer to these questions they seek out a number of excellent, unbiased resources to help them.  A patent analysis can be added to the other analyses both at the outset and at each milestone, and the results fed back into the planning process to best manage the path to immediate and to long term success.

Reach out to Andrew or Bob for a conversation about your startup.

Does RIM Matter to Startups?

If you haven’t heard by now, RIM is having a horrible year. Their earnings meeting yesterday was chock full of bad news:

Q1 revenue: $4.9 billion vs. $5.15 billion consensus
Q1 EPS: $1.33 vs. $1.32 consensus
Q1 shipments: 13.2 million vs. 13.5 million units expected
Q2 revenue: $4.2-$4.8 billion vs. $5.46 billion consensus
Q2 EPS: $0.75-$1.05 vs. $1.40 consensus
Q2 shipments: None given vs. 13.5-14 million units expectation

One caption I read put it best – RIIMMMMMBEEEERRRRRRR.

Out of the downfall the Globe and Mail was hypothesizing that the fall of RIM was catastrophic for Canada’s tech eco-system. The article was a bit light on fact as to why it would rip apart the Canadian eco-system, and my initial gut reaction was “RIM has almost no impact on any of the startups I know.” But then I decided to go and look at the facts.

Since roughly 2008 RIM has bought the following Canadian startups:

So they’ve probably flushed about $60mm-$80mm into the Toronto ecosystem over 3 years in exits. On top of that they have the BlackBerry Partners Fund (with about $150mm in cash) which has invested in several Canadian startups. Lets also not forget that the eco-system around their partners. BlackBerry’s platform has created opportunity for mobile dev shop’s like Fivemobile and Xtremelabs to exist. But it feels like those guys do most of their business in iPhone and Android.

So between exits and investment via BB partner funds they have probably kicked in about $100mm to the Canadian startup eco-system over the past 2-3 years. Which is not something to sneeze at. Having said that, Google (not HQ’d in Canada) has kicked in probably close to $100mm in the past 12 months… just in exits. So maybe its also not something to brag about either.

Putting these numbers together, makes me feel more ambivalent about RIM’s impact on the tech eco-system in Canada. Lets be clear, we’re talking about a decline in the short to medium term, not a total shutdown. In that decline I expect RIM to take an even lesser role in the eco-system than before. And I’m not sure it matters.

(Small end note as a UW alumnus. I’m not sure RIM’s downfall will have that big an impact on the school either. Big companies like Microsoft, Google, Facebook are still going to fight over UW’s top talent – their won’t a shortage of jobs for UW’s engineering community anytime soon. Maybe Laurier’s business & marketing grads… oh low blow).

iMessage & The Canadian Impact

The launch of iMessage was an announcement with pretty significant impact on a few big/hot tech companies in Canada. Kik has obviously built a private messenger service around iPhone, RIM has taken an aggressive stance on promoting BBM, and of course lets not forget all the Canadian telecos.

Being an investor in Kik and some others impacted by the new iOS announcements, Fred Wilson wrote a brilliant post analyzing the impact. “Expect platform owners to work against you”.

In fact it was so interesting, that the product manager for RIM’s BBM service re-tweeted it (note that Theban is a good friend).


Fred Wilson to devs: Expect platform owners to work against you | Tech News and Analysis http://bit.ly/m42nZC
12 hours ago

Which prompted this amusing exchange between him and I.


@ThebanGanesh you sir… are an ass… re-tweeting this as a “platform owner”


@dpmorel lol – it’s a balancing act. Platforms need to protect themselves from the ‘tragedy of the commons’

It is a fascinating lens into how RIM thinks of BBM and their own platforms. Despite my “ass” comment, I agree with him. Innovation often comes from the community who build things for the platform. The platform then needs to pull the best ideas back into the mothership – sometimes as an acquisition, sometimes they build it themselves and take on the “incumbent” in the community. This is in theory a good thing. We want the best innovations to be widely adopted. We want private messenger everywhere so we can all stop paying atrocious rates for SMS.

And those atrocious SMS rates charged by carriers, brings me to my next conversation. A good friend of mine runs messaging at a major Canadian carrier. Him and I have had the debate several times over the past few months on whether or not private messenger is a big threat today and now for them.

What i mean is that the argument about building SMS over data to drive costs down will go away in a few years as soon as LTE is deployed so ideally I want to invest in a solution I can leverage for more than a couple of years or so…

Customer experience and scalability are key for me. If I am spending money to improve the customer experience, it has to be open to all subs without having to invite people, therefore is has to scale.

The problem I have with the kik, textplus and the likes is that they are closed communities of 100,000 in 30 different countries or so and only address their own P2P niche market whereas SMS is an open community of a couple billion compatible devices; no need to register, invite friends, etc… While P2P SMS is plateau’ing in Europe, A2P SMS traffic is growing at a 25% rate yoy. In Canada P2P SMS is still growing at a 20% rate yoy and the A2P side of the business is still non existent.

P2P = peer 2 peer (i.e. customer to customer), A2P = application 2 peer (i.e. app to customer).

That list contains some some big, big knocks on ALL private messenger services – iMessage, BBM, Kik, TextPlus, etc. They are closed communities!! Meanwhile, with SMS, I can literally text ANYBODY in the world. Also, private messenger solutions don’t (yet) provide a solution for applications to talk to customers (A2P). And the carriers have a very real solution coming – LTE with better SMS clients on phones. SMS was literally one of the best services ever created – open, standards driven, no registration, etc. Awe-inspiring engineering. And with LTE the carriers will be able to take advantage of the cost savings of routing SMS over data, and they’ll have the biggest community (5b GSM users) and simply the best solution.

Buuuutttt… its not here yet. And thats what this is all about. Messaging is in transition and there’s an opportunity to own “messages over data”. Richer messages, more social messages, better user experiences, more cost effective for customers, etc. Its a fat, fat bazillion dollar market. And thats why this has happened:

  • Apple launched iMessage, Facetime, etc
  • Facebook bought Beluga
  • Google + GoogleVoice + GoogleChat + Android push notifications
  • RIM doubles down on BBM
  • Venture industry putting big money into potential disruptors like Kik, Textplus, Color, etc

By the time carriers get LTE out the door with new devices in market, the top end of this market may have already been won to the tune of 200-500 million users.

There is maybe some good news for Kik out of this announcement. For a startup the biggest problem is almost never a competitor. The biggest problem is typically non-adoption. Nobody knows there is something better than texting available. Nobody knows that Kik exists. Well, Apple & iMessage are about to blow up the “private messenger” space. In an ideal world, as the market grows, Kik goes along with it.

It’d be amazing if Kik & RIM (or others from up north) could figure out how to own this market. There are huge opportunities still – the A2P problem, the “interconnect” problem, etc. Lets hope they can figure them out and build ginormous services.