Why Patents Matter to Startups

Why should a startup bother patenting its innovation when the application process takes over 2.5 years on average for utility patents? Though valid, this question misses a crucial point. Patent applications help startups get funded.

Get Patents to Get Funded

According to a 2008 Berkeley Patent Survey, patents play a significant role in securing funding for technology startups. Thepatentsurvey found that venture-backed startups had a median of 6 patents or applications, while startups without venture capital tended to hold no patents or applications. Venture capitalists clearly prefer to invest in tech startups with patent-pending technology, and they’re not alone. Angel investors, banks, and friends and family also consider patents an important part of their funding decisions.

The survey also found that patents usually increase both the probability and quality of liquidity events, which will likely incentivize investors to fund startups choosing to patent. Additionally, patent portfolios can be part of defensive strategies to prevent or discourage others from asserting patent infringement claims against startups.

Patent Strategies for Early Stage Startups

With these findings in mind, why would tech startups forego patents? At the top of the list is cost. It’s a chicken-and-egg dilemma for cash-strapped startups: they need money to invest in protecting the IP that will in turn secure more funding.

One strategy is to get short-term patent-pending status and defer hefty legal fees by filing provisional applications. If converted to a non-provisional application within one year, your non-provisional will benefit from the earlier filing date of the provisional. But be careful; back-dating applies only to content disclosed in the provisional patent application, so anything added to the non-provisional will not benefit from back-dating.

While this may sound like an easy fix, relying on provisionals can be risky. You get what you pay for. A few hundred dollars spent on a bootstrapped provisional drafted by a non-expert can’t realistically provide the same value as a non-provisional written by an experienced patent attorney. Still, provisionals can be instrumental in buying time to raise capital.

Another option available to private companies is exchanging equity for patent legal services. Certain boutique law firms that represent startups offer either deferred or discounted attorney’s fees in exchange for equity. The main difference between deferred and discounted fees is in the payback process. Deferred legal fees may become due upon a larger capital raise such as a large angel round or a Series A round whereas discounted fees typically do not need to be paid back.

Ultimately, it’s best to evaluate options for IP protection before publicly disclosing your concept (e.g., pitch competitions, crowdfunding campaigns, launches, trade shows, etc.). Find a startup patent attorney who will understand your situation and can help develop a patent game plan that meets both your funding and acquisition goals.

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