When University Start-ups Begin to Patent Like Corporations

When University Start-ups Begin to Patent Like CorporationsStart-up patenting strategies have become as sophisticated as those of incumbent companies and start-up patenting costs have reached new heights — the average reported cost of a single patent was $38,000. (See the Kauffman-funded Berkeley Patent Survey of 2008, by Stuart Graham, Tech Sichelman, Robert Merges, and Pam Samuelson). The Survey data on start-up patent strategies offers insight into our current university model of start-up formation.

US universities spin off hundreds of new start-ups each year and spend millions of dollars to help their start-ups get patents. By way of background: a university start-up takes shape when an entrepreneur with a passion for the university-owned technology – typically the faculty member or student who invented the technology — licenses it from the university. New university-based start-ups, like most start-ups, want patents but don’t have the money to pay outside attorneys. To help their fledgling start-ups develop into mature technology companies, universities pay their patent costs with the contractual understanding that they start-up will later pay them back. Payback can take the form of an IOU for cash plus interest, or at some universities, the start-up agrees to give the university a chunk of equity in the company.

Berkeley Patent Survey data indicates, that rightly or wrongly, start-up patent strategies run the gamut from protecting core IP to locking up ideas they don’t plan to use, but don’t want others to get their hands on. Universities are not VCs; as the IP strategies of start-up companies become increasingly expensive and sophisticated, universities face new challenges. One, from a purely fiscal perspective, speculative patent payment is risky and expensive. Two, it’s very difficult to figure out which start-up is going to earn enough money to later pay back its patent costs. And three, unlike VC investors, it’s not clear whether universities should pay for start-up patents that some would consider unethical, e.g. paying to file broad patent claims on ideas that the start-up will likely never develop into a product.

Start-ups are as sophisticated as larger firms in their patenting strategies

Survey data indicates that the most important reason for getting a patent, even for software start-ups, is to prevent others from copying their idea – pretty much the classic old-school purpose of getting a patent (this held true across all industries — biotech, medical devices, software and hardware). What many people don’t realize, however, is that start-ups get patents for a whole host of other reasons. Start-ups get patents to improve their negotiating power, as a marketing tool, as red herrings to lure competitors off the scent of their product strategy, and to obtain “squatters rights” on ideas they may never use in a product.

This has a few implications for university start-up strategies. First, what constitutes “appropriate” and “inappropriate” patenting is no longer as simple as it once was. In other words, even innovation-oriented “good guys” such as technology start-ups execute patent strategies that go beyond just protecting their core product ideas. Second, if university start-ups are going to compete with their rivals that use patents to lock down market turf or to bully competitors, universities need to get comfortable with the idea that start-ups in their care will need strategies that go beyond just getting a patent to block rivals from copying a product idea or method.

Start-up patent costs are high

Available funding is key to a start-up’s patenting strategy. Start-ups reported that the primary reason they don’t get patents, across all industries, was the prohibitive cost of getting them and the cost of enforcing them. Perhaps not surprisingy given the shoestring nature of most start-up budgets, a whopping 76% of the start-ups surveyed said they held no patents.

Many on-campus entrepreneurs feel that coverage of patent costs is the most valuable service universities offer their early-stage, cash-strapped start-ups. Typical on-campus offerings intended to help start-ups bridge the so-called “Valley of Death” such as VC showcases and entrepreneurship workshops simply are not as useful as cold, hard cash to cover patent costs. VC-backed start-ups are significantly more likely to build a patent portfolio. The Berkeley Survey didn’t call out university start-ups as a unique category, but I wonder whether university-backed start-ups are also more likely to file for patents than those who receive no external funding.

Who gets the new shoes?

The Survey confirms what most of us already feel to be true: biotech and medical device start-ups perceive patents to be critical strategic tools to block others from copying their products. In contrast, although software start-ups filed for patents primarily to protect their idea, software start-ups ranked patents as their least important strategy for attaining competitive advantage. For software start-ups, first-mover advantage is the most important, followed by having interoperable or proprietary products, then trade secrets. Software start-ups value copyrights and trademarks more than patents, but less than time to market, product innovation and secrecy.

It’s a tough decision for a university licensing person to decide which start-ups need patent funding most. All start-ups, if they can afford them and to different degrees, value patents. Particularly as a vehicle to signal value and intent to the marketplace and to potential investors. While VCs investing in biotech and medical device start-ups value patents more, VCs backing software and hardware start-ups value patents as well. Biotech start-ups said that 97% of the VC firms that invested in them said that their patent portfolios were important in their decision; 59% of VC-backed software and Internet start-ups reported the same.

Better screening methods are needed, but what?

Venture firms manage large portfolios of start-ups because it’s darn hard to figure out which ones are going to make money. As my friend David Anthony likes to say, “If we VCs knew exactly what we were doing, we wouldn’t have 40 start-ups in our portfolio. We’d have one or two.”

Clearly, there needs to be some sort of orderly process in place for someone to walk out of the door with a start-up license and some of the university’s money. Based on my own experience and confirmed by research conducted by the RPX Group, many universities require would-be entrepreneurs to write a business plan in exchange for receiving a start-up license which must address the following: the timeline for receiving funding, names of the desired management team and timeline to get them into place, and planned activities to develop the technology, including specific market opportunities and resources available to implement the commercialization of the technology.

While the required business plan provides a necessary paper trail and operational procedure, even the best-written business plan is not going to successfully guide a university licensing person to the right start-up that will eventually pay the university back. No person or no plan can predict which start-ups will earn money, hence are worth investing in. Perhaps the real value of the required business plan is to indicate how serious a faculty member or student is about the start-up. Another unstated benefit of the business plan is that, like a written essay exam, it demonstrates which would-be entrepreneurs are capable of thinking clearly enough to successfully navigate the treacherous waters ahead of them.

A handful of universities are experimenting with “express licenses” to make the start-up formation process as quick and painless as possible. However, even a transparent and upfront standard set of licensing terms and a clear “no surprises” approach to a payback schedule, license fees, equity taken, and product royalty rates are based on the idea that the start-up will eventually become profitable. A public and straightforward license does not solve the very difficult problem of how to get patent costs reimbursed by a cash-poor or failed start-up.

Should universities pay for “inappropriate” patents?

Universities are not VC firms yet their start-ups must play in the rough and tumble real world where a start-ups’ patent portfolio plays a critical role in its business strategy. In theory, at least, the reason universities are permitted to own patents on federally funded research is to serve the greater good. At what point does a start-up’s patent strategy veer away from protection (appropriate) and into the realm of hindering the potential of other technology-based start-ups?

Appropriate use of patents, most would agree, is a straightforward cordoning off of a novel, useful and non-obvious idea that a company plans to build into a marketable product. Inappropriate patenting, in contrast, would be for a company to obtain patents, sit on them and ambush unsuspecting companies for violating its un-used patents (e.g. patent trolls). This gets tricky when universities venture into paying for what some would consider inappropriate patents, such as a patent that makes very broad claims over an area of basic research.

Conclusion

True, a number of issues are raised by the current practice of universities speculatively paying the patent fees of their licensed start-ups. However, with all the criticism of university strategies for start-up innovation and entrepreneurship, universities do not get enough credit for the simple fact that they put their money where their mouth is. As players in our innovation ecosystem, universities remain willing to gamble on cash-strapped start-ups. At the end of the day, who else is offering to pick up the tab to pay patent fees for start-ups who will likely never earn a dime?

Universities are one of the few organizations out there who have deep pockets but are not profit driven, are not held to a firm bottom line, nor made accountable for return on investment (how many “former VCs” do you bump into these days at conferences?). Warts and all, as start-ups must compete with other start-ups in a big patent arms race, universities continue to foot the bill to pay patent costs for start-ups that will likely never be able to pay them back.

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Melba KurmanMelba Kurman writes and speaks about innovative tech transfer from university research labs to the commercial marketplace. Melba is the president of Triple Helix Innovation, a consulting firm dedicated to improving innovation partnerships between companies and universities.

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