IP strategy insights for start-ups
Dr Ian Maxwell has a wealth of experience with high-tech start-ups in Australia. He has run start-ups in areas as diverse as polymers, water treatment, medical diagnostics, ICT, touch screens, solar technology and software apps. He has also been a venture capital partner and invested in many more start-ups.
With all this experience, I couldn’t wait to discuss patents and start-ups with Ian. Ian has kindly agreed to reproduce part of our discussion here.
Justin: As an experienced investor, do you believe Australian start-ups should have patents?
Ian: For an investor, the correlation between patents and investment return is too strong to ignore. I greatly prefer to invest in Australian companies that can have patents. I strongly encourage start-ups that I invest in to pursue patents. The reality is, however, that most investors in Australia are investing in start-ups that don’t have patents and don’t get a return. I advise entrepreneurs to only invest their time and effort into businesses where it makes sense to patent certain inventions.
Justin: Not everyone believes that start-ups should have patents, especially when it comes to start-ups developing software.
Ian: Yes, there are sceptics, many of whom haven’t looked at the evidence. As a scientist, however, I believe in looking at the evidence.
Pulling together the results of two studies, I found that, on average, a software start-up with patents is around four times more likely to go to an initial public offering (IPO) than a software start-up without patents. Each IPO had an average return of around four times greater than a trade sale. That is, a software start-up with patents has the potential to provide a greater return on investment than a software company without patents. (A full account of this analysis is here).
Software companies with patents are bankrupted at half the rate of software companies without patents. In my experience, when a company is bankrupted, patents offer the highest value assets to help recoup investment losses, resulting in better portfolio returns for investors.
I expect the importance of patents to be even greater for start-ups in areas other than software.
Justin: What about from the perspective of the start-up? Are patents worthwhile?
Ian: Most start-ups in Australia have a default position of not pursuing patents. Start-up founders have limited funds and find it hard to find the time for patents. These are valid issues.
In my experience, however, patents are worth pursing from the start-up’s point of view because they generally attract a better quality investor and increase valuations, and may add value on exit if the acquirer assigns value to the patent. In one study, software companies with patents received 73% more funding. This is because companies with patents represent much better business investment opportunities.
Justin: What are your start-ups’ experiences of patents?
Ian: As yet, patents have not affected the exit value of my start-ups due to particular circumstances, but I am a strong believer in the evidence.
Patents have provided value in others ways: engaging with the patent system has made some of my start-ups aware of prior art that they probably would not have found otherwise. In a competitive environment, it’s not a good idea to replicate something that has already been tried. It may also be important to work around your competitors’ patents.
Justin: What is an appropriate patent strategy for a start-up?
Ian: A start-up should consider the impact that patents will have on the likelihood of a successful exit and the exit value. A patent strategy is generally easy to develop when this question is considered.
If your patent portfolio matches industry expectations then the likelihood of a successful exit increases. To gauge industry expectations, it can be useful to look at the patent portfolio of other start-ups in the same field that have successfully exited.
Justin: Thank you Ian.
For more information contact Justin Blows, email@example.com