Is it worth getting a patent?

canstockphoto20633593Many entrepreneurs wonder whether it’s worth patenting their technology.

A number of studies have demonstrated that, on average, the more intellectual property a company holds, the higher its market valuation. In particular, there is a strong correlation between the number of patent citations and the market capitalisation of a company. Indeed, the most successful corporations in the world make a practice of extensively filing patents.

So why would an entrepreneur not seek patent protection if it is available for their technology? We suspect that the most common reason is the cost of obtaining patent protection.

 

The real question
A patent is a business tool, so patent costs should be viewed in this context. As with any business tool, the total benefit of owning the tool needs to outweigh the acquisition costs.

Therefore, the relevant question is: do the benefits of a patent outweigh the costs involved in obtaining it?

There is not a single answer to this question. The costs of a patent can vary substantially, depending factors such as the technology and the jurisdictions covered. Also, the potential benefits offered by a patent depend on individual circumstances.

To shed some light on the question of whether the cost of a patent is worth it for smaller businesses, it’s instructive to look at how start-ups have been using patents. A recent blog posting discussed some data published in 2009 about the use of patents by high-tech entrepreneurs in the USA. Some of the findings were:

Patents were found to be highly relevant to obtaining US venture-backed funding at biotechnology and IT hardware-based start-up companies. Interestingly, patents were also relevant to software-based start-ups gaining venture backing.
Patents were found to be more relevant to obtaining angel and “friends and family” funding than previously thought.
Patents were found to help start-ups compete in the market with their technology, but this was much more pronounced among biotechnology and hardware companies (including both medical hardware, such as surgical devices, and IT hardware).
It is clear from these results and anecdotal reports that investors like to see start-up companies hold patents. There are quite a few reasons for this, including:

A start-up with strong patent protection will generally have a higher exit value and higher gross margins on its products.
Patents offer a degree of assurance that the technology is unique and innovative.
The patent monopoly gives the start-up a competitive edge against incumbents in the market.
In the event that the start-up needs a licence to IP from another organisation, the start-up may be able to offer a cross-licence to its own patents instead of paying royalties.
Patents have the potential to be licensed in other fields of use and thereby generate passive income independently of the start-up’s core business.

Patents are viewed as an asset that have a certain amount of value even if the start-up fails. In the worst case, patents and other IP can be sold or licensed in order to recover some of the original investment.
The above reasons are relevant to almost any company, including companies that are not start-ups or not seeking investment.

Much of a patent’s value derives from what it does: it gives you the right to prevent others from using or selling your technology for up to 20 years. That’s a very handy thing to have when you’re trying to compete with established players in the market.

In addition to preventing others from using your technology, a patent makes it practical to sell or licence the rights to the technology. That’s because a patent is a legally recognised form of property. A patent is similar to real estate in that it offers the opportunity to derive regular passive income by licensing it to another party. However, a patent has a big advantage over real estate: a patent can be licensed to multiple parties simultaneously without incurring additional costs.

So is it worth getting a patent? It’s a matter of working out the likely costs and weighing those up against the potential benefits. The answer will depend on individual circumstances.

Justin Blows

j.blows@phoenixIP.com.au