Collision | Downtown Vegas, May 13 & 14 2014 | Post

This investor has some crucial advice for startups…

Posted May 7, 2014 by Jorge M. Torres

Today’s guest post offers great insight to Collision startups on patenting their ideas. The post comes from Jorge M. Torres, one of our investors attending Collision, Jorge M. Torres is a Vice President at SILAS Capital, a venture capital firm in New York that partners with early-stage consumer products and services businesses. He is also member of Kauffman Fellows, a global educational program based in Palo Alto that networks and trains venture capital and other innovation investors.


As a patent attorney turned venture capital investor, founders ask me all the time whether getting a patent is going to increase the likelihood that they will successfully raise money. With so much information out there on how to build and finance startups, you would think that the answer to this question is easy.

Think again. A lot of what you’ll read online is one-size-fits-all advice that simply doesn’t apply to the unique circumstances your company faces. An investor’s approach to patents often depends heavily on his or her sector focus, and this explains why some investors see patents as a waste of time while others won’t invest in your company if the core technology isn’t claimed in a patent.

​Patents rarely, if ever, let founders of young companies command a valuation multiple in a venture financing. At the same time, there are some companies that simply aren’t backable if they don’t own patents.

So where does your company lie? Here’s what I’ve gleaned from my experience working with different types of startups as an IP attorney and venture investor.

Jorge M. Torres on President Obama’s Plan for Patent Reform from Jorge M. Torres on Vimeo.

Life Sciences

This is the easiest case. I’ve never seen a life sciences company raise money that did not own exclusive rights in the drug or device being commercialized. Early-stage venture-backed life sciences companies typically own the relevant patents outright or they own at least an exclusive license. Investors in these companies expect to see patents discussed in your deck, and they will take the time to make sure that a company’s IP is strong and enforceable. It can take a long time and a lot of follow-on financing to bring life sciences innovation to market, and investors want patents in place to protect the billions in potential revenue at stake.

Consumer Products

Hardware and wearables are the areas where consumer products investors are most likely to look for patents. Having an issued patent may not be as critical as it might be in a life sciences deal, but the best investment opportunities in these two categories typically involve a compelling marriage of software and product design that founders should thoroughly consider spending time and money to protect.

​Sometimes, patents will play a significant role in deals that involve specialty consumer products where the bet is that iconic product design is going to delight customers and drive rapid growth. OXO, BUILT, and HICKIES are good examples of companies that use patents to protect features and functions of unique products. If your company wins in the marketplace because of outstanding product design, then it’s worth giving some thought to protecting that competitive advantage with at least a design patent.

Finally, patents tend not to command as much attention from investors in deals that involve packaged foods, beverage, apparel, and most offline consumer services companies. Founders building brands in these categories should be obsessed with differentiating their offering in a crowded marketplace, and investors will typically have more interest in seeing registered trademark rights than issued patents.

Consumer and Enterprise Software

There are few issues in tech more contentious than the patentability of software. Controversy aside, it’s simply not practical for most founders building companies around consumer software applications to prioritize patents. That’s because they will likely pivot to a different business in the amount of time it takes to obtain a software patent.

Besides, for social media, mobile, and e-commerce companies, the more valuable asset to own, by far, is a large network of highly engaged users. As my co-author and I have shown elsewhere, investors prioritize perceived networks effects over the size or quality of patent portfolios when they price public social media companies. In my experience, the same holds true for investors in private companies across many different consumer-facing sectors.

The case of enterprise software patents is less clear-cut. However, if your company’s secret sauce is a clever way of automating a traditional business process, then patents are unlikely to figure prominently in your investment process. Business method patents, under heightened scrutiny of late in the U.S., are some of the most difficult patents to obtain and defend.

TL;DR

The level of importance venture investors place on patents depends on their sector focus, your company’s market, and the technology behind your product. You should consider each factor carefully before deciding how much time and money, if any, you will invest in patent portfolio development. No blog post (especially this one) takes the place of good legal advice, so if things are not clear, seek out help from your patent counsel or other trusted advisor.

This post does not constitute legal advice or create an attorney-client relationship of any kind. This post may be considered attorney advertising in some states, in which case, you should know that an attorney’s prior results do not guarantee a similar outcome.

Add Your Comment

Event Sponsors