Patents – Do you really need them?

In the last Venture Capital Journal, Thomas Klein from Wilson Sonsini wrote a great article (Actually link doesn't work – this article requires subscription) about the diminishing value of patents for early stage technology companies. In the short article he quoted 5 recent court decisions that have created limited the value of patents. I will not repeat all the 5 cases that he quotes, but his overall verdict is clear: Leveraging patents in the courtroom is becoming harder and harder.

Thomas Klein took the legal view, but his claim has a strong business case as well. In a patents war, the startup is weak, and is constantly getting weaker. The larger companies have become patent machines. IBM is proud of its patent portfolio, and the fact that they produce patents at a rate of 10 a day. With such an extensive arsenal of patents, backed by unlimited legal funds – what chances are left for the VC backed company? This is like the US going to war against Micronesia.

In addition to that, the overall list of patents is impossible to handle. What patents are out there? What patents are in the pipeline? Even if a company files a provisional patent, it's really hard to know the value of that patent overtime, and how it will be seen vis-à-vis other patents that will emerge 3-5 years later.

The bottom line – I usually tell my portfolio companies to stay away from patents. It's a waste of time and money. Unless the company is based on a true, core, innovative IP (Usually not relevant for SW or Internet companies), I think patents should be completely avoided. Let's leave the battlefield for IBM and Intel, and spend our money on creating business value.

One last comment on this: The NVCA is doing a lot of work in Washington, to make reforms in patents law that will level the playing fields, helping smaller companies. You can read more about it on their Patent Position Paper from October 2007.

Comments

[zoobab]

http://stopsoftwarepatents.org/start

[zoobab]

I just put a quote here:

http://stopsoftwarepatents.org/quotes

[Roy Schestowitz]

Join the movement against intellectual monopolies.

[Guy Rosen]

Thanks for the interesting perspective Daniel. Despite the facts pointing that way, the community is clearly having trouble letting go of patents altogether.

Any entrepreneur, even with an Internet company, likes to think she/he has an original and creative idea. Patents are applied for because "there is nothing to lose". We all like to have that "patent pending technology" bullet slide on our VC presentations, even if only because everyone else does.

Here's my question then: you say that (where necessary) you advise your portfolio companies to avoid patents. But, when seeing these same companies before they come on board, do you go so far as to think negatively of a company that did "waste time and money" seeking patents?

[Daniel Cohen]

Guy -
Negative - No, but it's also not a positive. In other words, I will not invest in an Internet company or SW company just based on their patent portfolio.

[Saul Lieberman]

It is not unusual for VC bloggers to be negative about patents. Daniel is one of the very few to state clearly that it would be a misuse of time and money.
On the other hand, I am not sure that the industry has caught up with him... it might still be necessary for a startup that intends to seek funding to "waste" time and money on patents.

[Saul Lieberman]

from today's NY Times:

Samsung Offers $5.85 Billion for SanDisk
...
"SanDisk’s stock has lost more than half its value over the last year as the $14 billion-a-year flash memory market suffers from a glut of inventory and becomes increasingly dominated by two large players: Samsung and its Japanese archrival, Toshiba.

SanDisk, however, has something that Samsung needs: intellectual property. Mr. Harari, a former Intel engineer, recognized the value of patents early on. The company has some 860 patents in the United States and 550 overseas. Samsung pays SanDisk $440 million a year to license those patents."
http://www.nytimes.com/2008/09/17/business/17disk.html?ref=business

[zoobab]

Software markets move too fast for a slow patent process. Examination takes 4-5 years, if not more (up to 8 years in the US). Patents limit competition for up to 20 years. The software life cycle and amortisation of investments are much shorter.

The time you get your patent, the company will be closed down already. By the time many business or software patents are granted, companies are no longer in business.

[Mark McGuire]

I love to see you lead the charge here Daniel. Overall, online start up patents stiffle innovation and can be completely irrelevant. I'm on my third start up, and the other two exited successful without our patent filings mattering at all. However, I'm still seeking biz method patents for our next start up. At the end of the day, the $20k in legal fees is still worth the potential upside (if interested, you can read my full argument here: http://flywheelblog.com/2008/09/to-patent-or-not-to-patent/)