If you’re a startup or an early growth company and have intellectual property (IP) that might be patentable, does actually getting it patented make sense for you? I’m Rick Williams. I sit on the boards of directors of technology companies and I advise their leaders as they make key decisions on the path to growth and success.

Your Patent May Not Be as Valuable as You Think It Is

A first takeaway from this talk is that your patents may not be as valuable as you think they are. Investors will evaluate your patent and IP portfolio before they consider investing in a your company. We’ve all heard the story of Apple paying $530 million to a small technology company for infringing on that company’s patents relating to Apple’s iPad products, but let’s look at a hypothetical case.

Related: Business Valuation Basics

The case of Big Idea Technology, which we’ll call BIT. They’ve created a novel technology that improves the operation of CAT scans that are used in major hospitals and they filed for two provisional patents. BIT, at this point, spent another $10,000 to file the non-provisional patents, and these two patents were actually issued. Another company, Here First Technology – –we’ll call it HFT – –is introducing a product very similar to BIT’s. BIT believes there could be a patent infringement and files a notice with HFT. HFT’s response is, “Sue us if you want.”

BIT’s CEO and board think now is the time to get some new intellectual property lawyers involved. The lawyers then review BIT’s patents. They come back and tell the CEO and the board that the patent filings were really very thin. If they go ahead with the patent infringement suit, they might have to pay HFT’s legal fees, and the costs of pursuing this suit, whether they win or lose, is going to be $2 million to $4 million.

Related:

What does BIT and its leadership do at this point? Its patent filings were thin. They don’t have the funding to defend the patents in court. The founding team – –their investors, their customers – –are all depending on what BIT is going to do at this point and whether it can successfully compete in the marketplace against HFT.

Patents Must Be Properly Filed

Let’s step back for a second and think about how one might have gone through this process differently. We need to start with an understanding that patents are a defense against competitors and they’re very expensive to have any real value to your company. The patents will only have value if they have been properly filed and you have the funding to defend the patents in court. It’s very difficult for startups and early stage growth companies to create real value for themselves in patents.

Patents can be, and often are, a legitimate part of a company’s intellectual property (IP) strategy, but trademarks, copyrights, trade secrets, confidentiality agreements, mutual confidentiality agreements, and cyber defenses are also important elements of an intellectual property strategy. You need to carefully consider the trade-off between filing for a patent, which means disclosing your technology, and keeping your invention a secret from competitors.

Related: Patent Pending: A Patent Agent’s Take

Having said all of this, patenting their intellectual property is absolutely essential for some companies. The pharmaceutical companies are a very good example of that. On the other hand, Coca-Cola has never patented its formulas and keeps them as a trade secret. As we all know, patents are under attack in much of the software world and the app worlds, but while I’m saying this, whether it’s true or not, investors believe that patents are necessary for defending a company’s technology against competition.

Play for Time

Okay, so let’s go back and start for the beginning again. When funding is limited and you do want to patent your technology, here are the appropriate steps to follow. First, play for time in this whole process. File inexpensive provisional patents, but after you’ve done that, go out and determine whether there is significant consumer or customer acceptance for your technology in the marketplace.

Outline Your Profitability Potential

Once you’ve done that, go to your investors and financial partners and outline the revenue and profitability potential from these patents. Ask them to put the funding into the company that will enable you to defend those patents and make them a real value to the company. GSo get the funding in place before you make the full commitment to the technology. Make this funding separate from the funding for the company that is necessary for its growth.

Related: Venture Capitalists: Why and How They Invest in Startups

It doesn’t make any sense to think that you can fundraise once you’re in a patent dispute with a larger competitor and that you can convince investors to come in and defend the patents. It’s not going to happen. So that’s the better approach when the patented technology can create significant market opportunities that the company would not otherwise have.

There are some cases, however, where the less expensive patents can add value to smaller companies. Patents, for instance, record who owns what if you’re in a collaboration or partnership agreements with other companies. If the company is on a clear path to acquisition by a larger, well-funded company, then patenting your technology can make sense because the patented technology will create more value for your company in the eyes of the company that will be acquiring you.

Having said this, in all of these cases, you need to keep the cost of filing and defending the patents in proportion to the real value to your company. It doesn’t make sense to put precious funding into patents that you, in the end, cannot defend against competitors.

So I hope this gives you a better perspective on the balancing act that you, as a leader of a startup or growth company, needs to take toward all of your intellectual property, including your patents.