The topic of software patents has been getting a lot of coverage lately, and I think it is one that angel investors need to take note of, as it can — and invariably will — impact software companies in their portfolios. In the interest of full disclosure, I have been on both sides of the patent issue in my software career: as the sponsor of patent filings; co-inventor on patent applications (one still undergoing review); deponent for defense in litigation; and admittedly as an investor asking the question: “what sort of IP protection do you have?”
With the exception of the one instance being sued by a patent troll, I never gave the topic a lot of thought. When in small companies, I thought of patents as a fair way to provide some added defense in the ongoing battle against competitors large and small. When in larger companies, I accepted patents as part of the larger armory of legal tools that kept big competitors from suing each other into oblivion – a form of mutual assured destruction for the business world.
But that once instance with the troll was really, REALLY annoying. It taught me that there is a special class of company – typically small and unsuccessful at their core business – that doesn’t really value innovation, but instead sees the opportunity to use a legal instrument to build a business around. They are the bottom feeders of the technology world, and unfortunately their numbers are growing.
As an investor today, I often catch myself asking companies if they have any IP protection. In truth, I’m not all that biased by the answer, but want to know if the company has thought about it and how deep their innovations go. Essentially, the existence of a patent or patents tells me how the entrepreneur is looking at the market: a “better mousetrap” entrepreneur starts with IP, but a “change the world” entrepreneur starts with the customer and the business opportunity.
The reality is that for small companies – startups and even established SMBs – patents are an ugly trap. In a post earlier this week, Brad Feld talked about the various types of software patent plaintiffs, and referenced a previous post by his secret lawyer friend, Sawyer, entitled Why the Decks are Stacked Against Software Startups in Patent Litigation. I suggest that entrepreneurs give both of these a good read to understand the dynamics of the patent litigation process. Those who have been through patent litigation know that the answer is never as simple as did or did not infringe, because so many software patents are vague and over-reaching.
So litigation is the key, because without litigation a patent doesn’t have a lot of value. If a company wants to defend its patent, it will have to sue – or be sued. And therein lurks the struggle for the entrepreneur: many believe that a patent will help them attract funding and protect them from evil competitors – a magic talisman for startups. In practice, it often becomes a useless time- and money-sucking exercise that never comes into play, because to defend it costs more than the startup can afford. Entrepreneurs have to ask themselves if chasing alleged patent infringer is in their business plan, or even in their DNA. If you want to build great products and solve hard problems, you typically don’t start by hiring lawyers (apologies to my lawyerly friends).
Thinking about this issue, I tried to fit the dynamics into the ubiquitous 2×2 matrix, with company size (big and small) on one dimension, and patent strategy (defensive or offensive) on the other. The result left a void: large companies pursuing an offensive patent strategy (“offensive” meant here in the “aggressive” and not necessarily the “odious” sense). None came immediately to mind, but a recent NY Times article on Intellectual Ventures (IV) in the Seattle area provided a possible candidate. Admittedly, the IV strategy isn’t perfectly transparent, but they are very well funded and are attracting lots of customers and impressive revenues. For now, I take them at their word that they are trying to improve the marketplace for patent cross-licensing, and providing value to companies both large and small.
So we have a complete picture of the world:
On examination, I ask myself which of these strategies we (as an industry and body politic) really want to encourage through the issuance of software patents. With the exception of providing the software startup with some kind of short-term defensive tool during their earliest stages, I can’t see that any of these are more than manifestations of the inefficiencies inherent in the market today. And for the software startup, copyright and trade secrets should provide adequate protection while they raise money and enter the market.