"Patents are like nuclear bombs, you just got to have some. I have never seen patents make a business, but I have seen lack of patents hurt a business on many occasions."
— Fred Wilson VC Cliche of the Week
Entrepreneurs often ask me about how useful patents are (and for what). Many business plans have some claim ("we have seven patents issued on our process") in their "Top Reasons to Invest" list. (It usually sits below "we have no competitors" but above "our market is $10B and the financials are conservative").
I think Fred, a fellow Feedburner investor, sums it up quite well in
his post (as usual). Wikipedia also has a nice overview on the patent
topic in its Patent Entry. Having seen patents in action across a broad array of industries and companies, I would generically say that patents are useful defensively (e.g. preventing you from getting sued) but have challenges offensively (e.g. using to keep competitors out). I would also differentiate between patents related to software and services versus hardcore material science.
In hardcore scientific applications, patents can play a very key role in keeping competitors at bay. Our company, Imago, has a series of patents around Local Electron Atomic Probes (I won’t digress here as I am certain you are all familiar with the field 🙂 ). These patents have been very effective since they cover the key approach and processes regarding this type of imaging technology. There are few alternatives, so most players are limited in what they can do in this field. This is an example of a key blocking patent. However, it is effective because nature has presented few alternatives in the law of physics to this approach.
That said, even in this realm, they can fail to work. We had one company with $15M worth of patents (covering some 140 claims). It was a massive portfolio. Two global 100 companies, determined to enter the space, managed to create solutions that circumvented nearly all of them.
There are very few situations where such a toll bridge exists. In services and software, there are often many bridges onto the island. Process patents, in particular, while they can create speed bumps, can often be circumvented by slight tweaks to the process used. Additionally, even if you come across an infringer, it is extremely costly and time-consuming to litigate. Instead of building your business, you find yourself dragged into legal procedures. It is even more daunting if the infringer is a large corporation. For every Blackberry decision, there are hundreds that either settled early or were driven out of business trying to finance the challenge.
The downside of patents is that they disclose your secret sauce to the world. If your product takes time to ramp into the market (getting channel partners signed up, etc), your competitors will have time to reverse engineer your product. Several of our companies have filled patents on various aspects of their businesses but have kept their "secret sauce" out of the patent filings, electing instead to treat them as trade secrets (good entry in Wikipedia on Trade Secrets). Trade secrets have no expiration, but, if discovered, do not provide the limitations on use that patents do. One of the most famous "Trade Secrets" is the formulation for Coke. Keeping it secret is the challenge which is where rigorous use of Non-Disclosure Agreements, Non-Compete’s, IP management strategies (keep the components of the IP separated so even if one piece is discovered, it is useless), etc.
You also have to figure out where you want to file your patents and how much to spend. You can file in the US, in Europe, Asia, for individual countries, etc. At $10-25k per patent (and up), they are not cheap. Filing under the PCT (Patent Cooperation Treaty) buys you additional time to file in other countries without incurring the patent fees today. Filing just in the US protects you against US competitors or foreign competitors that want to sell in the US. However, it does not cover foreign competitors selling overseas.
So, what is my conclusion? Patents are expensive and complex so get good counsel. Patents won’t like keep competitors out at the end of the day (nor create foundation upon which a company is built), but they will create speed bumps and help prevent others from suing you. Investors will give patents some value, but generally they will be looking to execution, management and business model much more. So, don’t expect to wow the crowd with your patent portfolio.