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In the last post, I discussed the different types of non-operating entities that may acquire intellectual property. In this post, I will talk more about the different strategies these entities pursue and what implications that may have for a technology start-up.

Strategic buyers’ interest

Strategic buyers are usually mostly interested in the product and the market. In the sense that patents support a competitive advantage, and this is reflected in premium margins, they add considerable value. In some industries, such as life-sciences, patents are indispensable. In other industries, patents only play a supporting role. Some strategic buyers will be interested in patents for defensive purposes: either they have a product or they intend to develop a product that may infringe on the intellectual property of the seller.

Strategies of non-operating entities

Most of the non-operating entities will eventually try to find targets that license the technologies (or collect damage awards through litigation). Some will act for operating companies as a direct or indirect front to take intellectual property off the market and prevent others from enforcing the rights aggressively.

How does all of this affect start-ups?

1. Broad Strategy

From the outset, the patent strategy should be as broad as practically possible. This means being cognizant of other applications for the technologies, even if there are no current plans to pursue them. These areas can lead to additional license revenue and make the intellectual property more attractive to a wider range of potential buyers and licensees (strategic and non-operating alike).

2. More isn’t always better

Many companies are trying to amass as many patents as possible in support of a very specific product concept. It might be more cost effective to have fewer, but stronger/blocking patents, that also extend into adjacent application areas.

3. Who’s infringing. Today and tomorrow

It pays off to be aware of anybody currently infringing or on the trajectory to infringing on the company’s intellectual property. Any such instance – even if small and in different markets, will help to make the patents more marketable and may lead to higher income now or later.

4. Enforce the patent rights yourself, or have a “friend” enforce

Which leads to the question what to do if there actually is somebody infringing upon the patents. If the perpetrator is a direct competitor, it certainly makes sense to enforce the patent rights oneself. If the infringement happens at the margins of ones application, or is not worth the effort, or if the necessary funds aren’t there for a drawn-out legal battle, then there are plenty of non-operating entities that may take on such a case without the company itself acting as the bull in the China shop. Usual arrangements involve a sell-and-license-back agreement with the acquiring entity.

5. Geographies matter

Sometimes it pays to patent one’s intellectual property not only in the more obvious jurisdictions where the company intends to do business, but also in others, where potential acquirers reside. Some international non-operating entities will not be interested in US-only patents, but rather look for international scope.

This gives just an overview of some of the considerations for technology start-ups and their patent strategy. Beauty is in the eye of the beholder, and often start-ups are too narrow in the pursuit of patent protection and miss some of the beauty that others may see.

Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst (CFA) designation and an Accredited Valuation Analyst (AVA/NACVA). Gunther is a Member of the Board of the German American Business Association (GABA).

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