- how patent demands impact startups- the small fish in the sea
- the breakdown between large and small patent assertion entities (PAEs, or trolls), which pursue the suit against the defendant, i.e. corporation versus startup
- these patent demands' overall effect on the economy and looking ahead
Chien studied over 200 tech startups, 40% of which received a patent demand. She found that small companies, especially startups, are more vulnerable to failure than large, well-established companies. By small, I notice that more than half of the defendants in Chien's study make under $10M a year.
Firstly, the problem lies in the fact that as a small company, it is harder to absorb a PAE demand because it causes significant operational impact, business strategy, and losses in valuation relative to the startup's size.
Secondly, because small companies are focused on growing and building the business, they lack the time and resource to monetize their intellectual property. Unfortunately, patent sales are motivated in times of distress instead, like a "firesale" with the proceeds returned to creditors and investors instead of the company itself.
In addressing the issue, reforms that focus on startups and small companies have not been most successful to reduce the harm of patent assertion. Find out how in Part II.
Take a peak at the original paper.
I guess it will always be the case that small companies get targeted much more than the big fish, similar to nature where predators hunt the young and vulnerable ones. Measures in place by law will be more general, making it harder for the patent trolls, but the young will still be the more susceptible ones.
ReplyDeleteAs you mentioned in your other post, a collective formed by the start-ups could be helpful, but I feel experts in the patent field, perhaps those seriously irritated by the situation, could be hired into the union as well to provide guidance and help look through demand letters and determine whether it is worth challenging.
I wonder if it would be useful for small companies to consider the potential of patent trolling when starting up. If they took this into account from the get-go they could perhaps be ready when a lawsuit is filed their way. On the flip side, as you mentioned, most startups are more concerned with growing their business, which is what matters most, so it might not be a good idea to expend their time an energy outfitting themselves for lawsuit warfare.
ReplyDeleteFrom my other IEOR courses, I learnt that failure is common for entrepreneurs, and small companies are typically, or maybe definitely, started by entrepreneurs. Apart from a few lucky ones who succeed immediately at a young age, such as Mark Zuckerberg, most are in the mid-30s or 40s, so I guess they do know about such patent trolls and their big threat. But as much as the trolls can cause their company to shut, there are dozens other factors that can cause the company to fail. If they are planning for contingency plans for everything, there's no end to it. Thus, I guess they just focus on growing their business and only handle the crisis when it comes.
DeleteI studied abroad last summer, with a startup boot-camp in Estonia, and still distinctly remember the IP seminar. It was a couple of weeks into the program, when every team was making final touches and preparing to present to venture capitalists. A partner from Novak Druce, an IP law firm in San Francisco, gave a lecture about the necessity for entrepreneurs to watch their backs for aggressive litigation. One of the main points discussed was that entrepreneurs should do extensive research to see if they are in violation of any existing IP. Additionally, they should be ready to quickly and completely secure patents of their own in order to protect themselves from poachers. Although it is unfortunate that entrepreneurs must watch out for IP when they could be spending precious time and resources on innovation, it is a necessary cost.
ReplyDeleteI think what is interesting about the concept of small companies being more prone to failure from patent demands is that it promotes a more concentrated market. Small companies would not be able to compete and grow as another player in the market. What is ironic is that the point of patents is to create a "temporary" monopoly on the idea, which is exactly what this death to small startups create on the grand scheme. I believe that this is one of the reasons why an acquisition of a startup by larger and more established companies allows the survival of innovative ideas much more. Since small start have lower resource to prepare and defend patent trolls, I do believe that government's recent patent reform in an effort to try to protect the startups are very valid.
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