The Hut on the Goldmine: Why Start-Ups Fail to Dig for Gold

Swapna Sundar, CEO, IP Dome

Yesterday (April 26) was World Intellectual Property Day. I thought I could take the opportunity to write something that could help entrepreneurs build an IP perspective. Generally, start-ups do not have a high budget for R&D, probably none at all or for harnessing Intellectual Property (IP). But just the same, the two activities could dictate their destiny and ensure their survival in a competitive environment.Large technology corporations spend typically spend between 7% and 15% of their revenues on R&D and up to 80% of their net worth is their Intellectual Property. They have IP orientation hardwired into their DNA, giving them mastery over their IP goals. They have found the gold mine and know how to exploit it.

Start-ups often fail to see that they are sitting on great IP opportunity. Even if they do discover that they have commercially potent IP, they fail to exploit the IP appropriately. In this note, I want to list some common fallacies that inhabit the understanding of the Indian entrepreneur and inhibit optimal utilisation of IP.

• Fallacy 1: I have no IP

At a recent gathering of start-ups, I was surprised to be told by one of the mentors that ‘Wipro doesn’t have any IP, because Wipro is a software solutions company and you can’t patent software.’

This statement is symptomatic of the low level of IP education of entrepreneurs in general. Wipro provides many different kinds of services and solutions and has a wide spectrum of competencies in the consumer electronics domain, where it has more than 30 licenses for its Digital TV middleware stacks. You can patent software. Embedded software and software to run industrial processes are being granted patents regularly. Wipro filed 13 patents in 2009 and was granted one. The three IT Biggies in India – Infosys, TCS and Wipro filed together over 150 patents in 2009. And finally, IP is not only patents; it is all the property that adds value to your company over and above the actual building, furniture, goodwill, plant and machinery that you have. Wipro’s trademark is worth Indian Rs. 67,681 million. Much of the value is derived from access to new skills and IP.[i] Just to put things in perspective, the most valuable brand in India is the Indian Oil Corporation with a value of Indian Rupees 250,636 Million, which is 40% of the market value of the company.

As a start-up your brand value would be much lower, but it is never too early to invest in a brand strategy that could reap rewards a few years in the future. Apart from Patents and trademarks, your copyrights, designs and all the processes and services that give you an edge over your competition are your IP and need to be protected and nurtured.

• Fallacy 2: I will prepare for it when I have it

This would be akin to putting up your zoo enclosures after collecting your wild exhibits. If you are intending to have an IP orientation then you need to have the systems in place to secure it as soon as it makes an appearance. This would mean having in place:

1. Non-Disclosure and Non-Compete agreements with employees, development partners, associates and collaborators
2. IT security in your offices and back-end premises
3. Invention Disclosure forms and processes
4. Assessment of IP generated
5. IP strategy to make decisions on what IP can be licensed at what stage of development
6. IP development and sharing policy between the company and its employees, associates and co-developers

Having a process in place and personnel trained in the systems at the early stages of the start-up will enable your company to ensure that any IP generated is protected from malicious theft or leakage, before you or any other decision maker is informed of its generation.

• Fallacy 3: IP generation is a creative exercise.

True, IP cannot be generated by a person devoid of creative energy, but I do feel that the age of the (eccentric) genius inventor is past. Today alert, young, teams of Inventors follow a rigorous process of reaching the cutting edge of technology by a process of deduction, elimination and budget accountability with a clear commercial goal in mind. If you are looking to build an IP portfolio, you can

1. Acquire it by buying it or licensing in
2. Create IP in-house

Both activities must be supported by a clear budgetary goal and your business strategy. I have filed patents for some inventor-entrepreneurs whose inventions straddle vastly diverging technologies. They find it very difficult to commercialise their IP as:

1. They are unable to transfer their reputation in one technical field to another unrelated field
2. They are unable to convince investors of the commercial value of their inventions as they are unable to demonstrate a consistent growth or stacking of IP in one technology
3. They have no clear patent strategy and rely only on their creative instincts to guide them, with the result that they are short of funds and at the mercy of the first person who offers them any money for the invention

Creativity does not by itself translate into good business; a well thought-out business strategy is necessary.

• Fallacy 4: I cannot control where my IP goes after office hours.

My partner, Mr. Raghavendra Ravi likes to say that your IP comes to work at 9 in the morning and leaves at 5 in the evening...and you don’t know until you see him the next morning whether it is going to be there. Unless you are in control of your IP, and have it secured from all threats, your IP could be lost over the weekend. Companies such as Lockheed Martin have lost IP to competitors.

Apart from your Non-disclosure and Non-compete agreements, it is important for you to log the ideas being generated and inventions being disclosed, while this is going on. There are different ways of doing this, but perhaps the most common is to use an inventor’s log. An inventor’s log is a bound notebook, where day to day developments are entered; the entries are witnessed and signed. The log is evidence of the creation of IP during working hours and using the resources of your company.

You can also control your IP by making friends in the market. Your nearest competitor is also likely to be one who wants your IP the most; but if your nearest competitor is also your friend in the market, then your employee is less likely to be able to sell your IP to him. A good example is the 2006 incident when Coke employee Joya Williams tried to sell the recipe and sample of Coke’s new drink to rival Pepsico. Pepsico informed Coke management who alerted the FBI who arrested Williams and her accomplice.

• Fallacy 5: I have monopoly over IP; so I must keep it safe

If the object of the law was for you to keep your IP under lock and key, it would not have provided you with exclusive right to use, sell, make copies, manufacture, and export your IP. Monopoly exists because without it, when you publish, or put your IP on the market, a host of imitators and infringers would be competing against you in no time. On the other hand, IP has no meaning if your fear of infringement prevents you from exploiting its commercial potential.

Historically, exclusive rights were granted to persons who brought new technologies into the country for a period. During this period they could make a large profit by charging high prices for their ‘novel’ products. This incentivises innovation. When the period of exclusivity is over, other competitors step in and the prices drop to the levels dictated by conventional market logic of demand and supply.

The position is the same today too.

1. Patents grant exclusivity for 20 years
2. Copyright for 60 years after the lifetime of the author, or 100 years if the work is produced by a corporate
3. Designs for 15 years

The period of exclusivity reimburses the owner of the IP for her effort, R&D expenditure, and marketing and legal expenditure, besides providing for a large profit. You need to take a certain amount of risk, and be prepared to sue when you decide to market your IP. The Indian Government is taking a tougher stand against IP infringement now as can be seen from police raids on shops selling pirated CDs. In cases of IP infringement, courts grant an injunction against use of the IP or order the alleged infringer to maintain records of revenues till the case is decided so that monies due to the IP holder may be paid to her in full.

• Fallacy 6: The value of my IP cannot be judged

It is hard to value IP, but it is done and done very accurately, too – not just its commercial value, but also its technical value and the market’s adaptability.

I am a little sceptical when inventor-entrepreneurs come to us with a prototype or a proof of concept that they believe will have disruptive potential in the market; that will overtake the best alternative technology already in use and will change the way people look at product. The reason is that really significant research today is the domain of large well-endowed multi-disciplinary teams of researchers working towards specified results that can command really high prices. I would be delighted to commercialise a totally new technology or product developed by an inventor-entrepreneur.

On the other hand, I am more confident of the commercial potential when working with companies who come to us with a tentative invention disclosure by an employee hired to develop the idea which could grant their company a small competitive edge for the next 2 years based on a market survey and they ask how they can best leverage it.

Prior art search reports are essential in any IP development programme. The report tells you what already exists, what gaps exist in the development of the technology and what tangent can be explored. Market surveys, IP landscaping, IP mapping and tracking the competitor’s IP among others are tools we use to judge the value of IP.

When it comes to valuing one’s own IP, there is a tendency to either over-estimate or under-estimate it. An objective value will indicate whether there is commercial potential in proceeding with the development programme. If the indications do not suggest commercial value, the research can be halted and the results, partially developed IP, modules and any other valuable content can be sold or assigned independently. This is also called IP waste management.

• Fallacy 7: I know my technology best

Just yesterday, I had a meeting with a client who insisted that no one could understand his technology as only he knew it best. He claimed to have studied every journal or research paper in the field of technology and that he had found nothing even close to his own invention. He also said that he had met several IP professionals and found them ill-equipped to understand his invention.

One could agree with such a sentiment. It might be true too. However, it is essential that atleast one other person see value in the technology as well as the inventor-entrepreneur – the potential buyer or licensee. Commercially, a technology with close prior art and widely used alternative technologies is a better bet for a start-up than an impressively new technology with no alternatives existent in the market. Maverick products like the iPod need aggressive marketing and brand building that may be beyond the budget of a start-up.

Good IP portfolios are a combination of technological superiority, sound protection in law and smart business sense. I found that my entrepreneur client of yesterday was neglecting the business angle. He would not be able to explain the value of his invention to his buyer. What he needs to do is to study his technology, its embodiments and applications so deeply and well as to be able to explain it to the CEO (who may not be the technical head) of the company to whom he wants to sell it.

By the very nature of the work they do, IP professionals – attorneys, innovation intermediaries, strategy advisors, product development agencies, branding consultants, technical search agencies and others work with different technologies, and at the cutting edge of these technologies. Some of them are technology agnostic. Because they are ‘clued in’ to the IP economy, also referred to as the creative economy, their support and input is invaluable in any technological field.

In conclusion, have in place an IP policy from the start of your enterprise; clear IP goals can take you a long way towards building a sustainable competitive edge in the market. It is never too early to start being IP oriented!

The author is the CEO of IP Dome, Intellectual Property Strategy Advisors, based in Chennai, South India. She can be contacted at [email protected]

[i] http://www.rediff.com/money/2006/apr/11spec.htm