Don't waste money on patents...

Apr 27, 2021 2 min read

How many times did you hear a pitch of founders proud to have a long list of patents?

Good patents have enormous economic leverage. Consider that the cost to acquire a US patent averages $50,000 to $60,000, but the best of those assets can produce license fees (or verdicts in a lawsuit) of $500,000,000 or more over their lifetime. The secondary patent market is a good indicator: the average patent can sell for $200,000 to $500,000 or in the neighborhood of 3-10x their original cost.

However, most patents are worthless because they are researched poorly, badly written, not managed correctly, or suffer from a host of other problems.

One of the biggest mistakes startups make is not understanding that patents need to be detectable.

This may appear to be an obvious statement, but people pour money into patents where infringement simply cannot be detected. When looking at an invention (or an issued patent), one of the first questions should be: "Can I detect that my competitor is using this invention?" If there is no way to tell that a competitor is performing the same method or manufacturing the same product, how could that patent ever be enforced? The answer: it cannot be enforced and is therefore worthless.

Most software patents are awful and not just because they protect software. Most software patents are awful because the patent owner could never detect that a competitor uses their invention. Consider a gloriously complex and innovative artificial intelligence method for analyzing a bunch of data and returning a result. The algorithm runs deep inside a competitor's datacenter, where we will never have access. Could we ever tell that the competitor is using the exact same algorithm as in our patent? No. That patent is worthless and the invention would have better been kept as a trade secret.

In another example, Tropicana famously has a patent on fresh-squeezed orange juice. The patent is a detailed analysis of how to blend different varieties of oranges throughout the season to achieve a consistent product. This is because each variety has a different color factor and sugar content, and those factors further change depending on when they are harvested. Tropicana's patent reflects a lot of work went into this research. However, Tropicana's claim 46 requires "at least about 1 percent by weight of a stored orange juice." Could Tropicana take a sample of a competitor's orange juice and tell that it had "stored orange juice"? No. That claim is impossible to detect, therefore unenforceable and commercially worthless.

These two examples are from Investing In Patents, a book from Russ Krajec that I always recommend to fellow angel investors. Indeed, one of the most important things we should carefully analyze before pouring money into our next investment is a startup's intellectual property. While doing so, we should always remind ourselves that having a long list of patents is not necessarily a good thing.

I hope you enjoyed the reading! If you miss my latest investment report, you can read it here.

See you Saturday,

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