Should You Invest in Patent Protection?

Patent protection is an investment in technology. Like other investments, it can be expensive and uncertain. However, for a technology startup, patent protection can also yield an outsized return by attracting investors, increasing valuation, and/or generating royalty income. A patent portfolio can also be used as collateral or sold at a profit.

The value of a patent portfolio derives from the ability to use the portfolio as a barrier that prevents others from making, using, importing, or selling similar products and/or providing similar services. The ability to prevent others from reaching a particular market is especially relevant for technology industries and business models where the only other barriers to market entry are often time and money.

Here are a few ways to realize the value provided by a well-developed patent portfolio:

• Investors look for patent protection. Experienced investors usually look for patent protection when conducting due diligence prior to investment. Patent protection helps investors preserve their investment by establishing and maintaining barriers to competition that can enhance the value of your technology in the market.
• Patent protection should increase your valuation. If established properly, the barriers provided by patent protection should increase the value of your startup by enabling you to control access to the market(s) for your technology. All things being equal, a startup having patent protection that provides tight control of access to large market(s) should have a larger valuation than a startup without meaningful patent protection. In addition, a future buyer will typically consider the strength of your patent portfolio in determining the value of your business.
• Patent licensing may generate royalty income. If your patents cover a product or process that you do not plan to sell yourself, you may be able to license your patents, on either an exclusive or non-exclusive basis. Under such a license, you would receive a royalty from the licensee in return for permission to make, use, and/or sell the products or processes covered by your patents. Likewise, you can structure the license fee as a one-time payment; a recurring payment equal to a percentage of gross sales of the product(s), process(es), and/or service(s) covered by the patent(s) under license; an up-front payment against future sales; or any combinations thereof. A patent license can bring in thousands to millions of dollars per year, depending on the technology, the industry, as well as the strength of the patents being licensed. For example, between 2003 and 2011, Kodak made about $3 billion licensing its intellectual property—including almost $1 billion from licensing a pair of patents to LG and to Samsung.
• Patents can be sold. Patents are assets that can be sold, often at a profit. In 2011, Nortel sold 6,000 patents to Apple and Microsoft for $4.5 billion, or about $750,000 per patent—far more than the cost to obtain and maintain each patent. In 2014, Google’s purchase of Motorola included $5.5 billion for 17,000 patents, or about $323,000 per patent. While few companies have patent portfolios of such magnitude, even sales of single patents can provide meaningful proceeds.
• Patents can be used as collateral. Using patents as collateral is a convenient way to raise funds without diluting ownership, which especially useful for start-ups that are often short on more traditional forms of collateral. In fact, a recent uptick in patent sales seems to have spurred the use of patents as collateral in venture lending.
• Patents can be cross-licensed. Occasionally, your patent portfolio may cover something someone else wants to make, use, import, or sell, and they may have a patent portfolio that covers something that you want to make, use, import, or sell. That other party may be a competitor, a supplier, a customer, or someone operating in a tangential technology area. In this situation, you can trade access to your patent portfolio for access to their patent portfolio by using a cross-license.

Patents can be enforced. If your patent is being infringed, you can enforce it by filing suit in federal court. However, because patent litigation tends to be very expensive and last for years, enforcement usually does not make sense for most start-ups. Nevertheless, a patent portfolio’s value derives directly from the ability to enforce it. The most valuable patent portfolios are ones that cover profitable markets for technology, are easy to enforce, and are less susceptible to attack during patent litigation. Even if you do not plan to enforce your patent portfolio in the short term, you might enforce it five, ten, or fifteen years in the future. Likewise, if you plan to sell or license the portfolio, the buyer or licensee may want to enforce the patent portfolio. Therefore, thinking about enforcement while developing your patent portfolio will help you maximize the return on your investment in patent protection.