The Role of Patents for Software Start-Ups

Over the past few years I have shared my disdain for patents in web services. It’s not that I don’t value patents as a mechanism to protect, reward and encourage innovation. What I take issue with is patents of simple processes that are not innovative at all. Amazon’s 1-Click is the poster child for such patents.

I have had the honour to discuss my business with some very intelligent business people: some VCs, some start-up advisors, some Fortune 100 executives. Roger Davis, former CFO of AT&T, spent a good chunk of time reading my blog and confronted me about my disdain for patents. He also asked a great question: “In lieu of a patent, what sort of sustainable competitive advantage can you offer to investors?” I have my answers, but that’s a post for another day. The reason I bring all this up is I have never been comfortable with the role of patents in a web services start-up’s arsenal. Until now…

A few weeks back, Paul Graham wrote a great piece about patents. My trouble has always been the tension between the obvious benefits of patents and my common sense, which says things like Amazon’s 1-Click will never stand up in court. What Paul’s post helped me see is that patents really play more of a “threat” role. It’s not so much that you should prosecute to protect your patents in every case, but that you COULD. COULD is a powerful force in business.  It is an asset.  It dissuades. 

Allow me to clarify further. There is a whole range of patents; many (most?) should be defended to secure IP because they are truly significant breakthroughs, but really patents and the likelihood of enforcement depends on the type and significance of the IP.

In web services, most applications are basically databases and scripting languages used in generic ways.  I suspect there are few cases where patents will be enforced (at least successfully), but thanks to Paul, I can now see more clearly where and how and when patent applications fit for startups.

Here is the entire essay by Paul.  Below are some of the relevant excepts from my point of view:

Excerpt One

“Nor do startups, at least in the software business, seem to get sued much by established competitors. Despite all the patents Microsoft holds, I don’t know of an instance where they sued a startup for patent infringement. Companies like Microsoft and Oracle don’t win by winning lawsuits. That’s too uncertain. They win by locking competitors out of their sales channels. If you do manage to threaten them, they’re more likely to buy you than sue you.”

Excerpt Two

“We do advise the companies we fund to apply for patents, but not so they can sue competitors. Successful startups either get bought or grow into big companies. If a startup wants to grow into a big company, they should apply for patents to build up the patent portfolio they’ll need to maintain an armed truce with other big companies. If they want to get bought, they should apply for patents because patents are part of the mating dance with acquirers.

Most startups that succeed do it by getting bought, and most acquirers care about patents. Startup acquisitions are usually a build-vs-buy decision for the acquirer. Should we buy this little startup or build our own? And two things, especially, make them decide not to build their own: if you already have a large and rapidly growing user base, and if you have a fairly solid patent application on critical parts of your software.”

Excerpt Three

“Good hackers care a lot about matters of principle, and they are highly mobile. If a company starts misbehaving, smart people won’t work there. For some reason this seems to be more true in software than other businesses. I don’t think it’s because hackers have intrinsically higher principles so much as that their skills are easily transferable. Perhaps we can split the difference and say that mobility gives hackers the luxury of being principled.

Google’s “don’t be evil” policy may for this reason be the most valuable thing they’ve discovered. It’s very constraining in some ways. If Google does do something evil, they get doubly whacked for it: once for whatever they did, and again for hypocrisy. But I think it’s worth it. It helps them to hire the best people, and it’s better, even from a purely selfish point of view, to be constrained by principles than by stupidity.”

Excerpt Four

“The only real role of patents, for most startups, is as an element of the mating dance with acquirers. There patents do help a little. And so they do encourage innovation indirectly, in that they give more power to startups, which is where, pound for pound, the most innovation happens. But even in the mating dance, patents are of secondary importance. It matters more to make something great and get a lot of users.”

Finally, A Parting Thought and Some Investing Advice from Paul…

“When you read of big companies filing patent suits against smaller ones, it’s usually a big company on the way down, grasping at straws. For example, Unisys’s attempts to enforce their patent on LZW compression. When you see a big company threatening patent suits, sell. When a company starts fighting over IP, it’s a sign they’ve lost the real battle, for users.”

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