Intellectual Property & Secrecy
The two business types use intellectual property very differently. Traditional start-ups use intellectual property to protect their business and Mark’s problem is spot on. It takes millions of dollars to fund effective patent litigation and start-ups don’t have that kind of money. University spin-offs on the other hand don’t just protect their business with patents, patents are their business.
Building a technology manufacturing company has become almost impossible in North America and Europe. Outsourced manufacturing, fabless design and patent licensing have become the dominant business model for Western technology companies. These models have in common that intellectual property is the value carrier between the innovation and productisation groups. As such, intellectual patents are effectively the output of the technology business. Bluntly put, if a technology spin-off doesn’t have patent coverage it doesn’t have a product.
Once patents and other intellectual property make the transition from protecting your product to becoming your product, your view on intellectual property needs to shift accordingly. Patent protection doesn’t become a safety mechanism that can be assessed on the basis of cost and risk, but rather a product investment essential to the success of your business.
The shift is similar for Mark’s secrecy concerns in the investment process. Trade secrets are usually impossible to maintain during investment due diligence in start-ups and spin-offs alike. But the implications of this are radically different. Most start-ups can blissfully ignore the loss of secrecy because the value of their secret idea is marginal anyhow. The real value of conventional start-ups doesn’t come from the initial business idea but rather the follow-on implementation (e.g. leadership, corporate processes, marketing and market adoption, etc.). The potential damage of exposing your secret is therefore marginal and relying on the ethics of you potential investors is probably just fine.
Not so for technology spin-offs! Non-confidential exposure of your idea will destroy or at least substantially limit your ability to obtain patent protection which in turn removes the foundation for your entire venture. That’s true even if your investor is the most ethical person on the planet. It is absolutely essential that you file at least a provisional patent application before you make the rounds in the investor community. Mark is right in that investors hate non-disclosure agreements, so early patent filings are really the only way to protect the future of your business. Fortunately, university spin-offs usually have the financial resources to obtain this protection. Just don’t forget to do it!
