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A “profound” patent portfolio — one that addresses an industry’s critical challenges — will help a startup or emerging company to grow in the years beyond its current round of financing. To foster their startup clients’ development of such portfolios, counsel should encourage such clients to (1) identify their industries’ critical challenges; (2) use nondisclosure agreements to protect insights into those critical challenges; and (3) develop patents that both support their industries’ critical challenges and give due consideration to timelines and budget. IMPORTANCE OF A PROFOUND PORTFOLIO More than any other class of firm, startup and emerging companies need a profound intellectual property portfolio. The right piece of IP can be the stone that fells the giant competitor — or at least levels the playing field. Unfortunately, compared with larger and more established rivals, such young enterprises frequently do not understand the role of a profound portfolio and therefore do not plan to develop one. Driven by a few strong-willed entrepreneurs, many startups instead pursue an egocentric portfolio focusing on the founders’ inventions. This pattern is particularly prevalent in high-technology startups, in which technically brilliant founders often serve as the chief executive officer and the chief technical officer. Their cutting-edge technical frame of reference all too often causes them to equate profound IP with research of Nobel Prize caliber. Consequently, these technical dynamos tend to overvalue patents based on the results of fundamental research and to undervalue the competitive advantages derived from real-world economic applications of that research. Counsel for such emerging firms must address this misplaced emphasis — a challenge that frequently is exacerbated by limited startup budgets and poor client understanding of the use of patents to generate competitive advantages. Because startup and emerging companies are prone to defining their legal representation based on cost, even counsel with the demonstrated capability to write and successfully enforce patents may be pressured to avoid the expense of multiple patent applications by creating patents that attempt to shoehorn all company inventions into a single application. Although superficially impressive, the resulting patents can be unwieldy and are difficult, if not impossible, to enforce. PROFOUND INTELLECTUAL PROPERTY To build a profound portfolio of IP, both counsel and client must understand the distinctions and relationships among inventions, innovations and IP. As a working definition, an invention is the discovering of something new, while an innovation is the moving of that new something from mind to market. An innovation also can be thought of as a series of inventions, each resolving a challenge blocking the path to market. IP captures the novel, nonobvious and useful aspects of inventions and incorporates those features into a legal instrument. IP and innovation are linked in a symbiotic relationship. That is, IP has little value without the capability to innovate and, conversely, few innovation infrastructures could attract investment or withstand the attacks of pirates without the protection of IP. Counsel also must develop — and transmit to their clients — an understanding of the difference between profound patents and those that are worth little more than the paper on which they are printed. Even the best patent counsel cannot turn a sow’s-ear invention into a silk-purse patent, so a first-class job from a competent patent counsel is a necessary but not sufficient condition for creating a profound patent. In fact, a profound patent begins with profound IP, which is rooted in the challenges encountered on the path from mind to market. As one might expect, not all those challenges are equally important. The set of all challenges that leads to profound IP includes a critical path subset. This critical path comprises of the challenges that all industry firms must address to become competitive. These critical path challenges and associated solutions form the foundation and substance of profound IP. CRITICAL CHALLENGES AS IP We have interviewed hundreds of prolific inventors operating in major corporations and government laboratories. When the profound inventors are separated from those who are merely prolific, the difference lies not in their education or creative abilities but rather in the problems that they choose to address. Profound inventors are in touch with both their customers and their competitors. They recognize the problems that pose critical challenges for their industry, and they focus on solving them. When interviewed about factors that underlie development of the profound inventions that lead to valuable IP, inventors most frequently cite a clear vision of technology trends and an understanding of customer requirements. Paradoxically, our interviews indicate that researchers and engineers most frequently rank and assign day-to-day work based on criteria such as time pressure, personal expertise and available resources — criteria largely unrelated to trend and customer considerations. The wisdom of a startup or emerging company lies in its understanding of the questions that constitute the critical challenges of its industry. There is another reason that it is important to identify the critical challenges. Research into creativity confirms that the most effective type of motivation is intrinsic, and researchers have identified challenging problems as one of the best forms of intrinsic motivation. Critical challenges thus represent not only a key intellectual asset, but also a tool to spur employee creativity. Most startups either ignore critical challenge awareness altogether or confine such awareness to a few people. As such startups grow, they confront the risks associated with sharing critical challenge knowledge with all employees. In this scenario, counsel must emphasize that employment contracts and confidentiality (nondisclosure) agreements assume heightened importance in protecting the company’s insights into critical challenges facing the industry. The use of such contracts is akin to the use of patents to safeguard a company’s inventions. FINANCIAL DYNAMICS Startup and emerging companies generally spend substantial dollars on patents to attract investment. Established companies, on the other hand, more often spend money on patents to ensure freedom of action (and sometimes to maximize revenues). Startup and emerging companies are like their larger counterparts, however, in that they are under increasing pressure to spend minimum dollars on patent portfolios. To achieve their objective of full subscription to the current round of financing, young companies often attempt to file patents without any real attention to business strategy, budget and timelines. The companies often will file low-quality, rushed patent applications for cost and schedule reasons. A few years after the financing is completed, these patents often become a substantial liability. Because the patents were not linked tightly to the industry’s critical challenges, competitors may have been able to offer products with plausible patent “design-arounds.” The company then is forced either to enter into expensive, problematic patent litigation (which definitely discourages investment) or to tolerate the intrusion of a competitor that has copied their innovations. The product cycles for innovative products are shorter and shorter, and the pace of copying by competitors continues to accelerate. When the company does not budget for improvement patents and exhausts its financial resources on an initial round of patents, crucial discoveries incorporated into successful commercial products are not protected. Instead, management often deludes itself into believing that its patents are self-sustaining and do not need to be refreshed. Too late (often after the issuance of improvement patents by competitors), they learn that the company’s innovations are now in the public domain and that their competitors have obtained blocking patents. On the other hand, those companies that develop a patent strategy aimed at supporting the critical challenges of the core business with due consideration to timelines and budget can be rewarded handsomely. The valuation of the company for purposes of the next financing round are likely to reflect the actual value of a profound patent portfolio. Within two years of filing applications, patents should begin to issue. Fundamental patents combined with a steady stream of improvement patent applications also will make the company more attractive and may increase the number and stature of potential investors. For information on subscribing to the newsletter “Advising Start-Up and Emerging Companies,” please click here. 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