Intellectual property (IP) such as patents, designs, trademarks, and copyrights form a significant part of the value of any company. For technology companies in particular, patents can play a paramount role. Patents grant exclusive rights to the patent owner to prevent others from making, using, selling, or distributing the patented invention without permission. Initially, costs related to patenting may be a significant expense relative to costs of R&D and marketing of the product, especially for startups. However, patents can prove to be an asset to a technology startup in multiple ways.
For one, patents can effectively prevent competitors from exercising any of the rights accorded to the patent owners. Therefore, a good patent on the core technology, service or business method of the company can provide a very good competitive advantage to the startup. Currently, the threat of patent litigation is very serious and expensive, often running into millions of dollars. The resultant fear of infringing a patent can act as an effective deterrent to competitors. Even though the patent is not making any money per se for the company, a strong patent portfolio provides the ultimate “freedom to operate” to the startup by preventing potential competitors from imitating the patented product. A patent thereby provides legal monopoly for a certain amount of time, by enabling the company to exclude its competitors entirely from the market.
A good patent portfolio helps in attracting investment. Valuation of a startup company is often based primarily on the value of the patents that protect the key technology areas of the company. A patent or even a patent application gives you an advantage in the market and can therefore give the company an edge during evaluation by venture capitalists. Further, if partnering is needed to access a third-party technology, patents may help by demonstrating credibility and technology leadership, and enhancing the image of the product or the company. It thus provides strategic value by improving negotiation position for contracts, cross-licensing, and other collaborative deals.
One of the most important uses of patents is its ability to generate licensing revenues. The patent owner may grant a license to another party in order to authorize the licensee to exercise the rights of the patent without infringing the claims of the patent. This is especially true in cases of patents on breakthrough technologies, where many competitors have a requirement of the patented technology in order to improve their own products. Apart from monetizing patents through licensing, patents can also generate revenue though settlements and damages won through patent litigation, when the patent is infringed.