IP

How Important is Intellectual Property for Innovation and Start-up Success?

How Important is Intellectual Property for Innovation and Start-up Success?

Too trivial to mention, if you would believe an analysis of over 3200 technology start-ups! [1]

No mention either in meta-analyses [2,3] of 233 product and 92 service innovation studies.

(Note: this post was first published in The South African Institute of Intellectual Property Law’s publication IP Briefs. Republished here with permission.)

The conventional model of product and service innovation is that intellectual property (IP) is at its core, and that start-ups are its key engine of commercialisation. If this model is correct, we should expect to see IP emerge as a key success or failure factor for innovation and start-up activity.

Innovation and new technology business creation are notoriously difficult. Even the historical leader in these areas, the USA, has a modest success rate. About 70% of US start-ups that have raised a round of seed funding die or become zombies (in other words, self-sustaining but not growing meaningfully) [4], and over 95% of US patents are never licensed or commercialised [5].

This knotty problem of how to innovate successfully has unsurprisingly attracted a lot of attention, resulting in several comprehensive studies in the past decade. This article summarises the conclusions from the largest and most authoritative studies [1,2,3,6,7,8,9,10,11] in 2 areas: product & service innovation and start-ups. (Note: product & service innovations can be commercialised via either start-ups or existing organisations.)

Surprisingly, none of the studies explicitly mention any form of intellectual property (IP) as either a major success or failure factor. Note that success and failure factors are not antonyms in the context of this article. Success factors are things that improve the probability of success. Failure factors are things that, if present, can lead to company failure, but if absent, does not necessarily impact on likelihood of success.

The only mention of IP in the studies comes from the Startup Genome Report Extra on Premature Scaling [1], which mentions that “…72% of founders find that their initial intellectual property is not a competitive advantage”.

Before reflecting on possible reasons why IP is so conspicuously absent, let’s first look at what the studies do identify as major success and failure factors.


For product & service innovation, 4 success factor themes emerge: Product, Market, Organisational design & capabilities and Team. Product and Market are closely linked through what is called product-market fit, which is a dominant success factor. This is perhaps best explained as follows:

If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning. – Andy Rachleff (famous Silicon Valley venture capitalist)


Key success & failure factors for start-ups

Start-ups have the same four themes (Product, Market, Organisational design & capabilities and Team) with two additional ones: Mission & goals and Resources & partnering. Product-market fit is again an overarching success factor.


Why is IP not explicitly mentioned as a key success or failure factor?

I can think of two possible reasons (you might think of others):

  1. 1. IP is necessary but not sufficient for success. It goes without saying (just like good cash flow management) and hence is not worth isolating as a success or failure factor. In Michael Porter’s competitive advantage framework, it is more operational effectiveness than strategic differentiation.
  2. IP permeates everything. In its broadest interpretation, IP is any product of the human (and soon artificial?!) intellect. All product and service innovation and all entrepreneurial activity such as technology start-up creation is then by definition IP-generating and concerns itself with managing IP as its central activity. Thus, IP stretches across all the success and failure factors.

The changing nature and importance of forms of IP

The increasing pace and shifting character of technological innovation are impacting on the value and relevance of different forms of IP, especially in the field of software. Since “software is eating the world” [12], virtually no industry is untouched.

Software has limited patentability in most territories, and copyright does not protect against copying functionality, user interface or almost any other aspect that the market cares about. The relentless rise of the open source movement has also changed how businesses compete.

For patents, fast development cycles, short product lifetimes, the cost & difficulty of enforcement (as well as the cost & effort of detecting infringement in the first place) have lessened their relevance in many industries. By the time a patent is granted, the product is obsolete.

Of course, there are some major exceptions where patents remain pivotal, such as:

  • New scientific breakthroughs or discoveries (for example the CRISPR technology);
  • Platform technologies with broad application areas;
  • Some industries, such as pharmaceuticals and biotechnology;
  • Competitive moats for larger companies;
  • As a defence against infringement suits and an enabler for cross-licensing.

Start-ups do not have the money to enforce, and thus tend to patent with an eye on increased value come acquisition time, and to tick boxes for venture capital due diligence.

The inexorable rise of data

Data has become the key asset of the most valuable businesses in the world, and its importance will only increase with the rise of artificial intelligence and the digitisation of every industry. When combined with network effects, it can create a competitive advantage that is extremely difficult to break. (Witness Google’s failure to create a rival social network to Facebook through Google+, despite its tremendous financial and human resources.)

Whilst copyright can provide limited protection of databases[13], data itself is mostly managed and protected as a trade secret. Thus, trade secrets and know-how have perhaps become the most valuable form of IP.

Whence then for IP in the innovation and start-up context?

Successful businesses are based on secrets. – Peter Thiel (co-founder of Paypal, billionaire investor)

My conclusion is that the importance of IP in its broadest sense has not diminished at all. If anything, it is growing at a rapid pace. We see companies leveraging their trade secrets in the form of data to gain outsized benefits and competitive advantage. The copyleft and open data movements are making access to data, information and creative outputs available at an unprecedented scale.

How we think about and manage IP might be changing, and we might even need to define new types of IP, but it remains part of the fabric of the innovation and start-up picture.


Note on methodology

The top 5 or 10 success and failure factors from each of the studies were extracted and then sorted into themes. The themes are a subjective selection and can be debated. The factors themselves are well-founded in research. Since studies have varying terminology and methodologies, clustering risks distorting the underlying conclusions. However, for a high-level comparison and qualitative analysis such as this article, only the overarching trends are of interest and so it should not detract from the discussion and conclusions.


References

[1] Marmer M et al. 2011. Startup Genome Report Extra on Premature Scaling. Website: http://innovationfootprints.com/wp-content/uploads/2015/07/startup-genome-report-extra-on-premature-scaling.pdf. Last accessed: 2019/04/11. (Analysis of 3 200 technology start-ups.)

[2] Evanschitzky A et al. 2012. Success Factors of Product Innovation: An Updated Meta-Analysis. J Prod Innov Manag 29(S1):21-37. (A meta-analysis of 233 product innovation studies.)

[3] Storey C et al. 2016. Success Factors for Service Innovation: A Meta-Analysis. J Prod Innov Manag  33(5):527-548. (A meta-analysis of 92 service innovations.)

[4] CB Insights. 2018. Venture Capital Funnel Shows Odds of Becoming a Unicorn are About 1%. Website: https://www.cbinsights.com/research/venture-capital-funnel-2/. Last accessed: 2019/04/11.

[5] Walker J. 2014. The Real Patent Crisis is Stifling Innovation. Website: https://www.forbes.com/sites/danielfisher/2014/06/18/13633/#7f48dcba6f1c. Last accessed: 2019/04/11.

[6] Henard A & Szymanski DM. 2001. Why Some New Products Are More Successful Than Others. Journal of Marketing Research 38(3):362-375. (A meta-analysis of 60 product innovation studies.)

[7] Own study – unpublished data from technologies at a large South African public R&D institution. (An analysis of 23 technologies.)

[8] Peter Cohan. 2013. 6 Things Super Successful Companies Have in Common. Website: https://www.inc.com/peter-cohan/6-things-super-successful-companies-have-in-common.html. Last accessed: 2019/04/11. (Based on interviews with 200 entrepreneurs.)

[9] CB Insights. 2018. The Top 20 Reasons Startups Fail. Website: https://www.cbinsights.com/research/startup-failure-reasons-top/. Last accessed: 2019/04/11. (An analysis of 101 failed start-ups.)

[10] Paul Graham. 2006. The 18 Mistakes that Kill Start-ups. Website: http://paulgraham.com/startupmistakes.html. Last accessed: 2019/04/11. (Paul Graham is a founder of Y-Combinator, a famous and successful start-up accelerator in the USA.)

[11] Berkus D. 2016. After 20 Years: Updating the Berkus Method of Valuation. Website: https://www.angelcapitalassociation.org/blog/after-20-years-updating-the-berkus-method-of-valuation/. Last accessed: 2019/04/11. (The Berkus Method is a well-known method for venture capital companies to value pre-revenue start-ups.)

[12] Andreessen M. Why Software is Eating the World. https://a16z.com/2011/08/20/why-software-is-eating-the-world/. Last accessed: 2019/04/13.

[13] Cornell University. Intellectual Property Rights in Data Management. Website: https://data.research.cornell.edu/content/intellectual-property. Last accessed: 2019/04/13.

Photo credits: Lightbulbs by Josh Boot on Unsplash. Zombies by Daniel Jensen on Unsplash.

Posted by Sean Moolman in Innovation, 0 comments
Test 5: How to Develop a Basic Intellectual Property Strategy for Your Business or Technology Idea

Test 5: How to Develop a Basic Intellectual Property Strategy for Your Business or Technology Idea

Can I protect the idea? Should I? Do I have freedom to operate?

[This post is part of a series of blog posts titled “6 Tests to Know Whether You Should Pilot Your Idea” and focuses on Test 5: Intellectual Property. The full blog post series is available in a downloadable ebook. It is covered in more detail in the online course Opportunity Assessment for Entrepreneurs and Innnovators. Click here for a summary overview of all 6 tests, here for the previous post (Test 4: How to Quickly Check Financial Viability of Your Business or Technology Idea) and here for the next post (Test 6: Do You Have the Right Team to Commercialize Your Business Idea or Technology). Subscribe to the Moolman Institute newsletter (in the footer at the bottom of the home page) to be notified first when more content like this is posted.]


Why is this important?

Idea image

Can something be overrated by some and underrated by others at the same time?

That seems to be the case for intellectual property (IP). Over 95% of patents are never licensed or commercialized. But the few that do get commercialized in some cases create tremendous value.

And it is not only patents that have such divergent value. The value of all types of IP varies widely between industries, technologies, business models, territories and over time. For example, whilst patents are pivotal to the pharmaceutical industry, they have limited value for the military. Brands & trademarks are central to the fashion industry, but not to gold producers.

To navigate this tangle for your business or technology idea, you need to answer 3 basic questions:

  • Can I protect it?
  • Should I protect it?
  • Do I have freedom to operate*?

* Freedom to operate (FTO) refers to the ability to execute your idea without infringing on others’ intellectual property. You want to find out about potential infringements early to avoid a mortal blow later.


Intellectual property paranoia

Paranoid person imagePeople are usually too paranoid about secrecy. Test and evolve your idea with friends and colleagues.

Everyone is too busy with their own lives to drop everything and steal your idea! And you need a passionate champion to make anything succeed.

As Thomas Edison said, “The first requisite for success is the ability to apply your physical and mental energies to one problem incessantly without growing weary.”

Yes, there are limits to sharing – use your common sense. Don’t share your idea with someone well positioned to exploit it (such as a company with similar products or services) without protection. At least sign a non-disclosure agreement (NDA) or file a provisional patent application before talking to them.

Both protection options have factors that colour their value. NDAs have limited restricting power (you typically won’t have the money to enforce it) and patents have many considerations:

  • A patent is a business tool, nothing more;
  • It only gives protection if you have the money to enforce (“a patent is a sword, not a shield“);
  • It discloses details of your idea;
  • Patents only protect in the countries where you file;
  • They are expensive;
  • They can be circumvented;
  • Other IP protection methods might be more appropriate (such as trade secrets, copyright, registered designs);

Patents do have their place. Even though you might not be able to enforce, larger companies can – this creates potential for future licensing and ring-fences value for you.

You can file a provisional patent application at low cost (especially if you are a small business filing in the USA) and then have a year to figure out if the idea is worthwhile or if you want to protect it with a patent. (For South Africans, IdeaNav is a service with reasonable prices for filing provisional patent applications, trademarks and registered designs.)


How can I check this quickly at low cost?

Here are four steps for developing a basic IP strategy for your business or technology idea.

Step 1. Consider what type(s) of IP might be relevant for your idea

There are several types of IP protection, such as:

Old patent image

  • Trade secret – This is confidential information that is not in the public domain and that confers an advantage to the holder. Most countries have laws protecting trade secrets for as long as efforts are made to maintain secrecy.
  • Copyright – This is the automatic right that creators have over their literary and artistic works, such as books, advertisements, online articles, software programs and paintings. This typically persists for 50 to 75 years after the creator’s death.
  • Registered design – Aesthetic or functional design aspects of physical items can be protected. It provides weaker protection than patents but is granted more easily and is useful in industries where design is a prominent aspect. Designs can typically be registered for 10 to 15 years.
  • Patent – This provides protection for inventions that are (1) novel, (2) unobvious based on the current prior art, and (3) useful (have industrial applicability). Patents confer to the holder the right to exclude others from using or applying the invention in exchange for full disclosure. Patents are typically granted for a period of 20 years from date of filing of the initial patent application.
  • Registered trademark – This is a sign that distinguishes the products and services of an organization from those of others. It usually consists of either or both words and an image (logo), but shapes, sounds, fragrances and even distinctive colours can be trademarked. These last for as long as the trademark owner renews the registration (usually every 10 years).
  • Geographical indications – This signifies that a product originates from a specific geographical location and that it possesses specific properties characteristic of that location (for example Champagne, Port or Kobe beef).

The World Intellectual Property Organization (WIPO) provides a basic overview of the types of IP and their benefits and disadvantages.

Often you will use multiple types of IP to protect different aspects of your business or technology (for example copyright for software, a mix of trade secrets and patents for products and registered trademarks for your brands).

Patents, designs and trademarks are registered per territory (country or group of countries) and costs can balloon. Hence you also need to think about where you plan to operate.

There are additional barriers to entry (such as regulatory approvals or exclusive partnerships) that you can (and should!) leverage for your idea.

Step 2. Do a prior art search

“Prior art” is any information or evidence that (part of) your invention is already known somewhere in the world. It does not have to be in written format – it can be in the form of a video, physical product or any other medium.

Prior art searching is most relevant if you are planning to patent, but you should still do a search either way. You need to understand:

  1. If your idea is novel;
  2. Who the competition is;
  3. If you have freedom to operate.

I am planning a course on Intellectual Property for Entrepreneurs and Innovators that will cover aspects such as how to do a prior art search in detail. In the interim, here is a basic guide to get you started. You should also search existing trademarks and designs if you are planning to file such (see for example the WIPO Trademark & Brand databases).

Step 3. Think about encumbrance

Has anyone else contributed to the idea that could lay claim to an ownership share later? If there is any risk of this, make sure to handle it early onbefore there is money on the table. Come to an agreement with the other party on ownership and benefit sharing as soon as possible. Don’t make assumptions and reduce any agreement to writing.

Step 4. Decide on your basic IP protection approach

This will most likely change over time, but since early IP decisions can be irreversible (such as publishing software as open source or making an idea public before patenting), you need to have a basic strategy from the start.

Make initial decisions on your IP protection strategy based on the information and insights from Steps 1 to 3. Answer the questions: Can I protect it? (How) should I protect it? Do I have freedom to operate?


Real-world examples

Instead of a single real-world example, here are some serious successes and a few frivolous failures.

Serious successes

Polaroid image

  • Polaroid – Edwin Land invented a new material for polarizing light, patented it and built a successful business based on the patent. By his death in 1991, he had 535 patents in his name.
  • Google’s PageRank patent – for those of you who remember the days of Altavista (busy page alert) and Ask Jeeves, PageRank was a revolution. No more finding your search result on page 27 (or not at all). This is the patent that launched the mighty Google empire that touches all of us today.
  • Dropbox’s network folder synchronization patent showed everyone else how online file sharing should work.
  • The quad-rotor drone was invented by Edward Vanderlip in 1959 already. His employer at the time, Piasecki Aircraft Corp, obtained a US patent for this invention in 1962.

Frivolous failures

Patent troll image

  • A Non-Practicing Entity (also known as a patent troll) is a company that does not make anything itself but focuses solely on enforcing its patent portfolio – mainly through suing other companies. They are the bane of small companies, who often cannot afford litigation and are forced to settle out of court, even when the case has no merit. Eon-Net supposedly invented online form completion, but in fact filed some broad, vague patents about digitising documents. Eon-Net sued over 100 e-commerce companies for patent infringement over more than 15 years, making many millions of dollars in settlements, before being successfully countersued in 2009.
  • HP received a US patent grant in 2017 for “Reminder messages”. It describes calendar reminder messages sent from one computer to another. If that sounds like old news, you are right. (And while you’re there, check out some of the other “Stupid patent of the month” awards!)
  • Harley Davidson tried for more than 6 years to obtain a trademark on its motorcycles’ distinctive engine noise, but finally gave up due to strong opposition from other motorcycle manufacturers.
  • Walmart tried to trademark the yellow smiley face 😮 but lost 🙂.

The lesson? IP protection is important, but don’t lose focus on building your business.

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In the next post in the series I discuss the 6th and final test: how to analyze your team strength (Is there a passionate champion? Do I understand what skills are missing?).

Let me know in the Comments section what you think of this method or if you have a good example of where things went wrong based on the Intellectual Property criterion.


This methodology is part of a Moolman Institute online course called Opportunity Assessment for Entrepreneurs and Innovators. The course guides you step-by-step through the 6 tests and provides you with a set of practical tools and templates to make it as easy as possible for you to get to product launch or idea demise.

If you would like more useful content like this or get notified when the next course launches, subscribe to the Moolman Institute newsletter on the home page.

Photo of disco globe by Vale Smeykov on Unsplash. Photo of paranoid man by Ryan McGuire on Gratisography. Photo of patent troll by maritravel on Pixabay.

Posted by Sean Moolman in Opportunity Assessment, Technology Commercialization, 3 comments