This is an excerpt from a talk I gave at the Element8 angels workshop in Seattle: Investing a World With Few Exits.
Some of the key points from my talk:
- I believe only 25% of all companies that could have been sold actually end up successfully exiting
- If a company misses the ideal time to exit, then the most likely result is that it will fail completely
- I’ve identified five failure mechanisms
- This talk describes the failure mode driven by intellectual property infringement
- Patents have become a much more valuable tool for entrepreneurs and angels
- Patents are a “Double Edged Sword” and create serious risks for smaller companies
- Many big companies take the attitude that they will just use the IP and let the lawyers figure it out later
- Defending your patent could cost $10 million and take ten years
- Big companies know that many times a small company can’t even afford to start the suit, so they will win by default
- If you have a good patent, the only reasonable strategy is to sell the company as soon as possible after the patent is granted
- Or when you have disclosed the technology – whichever is sooner
- The risks of not selling early just aren’t a good business, or investment, decision
[…] This video describes the same topic and is an excerpt from a talk I gave at a workshop on exit strategies sponsored by the Element8 angels in Seattle. […]
Basil, thank you for the post. In cases where the patent was infringed, would the company benefit by selling to a competitor of the infringing company? Would there still be value there?
Excellent question, Richard. Selling after the infringement might be possible, but I’m sure the price would be a small fraction of what could have been achieved prior to the infringement.
Surely this is a catch-22. If you engage with a large company in an effort to be acquired, then during due dilligence the large company will learn all they can about you technology and copy your technology?
Rolf, it’s certainly a “double edged sword” but I am not sure if it qualifies as a “catch-22.” The challenge for patent holders is that to be enforceable a patent has to describe all of the critical elements of the intellectual property. So once, the patent is public you’re pretty vulnerable. It’s also why a clear exit strategy is critically important. You really don’t want to start the process and not complete a transaction. Good patents should be owned by big companies with the resources to defend them.