Create an Exit Story for Your Venture Company
How Venture Capitalists Assess Risk with the Scorecard Method
Prepare Your Company to Attract Venture Capital Interest

Venture Capital and the Benefits of Patents

A venture company’s success is largely hinged on an unfair advantage. A venture company needs to capture a large portion of the market that might otherwise go to competitors. To do so, it must have an advantage that competitors cannot easily copy, purchase, or develop.

Many entrepreneurs think they can rest easy in the knowledge that their product is a better solution to a market need than anything in existence. Although having a better solution is an advantage, an advantage like that cannot stand alone.

Without patent or trade secret protection, other companies can steal your solution and out sell your product in only a few months. Without branding, customers won’t recognize your product as a solution to their problem, and they’ll purchase the subpar product that speaks to their emotions and desires instead of an unknown and superior product.

VCs love a product that is better and cheaper than the competition, but you must also show that you have ways of preventing other companies from copying your product and selling more of their knock-offs than you can sell of your original.

One commonly used method to prevent competition from copying a product or technology is by securing a patent. Patents legally prevent other companies from using your product, design, or technology without your consent. Although patents can be expensive, short-lived, difficult to prosecute, and limited in geography, venture capital investors still look for patent protection whenever possible. A patent can be like a watchdog; even when the dog doesn’t bite, its presence protects your property.

Patenting has some limitations that you need to consider before you invest the time and money necessary to secure one:

  • Patents don’t give you the right to use a product or technology; they only prevent others from using it.

  • Your product/technology must be novel, non-obvious, and previously unpatented.

  • To protect your work with a patent, you must publicly disclose details about your work in a formal patent application. Therefore, any secrets you held before submitting a patent are public after the application is accepted.

  • The legal work and application submission fees required to patent a technology cost between $10,000 and $30,000, and this amount becomes even greater when you consider the annual maintenance fees that must be paid.

  • A patent doesn’t actually prevent other companies from copying your product; it only gives you legal grounds to sue.

    In a lawsuit over a patent violation, the company with the most money pretty much always wins. Big companies have been known to brazenly copy obviously patented software applications without even bothering to change the text and graphics. In this situation, small companies have little realistic recourse.

  • A patent is only effective in the country from which it was issued. A United States patent can be legally ignored in China, so to be protected, you need to file patents in multiple countries.

  • U.S. patents are effective for only about 20 years from the filing date. After that, the technology becomes public domain.

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