TFTSL Excerpt—Episode 06 - To Patent or Not to Patent!

Well, as a young technical founder, I was always told to go apply for a patent, get a provisional patent application very quickly for a couple hundred bucks. You get a year to figure it out and then that makes you look good. There's a little bit of rigor in your thinking and somebody's looked at it. I think that's valuable, particularly in a hard technical or deep tech type environment. And then spend 5 to 10 grand to get it in. I think your number 253 grand is about the going rate to get a patent for something right. And then the game was always you've got to get a patent. You just might have to narrow it down a little bit. And then if we have every narrowing niche patents, what are we doing right? That's just, and it kind of goes back to if you had that 30,000 to 50,000 back and you spend it on sales and marketing, you're not going to get the patent for five years anyway, right? Three, four, five, six years. And then what are you going to do? If you're a small, single-digit million ARR company, you're not going to spend a million dollars to litigate Google or some big company coming and infringing on your patent. You're saying it's probably much better to just go all in and take the market and become big. And that's exactly what we see the market doing right, with some exceptions. Biotech is a notable exception. You cannot operate in that market without patenting. But in a world where it costs 100 million dollars in 10 years to go from molecule to market, spending a few extra hundred grand on patents makes sense. You can support that within the construct of the overall budget. But that's why when the real grownup VCs are investing, the thesis is how much market can you grab and achieve market power, market pricing power, not by patents but by having a barrier to entry through branding and network effects.

What do you think the lifetime of a typical venture-funded company is from angel investment to some kind of exit? It's got to be not much longer than the five years it would take the patent anyway.

Well, the standard view is five years. And the reason that it's five years is because the way the venture capital business works, typically the life of the fund is 10 years. After 10 years, time's up, pencils down, whatever you've gotten in the portfolio you've got to liquidate and return the money to limited partners. Assuming it takes a couple of years to even start to get deals in the door and done, that leaves eight. So for the back end, you really can't start investing after six years because you need to focus on harvesting those guys. So the way that the funds are set up, if it's true venture capital and not family office money, that's a different animal. But when they have a finite ticking clock, it's got to be between five to six years or contracts start to get violated.

Well, I've been thinking about this a lot. Since I have been issued a number of patents in the past for kind of hard science stuff and then maybe a little bit for squishier stuff along the way. People called me and said hey, we've got this legislative action. I think there's a fellow with water balloons and there's a gazillion little straws and the auto inflates the balloons. I think the dude who did that got copied by some international mega company that does this all the time. They just run right over everybody. They went to the Patent and Trademark Office and tried to get him invalidated. He's literally the one in 10,000 that won because he spent millions of dollars to defend. He's a really rare exception. But we're going to the Senators and it doesn't seem to be getting any better. So if you have to spend early money that would be better suited to do sales and marketing, developing product-market fit, it's going to take you five years to get it anyway. Even if you get it, it might probably get invalidated if anybody really cares. If it's a decent patent or worst case, you have to spend millions of dollars to litigate. Then what? Like, what are we doing? Why would anybody do this? Just go all in and get the market.

Look, there's a market out there. There's an alternative asset class for people who invest in lawsuits. They back lawsuits including intellectual property. They're hard to find. They're hard to convince. It's harder to convince them to back your litigation than it is to get VC to back a deal. But that in itself is now its own investment vehicle, which I don't know speaks overly well for the intellectual property protection system.