Just recently, I was invited to do what I like to do best, namely, look at an early-stage business with a high-potential “breakthrough” technology, with a view to becoming involved. The issues the business faces are not only interesting in their own right (especially to someone like me), but they provide useful lessons for almost every early-stage technology company on the threshold of real success.
Base technology camp
The base technology of this venture has been developed by a small group of committed specialists, funded, to date, by angel investors. The first “application” has been produced and a contract signed on a licence fee-plus-royalty basis.
Under the terms of this deal, the client will embed the new component into its own established product, thus substantially enhancing its performance. If the impact is as successful as expected – and there are no reasons to suspect it won’t – the deal should be worth millions of pounds over the next few years. Whetting the appetites of all involved even further is the simple fact that there are many applications and several industries in which the technology can apply, and each should ultimately distribute on a global scale.
As you can see, some huge hurdles have been jumped here. The breakthrough technology has been applied to a specific application, a product developed, a client satisfied and – crucially – the self-same client committing money.
As things stand, the company numbers just about five people. But, because it has made the quantum leap from being a mere idea to a major business opportunity (in need of speedy exploitation) it has many decisions to make about the shape and scale of its development and financing.
A view from the inside
The founders’ attitude to these challenges is already taking shape. They believe this does not need to be a large company in headcount terms, as it will be based around the technology (not very people-heavy in this case), and a business model based on licensing the intellectual property to particular applications/industries.
On the financing side the question they have asked is ‘how much will actually be needed at each stage?’ With the initial contract, the company believes it can get to profits, hit its immediate development goals and fund a reasonably strong IP protection programme, with a further investment from some new and existing shareholders of £500,000. The benefits of this is that it will minimise dilution in the short term, and ensure that the forward plan – with its attendant future financing – will be much more solid in another nine months.
Further, faster, smarter
It is hard to disagree with their initial conclusions about the next stage of planning, which are eminently practical. However, apart from short-term financing needs and near-term profit targets, there are a few more fundamental issues to solve. For instance, I have two crucial, related questions which I think they shoud be attempting to answer:
- What will it take for the business to become self-insuring in all areas?
- How fast could they get there under their own steam, and how much earlier could they get there with additional capital?
Spread the intellectual property around
The two big issues here – management and legal protection – are clearly based around the IP. The first task must be to spread the key knowledge throughout the organisation. Why? Because there are two founder scientists whose technical baby this obviously is. By being constructively pessimistic, you can easily see potential problems. For instance, let’s say one will get a brain tumour in six months and the other will get divorced and crack up.
Key-man insurance will provide some money should disaster strike, but this is hardly enough. What the company really needs is the ability to develop and operate the technology independently and generally. In short, the IP must be disseminated throughout a self-sustaining team that is no longer reliant on one or two people. ASAP.
Mapping out the legal defence
The legal approach to protecting the IP is really a business strategy for a company like this, and it is expensive. The other problem is that different industries work in different ways. In the IT industry for instance there is effectively a “club” you’ll have to join before you can build a computer of any type. The major players have 8-9,000 patents each in the space, rendering it impossible to build a computer without infringing. They all cross-license each other and if you want to join the party, you have to pay your way in, probably giving up much of your advance in exchange for being allowed to play.
So in each industry you target, you need a full map of the patented terrain to see where and how you will fit in, and what strategy you could adopt.
See also: Top 5 intellectual property mistakes to avoid – British Library Business & IP Centre’s Jeremy O’Hare highlights the five biggest intellectual property mistakes all growing businesses should avoid.
Legal ownership of IP means nothing without cash
It’s also worth remembering that your own filings will immediately be picked up in the industry research departments. Their commercial attitude to you will be coloured by the nature, quantity and jurisdictions of your patents. And of course, in the pragmatic world we live in today, having patent protections are not really any help unless you have the resources to make them stick against infringements. I believe Intel spends about §100 million per year in legal fees doing just this – a strong message.
In the UK, taking a patent case to trial costs each side anywhere between £750,000 – £1 million. In the end the loser usually has to pay most of the victor’s costs (different rules apply in the US, and costs are cheaper in EU countries). But if you don’t have the cash, you can’t really prosecute the case. The potential infringer will have checked your balance sheet (and thus your ability to defend yourself) when finalising his or her product. Not being properly funded is like waving a red rag to the IP thieves.
What it all boils down to is that determining your IP protection strategy is complex and will cost more than you think. And once you have it, it may not be worth a candle unless you have a couple of million in your defensive war chest or an investor with deep pockets to back it up.
Article by Peter Williams
Peter has raised over £13 million of venture capital for companies in which he has been involved. The first company he founded was listed in the Independent on Sunday 100 as the fastest growing UK private company over the previous five years. He sold the business to Reuters. Peter is now an investor and director of privately-funded, VC-backed and quoted companies and runs a mentoring service for CEOs.
