How Getting A Patent Can Actually Be Detrimental To A Startup's Long Term Success

Patents

from the thinking-twice... dept

There’s a standard refrain we hear all the time from startups in Silicon Valley, which is some form of “I hate patents and think they’re anti-innovation… but I still have to register a bunch, just for defensive purposes.” One variation on this is “just to show investors I’m serious.” These entrepreneurs insist that their patents will never be used offensively, but they can’t really promise that. In fact, such patents can actually harm the very company that got them. One way is pretty obvious: just getting patents takes (precious) time, money and resources that could be put to much better use elsewhere. However, that’s perhaps a smaller issue than the fact that patents can make a company throw in the towel earlier than it should.

To explain why, let me pull from a few recent news articles that, together, hopefully explain the issue. Tim Carmody at Wired highlights how, when startups fail, investors sometimes recoup some of their money by selling patents. He gets that from a PEHub interview with Silicon Valley tech startup liquidator extraordinaire, Marty Pitchinson, whose reputation, as the dot com cleanup guy, we’ve chronicled for nearly a decade (when his business is good, the rest of Silicon Valley’s business isn’t).

There are two key points that he makes. The first is that ten years ago, patents weren’t a big part of his business. Today, they’re a massive part of his business:

Things have definitely changed. I remember in 1999, 2000, I would sell a used server for $35,000 and I had a line of people wanting it. Today, a server is $5,000 and you can get an okay server for less than $2,000. [In the meantime], we?ve probably become one of the largest sellers of [intellectual property] in the country. We sell tons of IP, and as you know, the IP wars have started, so we play with the big guys, the little guys, and the in-between guys. During the last bubble, there weren?t as many patents. It was more ideas and URLs. So the business has matured.

Back in the Wired article, Carmody points to a case study on Pitchinson’s website, in which it notes that it helped sell off the patents of a company that had raised $65 million in venture capital. In that case, the board (meaning, mostly the investors in the company) decided that “they would be better off selling off their IP than seeking an additional round of funding.”

Now, combine that with the story we had discussed recently by law professor Colleen Chien about patent trolls, where she makes a point that many have raised before: the system actually encourages the formation of non-practicing entities (trolls) to hold patents, rather than companies who actually do stuff:

Successful trolls have found ways to remove these traditional obstacles to suit. Most obviously, not making anything immunizes them against counter accusations of infringement. A liability in every other context, having nothing to sell is an asset for trolls. This is why patents are often worth more when a company is dead and has nothing to lose from patent counter suits, than when it is alive and does.

Now, pull all of this together and you have a situation where patents can actually be a ticking time bomb for startups. With patents in hand, even if they were obtained solely for defensive purposes, a board could decide (as happened in the case above) that a better way to get some return on their investment is just to shut down the company and sell off the patents — again noting that the patents are more valuable when there’s no practicing entity to deal with.

Thus, startups with patents risk having those patents represent a greater value than the business itself, making it too easy a target for a board (of mostly investors) to simply liquidate the company in order to seek the immediate cash of patents for use by trolling operations. It’s the worst of all world’s. Companies get shut down too early because the cost/benefit tilts too strongly towards selling the patents. The patent that was originally acquired solely for defensive purposes then ends up in the hands of an NPE who plans to sue lots of companies.

While this certainly does not apply in every case, it should be a real concern with some companies, in that they will have a shorter timeline to build a business and succeed before the VCs decide it’s best to just sell off the patents and see what they can get.

Filed Under: innovation, patents, startups

Yes, Silicon Valley Is Filled With Trivial Startups… And That's A Good Thing

Innovation

from the missing-the-point dept

One of the more annoying logical fallacies of the post-gatekeeper era is that because so many people/companies/groups can do something, then the overall output is worthless. We hear this all the time. For example, people will claim that “blogging” sucks, because many blogs suck, and it doesn’t have the same standards as journalism. That, of course, ignores the many excellent blogs out there. Similarly, we hear about how the world is now “flooded” with crappy music, because it’s so easy to record and distribute songs online. The problem with this argument is that it makes a few really dumb assumptions, including the idea that relative quality is more important than absolute quality. It also is based on a lack of understanding of totally independent events.

That there may be a ton of crappy blogs out there has no impact whatsoever on quality blogs. That there’s lots more music out there that you don’t like, doesn’t mean that there’s less music that you do like. In fact, in both cases, the fact that it’s easier to create and distribute such things actually increases the likelihood that the amount of actual quality increases. You just ignore the bad stuff and rely on better filters to find the good stuff.

Still, we usually hear this argument applied to content. So I was a bit surprised to see someone named Hermione Way basically making the exact same logical fallacy when it came to Silicon Valley as a whole. Her complaint? Too many startups here are working on trivial things, and somehow that’s some sort of threat to Silicon Valley itself. This is the same thing as saying that there’s no good music anymore, because there’s so much bad music out there. The fact that there are some startups in Silicon Valley that are doing trivial things does not change the fact that there are many others doing amazing, world-changing things. The fact that there are some who go into startups and see them as get-rich-quick opportunities, does not impact the huge number of folks here who do not view startups this way (and, honestly, anyone who views startups as a way to get-rich-quick has probably never worked at a real startup).

Let me flip the argument on its head. Is there any place in the world that has a huge concentration of “world changing startups” that doesn’t also have a bunch of frivolous and trivial startups hanging on as well? Of course not. I’d argue that if you stopped looking at the relative level of “world changingness” and instead looked at the “absolute” level, you’d be hard pressed to argue that more world-changing innovation comes from a single location than comes out of Silicon Valley.

That there are trivial companies mixed in as well doesn’t take away from that. In fact, it often can help the world-changing innovations take place. That’s because in this environment so many ideas are tossed up on the wall, that you get surprisingly powerful ideas coming out of them. Blogger and Twitter were both “side projects” that many people considered to be trivial. While I’m sure some people still consider them trivial, to argue that these weren’t “world-changing” when you look at the communication they enabled, and how they’ve been used around the world, would be an impressive level of denial. People derided the original Apple computer as being trivial. But it changed the world in many ways. People mocked Google as being a trivial search engine in a crowded market. But it changed the world and the way we interact with information today. Many world-changing ideas don’t start out that way. Most companies don’t end up in the business they intend to start out in. Someone who’s lived through startup life knows this. It’s easy to mock from the outside, and not realize this is how innovation works. A trivial idea may be trivial forever… but it can also spark the next world-changing idea.

It’s the cauldron of ideas and innovation, good and bad, that helps bring to life those world-changing concepts when they come about. Pretending that you can build an ecosystem that only produces world-changing companies is a fallacy.

That’s not to say there aren’t problems with Silicon Valley. And there certainly are overly eager folks who jump into the fray all the time without realizing how the world really works. But to brush off Silicon Valley because there are some trivial startups out there is to miss the point in a big, bad way.

Filed Under: innovation, logical fallacies, startups, trivial, world changing

Send In The Clones: Startup Raises $90 Million To Copy Other Startup

Venture Capital

from the interesting-strategies dept

For all the talk of companies “copying” each other, it’s always interesting to see how things work in practice. Last year, we wrote about the excellent book Copycats, which discusses both successes and failures in companies that simply try to copy others. In general, what it finds is that merely copying someone else isn’t enough to be successful. You have to innovate, and do something better to be a success. But, one of the “easy” targets, if you want to just copy and still find a market, is to copy in a different territory. For example, it’s well known that for every successful US internet startup, a near direct clone pops up in China pretty quickly. The same thing happens in Europe at times as well. But sometimes things get odd.

There’s been a ton of buzz lately around the startup Airbnb, which a lot of investors apparently weren’t impressed with early on, but which has been able to build up pretty massive adoption pretty quickly, leading to stories of it apparently being about to raise $100 million on a staggering $1 billion valuation. That seems a bit rich, but in the world of Winner Take All economics, you can see how it could make sense for some early investors.

What seems like a bit more of a head-scratcher is when a brand new clone in the space then raises $90 million just a few months after launching… and hires 400 people. This company, Wimdu, seems to be focusing on Europe. If it can pull that off, that’s something, but this sets off basic alarm bells. It sounds like a company and investors just throwing money after a problem, rather than actually innovating. Historically, just throwing money after a market tends not to work nearly as well as people expect. Airbnb is apparently worried about this particular clone, but I think it may be overreacting. Money isn’t everything, and a company that focuses on providing a better overall experience, rather than worrying about clones, seems like it’ll be better positioned to succeed long term.

Filed Under: copycats, funding, startups
Companies: airbnb, wimdu

DailyDirt: Rental Space For Anything

Business Models

from the urls-we-dig-up dept

Money can’t buy happiness, but they say that you can try to rent it for a while. All sorts of things can be rented these days — and at fairly reasonable prices, too. There’s a pretty big real estate glut, so it looks like a bunch of places are trying to get attention with some interesting “shared space” ideas. Here are just a few rental ideas we’ve come across recently.

Rental kitchens are like incubators for culinary startups. Warning: may contain nuts, though…. [url]

A DIY science laboratory in NYC complies with CDC biosafety level 1 regulations. And nothing could possibly go wrong with a biohacker lab located near a major metropolitan area like NYC. [url]

CubeSats are available for a few thousand bucks — and if you can find a spot on a rocket, you’re set to go. However, rental space on a rocket isn’t exactly easy to come by…. [url]

Filed Under: biohackers, cubesats, startups

Attacks On 'Frivolous' Startups, Sound Like Misguided Attacks On 'Frivolous' Blogs & Social Media

Innovation

from the cat-bloggers-of-silicon-valley dept

We hear it all the time when it comes to various social media offerings. Blogs were dismissed early on by all important people who said they “don’t care about what people wearing pajamas sitting in their basement have to say about their cats.” Twitter was dismissed by people who “don’t care what so-and-so ate for lunch.” And on and on. But what’s interesting is this same sort of attitude seems to also be playing out on a larger scale, in how people look at innovation. Investor Peter Thiel is apparently complaining that Silicon Valley companies aren’t doing anything really important any more. But, I think, like the complaints about Blogging, Twitter and other social media efforts (some of which Thiel invested in), he’s focused too much on all the fluff and ignoring the fact that plenty of serious things are going on. However, there’s almost always been random silly startups that get lots of attention (and some of them later turn into being serious, important companies). Google, Amazon and eBay were all derided as being frivolous in their early years, but all turned into something much larger.

Along those lines, Dan Lyons has perhaps his most ridiculous column to date (and that’s saying a lot), in that he sets up by complaining about the same “frivolous” innovation going on in Silicon Valley, and then uses Nathan Myhrvold of Intellectual Ventures as the counter-example of a company taking on the real hard problems. Uh, yeah, the real hard problems of hoarding patents, waiting for someone else to do the real work, and then shaking them down for money? Lyons, like so many others, seems to not recognize the difference between ideas and execution. What has Intellectual Ventures actually executed on. What product has it brought to market? Absolutely none. The only thing it’s done to date is collect hundreds of millions of dollars from a few tech companies so that those companies can avoid getting sued, and can dig into IV’s patent database to countersue those who sue them. Lyons quotes Myhrvold making the following statement:

“The old Silicon Valley was about solving really hard problems, making technical bets. But there’s no real technical bet being made with Facebook or Zynga,” says Nathan Myhrvold, the former chief technology officer at Microsoft who now runs an invention lab in Seattle. “Today almost everyone in the Valley will tell you there is too much ‘me-tooism,’ too much looking for a gold rush and not enough people who are looking to solve really hard problems.”

Myhrvold is being misleading yet again. There’s always been “me-tooism” in the Valley, and sometimes it works out, and often it doesn’t. Microsoft, where Myhrvold worked for many years, was pretty damn famous for its brand of “me-tooism.” And, oh yeah, it too could be dismissed in its early days for not being “about solving really hard problems.” And, of course, there are plenty of tech companies out there that are working on solving hard problems, so cherry picking a few you don’t like does not make for a representation of the entire industry.

“What bothers me is the zillions of wannabes who will follow along, and the expectation that every company ought to be focused on doing really short-term, easy things to achieve giant paydays. I think that’s unrealistic, and it’s not healthy,” Myhrvold says.

So don’t worry about the wannabe and followers. They’ve always been around Silicon Valley and the ecosystem tends to take care of them over time. Focus on building what you’re building (which in Myhrvold’s case, still appears to be nothing) and let the market take care of the rest. It always seems to do just fine.

Filed Under: dan lyons, frivolous, nathan myhrvold, peter thiel, startups

Entrepreneur Stuck In Canada Highlights The Need For A Startup Visa Now

Legal Issues

from the this-shouldn't-wait dept

I’ve publicly thrown my support behind the idea of a startup founders’ visa that makes it much easier for foreign skilled workers who want to come to the US to start companies and create jobs to do so. Right now, our immigration policies do not favor entrepreneurs at all. The good news is that this very grassroots movement has actually picked up some steam, with a ton of support from the startup ecosystem around the country. Whether or not that translates to enough political momentum remains to be seen.

To understand just how important this is, here’s one story of an entrepreneur who’s been working hard to help build a startup in Silicon Valley who, only just this week, has found himself stuck in Canada unable to get back to the US, despite believing he had the proper visa (in this case, an H-1b). The story is depressing, and reminds you of all the ridiculous bureaucracy that people are forced to go through for something that makes no sense:

Just as everything seemed to be going so well, I came up to Vancouver on September 24th to renew my H1b visa and it turns out the approval I got last year is not worth it’s weight in paper. Upon appearing for my interview, my previous approval notice was held by the consulate till I furnished a ton of extra documentation from our tax filings last year, to a full report of all employees, all of my bank statements right down to the photographs of our work area (as alien founders we cannot have startups in garages and our apartments, it has to be in real offices).

I worked through the rest of Thursday and all through the night gathering all this evidence…. So after working through the night to get the evidence to the officers the very next day by 11:30 am, I was told that my application would take a week to be reviewed.

My biggest concern is that an LLC due to it’s structure doesn’t pay a salary to it’s members but a guaranteed payment. My attorney has already warned me that this is a slippery slope to start explaining to consular officers when the time comes.

Now leaving aside the exorbitant costs of living in a city like Vancouver for a week, I don’t have to talk about what an entire week means in startup terms. This particular week in question, since we’re in fundraising mode, I have had to cancel a meeting with Comcast Capital and cannot present at the Plug and Play Expo on Thursday Oct 1st – they were nice enough and believed in our product to pretty much waive the $1500 participation fee, only to realize I can’t make it.

It makes no sense that someone like this should be going through this sort of ridiculous bureaucratic process, held back by bureaucrats who don’t understand how startups work.

Brad Feld, the venture capitalist who deserves all the credit in the world for taking this concept — originally proposed by startup investor/mentor Paul Graham — and actually getting some political interest in it, has a post discussing the momentum and some open questions.

The main open question he brings up is about how investors can “sponsor” an entrepreneur. Basically any qualified venture capitalist or “super angel” who is investing at least $100,000 in a round of at least $500,000 could sponsor a founder. I have to be honest that I’m not sure I agree with this. Why should the visa be dependent on financing? These days, we’re hearing about more and more startups that are bootstrapping their way to success, or getting by on much smaller amounts of money. If a founder can build a successful company without raising $500k, should they not be allowed to take advantage of the startup founder’s visa as well?

The proposal goes on to have renewal rules, as well, that also are dependent on job creation and raising more money. The job creation bit I can understand, but again I am troubled by the “raising money” bit. Why should the investors be the gatekeepers in determining who gets to be an entrepreneur?

Filed Under: entrepreneurs, immigration, startup founders visa, startup visa, startups