When Patents do Matter for Start-Ups

One of the better articles that I have read in awhile was on CNET a few days ago — “Investors snub Friendster in patent grab”. The really interesting thing about this article is not the content about the wranglings among the various social networking websites; this is one of those seldom-publicized cases where intellectual property really does have a meaningful impact on the development of a private company.

Just to set the stage, most technology start-ups claim to have some unique technology or technological advantage that they feel they can leverage into a defensible market position. In practice, this seldom seems to matter for the following reason:

1. In a new market, it is not always clear what the critical intellectual property elements will be, so knowing which patents and trademarks are “must-haves” is a difficult a priori judgment.

2. There is a multi-year time lag between when patent applications are filed and when a company hears back regarding the patent application.

3. Because many new entrants to a market file patents at the same time, it is difficult to know whose patent will actually prove to be the blocking patent.

4. Even if you have a patent, you must have the resources to defend it against infringement. The necessary resources are both financial and human bandwidth.

Just to be clear, this is not the only case where the presence of a prior patent has had a meaningful impact on the development of a market (see the RIM vs. NTP lawsuits, for example). However, this one is very instructive in today’s market. Right now, there are a lot of entrepreneurs out there looking at ways to resurrect ideas from the mid 1990s, not all of them bad. It seems inevitable to me that someone is going to find himself or herself in a situation where they are in conflict with a patent filed in the past. This could really become a problem if there is a market where there are several companies pursuing a similar technology applied to different sub-markets or niches.