Patents are Call Options on Technology

The only way for your patent to be valuable is to bring a product to market.

This post was published on Medium. You can read it here.

This post is an excerpt from my upcoming book "Startup IP Strategy."

A call option is an option to purchase a stock at a defined price. It is a bet that the stock price will increase, and the option holder will make a lot of money as the stock price exceeds the strike price.

Call options fall into two categories: out-of-the-money and in-the-money options. Out-of-the-money options need the market to move upwards before it has real, intrinsic value.

Patent applications are out-of-the-money call options, at least initially.

They are out-of-the-money because they do not (yet) have intrinsic value. (This is by definition, since nobody has ever seen the invention before.)

Patents that have in-the-money value are those where there are infringers who could be sued and who should pay a license fee. In-the-money patents have real, measurable value: the amount of money we can collect in licensing. Out-of-the-money patents are those that have only speculative value: hope that the market adopt our technology before the patent expires.

In other words, the patent is a bet that the market will somehow come to the invention. The bet is that market will see that the invention is the single best way to solve a problem, and everybody will want to solve it that way.

In the business model of a patent troll, an inventor may prophesize the future and create solutions to problems that will come up in the future. These “prophetic” patents are typical of every patent to some extent, but a patent troll’s business model is to sit tight and wait and wait and wait for someone else to come to the same conclusion as they did. Once someone else brings a product to market, the troll can pop out from under the bridge and extract a toll.

An Investment Grade Patent does not operate in a vacuum, with hope as our only business model.

Any patent has value only when a successful product is in the market and using the patented technology. At this point, it is an in-the-money call option.

An Investment Grade Patent has value only when it has a corresponding product that is in the market. Further, it only has value when that product is purchased because of the patented feature.

The single best way to push this type of call option in the money is to bring a product to market.

For new products (or new features of products), the market needs to be educated through marketing. Potential buyers need to be made aware of the product or feature, be convinced it adds value, and they need to purchase. Once customers are purchasing the patented product, competitors will begin to take notice. The investment in the marketing is necessary to develop the market for the invention. Without that investment, the invention will languish in the stacks of patents that never made money.

Prophetic patents used for trolling are not just bets that someone else will come to the same (brilliant) idea, but that the person will believe in it enough to develop a prototype, test the market, refine the product, and invest in the marketing to get to a product sale.

When we create Investment Grade Patents, we are trying to capture the reason why a purchase is made. This means we need not only the technology covered, but we need to have effective marketing and sales for our Investment Grade Patent to have value.

It is not enough to have a “cool” idea. An Investment Grade Patent has value only when a startup company is putting money and effort into educating the market about the patented feature, and where the market is buying the product based on the patented feature.

Without the corresponding investment in marketing and sales, the patent only has value as a wishful-thinking troll-worthy patent. As an investor in Investment Grade Patents, we require that our risk in the patent is reduced only when there is a clear path to invest in the marketing and sales of the patented product. This investment reduces our risk in the patent and helps it cross over from being out-of-the-money to in-the-money.

Consequently, we often hold off on patenting until we have some customer feedback on whether the patented feature is valuable or not. An Investment Grade Patent is one part technology and one part marketing/sales.

Posted in Patent Basics, Patent Strategy, Building a Patent Portfolio

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BlueIron Invests in Startups

Pre-revenue startups can apply for BlueIron's patent financing, which is typically a $50-100K investment initially, with appropriate follow on investments.  Find out more here.

For Series A/B or later stage companies, BlueIron can provide $2-5M loans, using patents as collateral.  Find out more here.

Patent enforcement and defense insurance are also available, giving you pre-paid legal fees for enforcing your patents against competitors, or surviving patent lawsuits from trolls.  Find out more here.

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