May 2, 2014

Using Patents as Collateral – A New Source of Financing for Entrepreneurs

I once had a startup in Paris that was sued for patent infringement and died. That was my crash introduction to IP. I was a software engineer and marketeer, and found it ludicrous that patents could be granted for something which I thought was just an idea. When I created my next startup, I avoided other people’s patents, filed my own, and then wiped out a few competitors who were providing similar technology. Clearing them out of the way helped us achieve commercial traction easier and ensured a good exit for our shareholders.

I would never again create a technology company that doesn’t have solid patents. In addition to the benefits I was already convinced of, here comes a new one: innovative financing.

Banks around the world are exploring ways to use patents as collateral to reduce the risk of loss in case of default. This was given a boost by Nortel’s bankruptcy a couple years ago, where sale of the group’s wireless patents generated more than $4.5bn, five times the price originally offered by Google.

The Intellectual Property Office of Singapore recently launched a S$100 million financing scheme, enabling firms to use patents as collateral for bank loans. The government will essentially be underwriting the three local banks – DBS, OCBC and UOB – so as to reduce the banks’ risks and jump start the process of providing loans secured by patent portfolios.

If your company owns patents, you may be able to benefit from this scheme and reduce the need for VC funding and limit shareholder dilution. With today’s Series A crunch, any kind of alternative financing is valuable.

Here are a few tips I learned on patenting as a business strategy. First, patent your core technology in the broadest possible way. You want patents that cover your main feature, your unique selling proposition, so that it is easy to show stakeholders that their investment is protected.

Give your patent a simple name that anyone can understand. Remember Amazon’s One-Click patent? You want the competition to be saying, “How can they possibly patent that?” Which leads to my next tip.

You need to feel in your gut that the thing you are patenting is truly innovative. It has to be unique, non-existent, and really cool. I have had that feeling for just a couple of the patents that I have filed.  Dozens of other patents did not give me this gut feel, but they were still useful add-ons to the core technology. Your business needs to have at least one core patent that you get this feeling with.

When you are convinced that your patent is cool and valuable, you can stand in front of a judge and defend your patent with certainty. I will never forget an Australian judge’s look when I was being grilled in the witness box, with the opposing counsel arguing that my patent was obvious and non-inventive. The strength of conviction in my gut came through for the judge to see. This was evident in the courtroom and then again in the final judgment.

Your own certainty will also help you market the value of your patent to your shareholders, B2B customers, suppliers and banks. Patents can help you raise funds easier, and convince B2B customers to go with you instead of a competitor who may end up infringing your patent.

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