Without broad patents, small tech may shipwreck on ‘Island of IP’

Feb. 11, 2003 — Generally speaking, if you’ve formed a small tech company based on the strength of one or two promising but limited patents and you don’t have an absolute slew of trade secrets up your sleeve, chances are you won’t be around very long.

At least that’s the view of a cross section of industry analysts and venture capitalists.

“Whenever I run into a entrepreneur or company that’s overfascinated with intellectual property (IP), it kind of raises the red flag for me,” said Ed Moran, director of Deloitte & Touche’s technology consulting practice.

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This is particularly true in the small tech startup world, where many companies are predicated on technologies that improve just one aspect of a product, such as displays or computer memories, said Moran.

“There are so many ways to skin (the molecular memory) cat, for example,” he said. “And if someone is saying, ‘I’ve got a couple of pieces of IP that give me a competitive advantage or lock up some important competitive advantage,’ that’s what I call ‘Islands of IP’.”

In most cases, unless a deep-pocketed development, manufacturing or venture capital partner is willing to put the time and money into turning that IP into a real product that exhibits demonstrable, mass-production-friendly manufacturing processes, the long-term prospects for most of these companies are not very good, said James Tully, Gartner’s chief analyst specializing in IP issues for the company’s Semiconductor Group.

This doesn’t mean these companies will necessarily fail outright, but dreams of small tech glory and riches may one day be replaced by a licensing deal or buyout to pay off creditors, said Tully. Based on the lessons of startup history, this is where most companies will end up.

“Somehow those startups have got to persuade somebody they’ve got a great idea or they’re just lost immediately, really,” he said.

To avoid this trap, companies could follow the example of Cambridge Display Technology. The British company has signed numerous licensing deals for its polyfluorene light-emitting polymer technology, which will be used in next-generation displays, with leading firms including Seiko-Epson Corp., Phillips and Dow, said Douglas Jamison, a vice president at small tech investment house Harris & Harris Group.

“They’re only successful by being able to partner,” said Jamison. “But they partner by having something they can bring to the table.”

This can be the all-important delineator between small tech success and failure. Having a good idea and great technology is just the beginning. That technology has to mean something to someone — in this case an investor or manufacturing partner — or it’s only going to be of serious interest to other scientists.

To achieve this, startups need one of two things: a broad portfolio of IP (which can include trade secrets as well as patents) covering as much of an emerging technology as possible, or a dominant patent that effectively does the same thing. Dominant patents are generally among the first patents issued in any field that details the discovery of something totally new.

Take carbon nanotubes, for example. “Even though there are hundreds of carbon nanotube patents issued, NEC is among the holders of the first ones for single-wall carbon nanotubes. Arguably, this gives the computer giant a serious and legally enforceable advantage in any market where carbon nanotubes play a role, said Jamison.

Hyperion Catalysis International Inc., which uses multiwall carbon nanotubes to make static-free chip handling trays for the semiconductor industry and automotive fuel system components, is in a similar position because it has a broad base of patents covering wide swath of the technology, said Lori Pressman, a director at Harris & Harris.

And, of course, there is the poster child for startup IP strategies: Nanosys Inc. From the beginning, Larry Bock, the company’s founder and chairman, has set about wrapping up all the IP surrounding nanowires, their synthesis and use in a strategy he used some 14 times before in the biotech world to found one successful company after another.

Of course, all the IP in the world won’t help if the markets don’t take to your idea, said David Prend a partner at the $100 million VC firm of Rockport Capital. This where the other half a of the equation comes in: a well-thought-out business plan backed by a good, experienced management team. This can make all the difference between an idea that finds a market and one that doesn’t.

“I have to say this to entrepreneurs again and again because they all believe the minute they’ve developed a piece of technology it’s got huge value,” he said. “That goes totally against all my experience in the business world. In the end, its the value proposition to the marketplace that creates value, not IP.”

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