Maximizing your Value
Zoic Capital has a specific focus on investing in companies with the potential for strong Intellectual Property (IP). To help entrepreneurs understand how we approach this subject, we've prepared a discussion on the topic covering three key areas:
How should startups think about IP?
How do you identify the ideas, products and services worth protecting?
How do you maximize the value of your IP?
IP for startups has some unique considerations
In the podcast series How to Start a Startup by Y Combinator and Stanford University, the first lecture outlines how startups require four things to be successful:
1) a great idea
2) a great product
3) a great team
4) great execution
The first three items on this list are related to your Intellectual Property potential. A great idea is your foundation and should be protected broadly. A great first product shows the business potential inherent in your idea. More importantly, ideas come from a great team and the breadth and depth of expertise they bring. We cannot emphasize enough how critical it is to have a great idea as your foundation. Without that, the other pieces don't work and you can't build a successful company.
While science and innovation on their own create great value for society, for a startup to be successful you have to capture a portion of this value. Value is captured via a strong business model and a great IP strategy. Too often we have seen startups focus on the first way of creating value, but miss the second.
We understand why a startup may choose to delay investing in IP. Resources are highly constrained, and entrepreneurs are trying to do as much as possible within the limitations. Some investors are more interested in business metrics such as customer traction, product development milestones, etc., and so all effort is directed towards these areas.
Additionally, early stage startups by definition are exploring their product-market fit and are likely to shift directions, perhaps even multiple times. Intellectual Property requires an investment of time, money and team effort. Early on, when entrepreneurs face a lot of uncertainty, they feel reluctant to spend precious limited resources on expensive IP, especially when their path forward is not crystal clear.
Pivots are common in startups. Pivots may save a company and open new avenues for growth, but in a worst case scenario pivots may also render earlier Intellectual Property useless. Pivots are so common that Eric Ries has even cataloged the most common ones in his book, The Lean Startup.
TYPES OF PIVOTS
Engine of Growth
We think it is critical for a startup to be smart about IP and develop and execute a strategy early on, ensuring value is captured for the long run at a reasonable cost. There are a few principles that we think will set you up for longterm success and help protect your great idea, great product and key learnings acquired by your great team.
Ideas Worth Protecting
“A [core] technical insight is a new way of applying technology or design that either drives down the cost or increases the functions and usability of the product by a significant factor. The result is something that is better than the competition in a fundamental way. The improvement is often obvious; it doesn’t take a lot of marketing for customers to figure out that this product is different from everything else.
— Eric Schmidt & Alan Eagle, "How Google Works"
Any time you have a core insight, you need to recognize it and protect it. A core insight is something with the potential to significantly change the status quo. It's not about an incremental change that makes something 10% better, it's about a significant change that makes something 10 times better. Larry Page of Alphabet, the parent company of Google, likes to talk about how successful companies rethink problems entirely. "The way Page sees it, a 10 percent improvement means that you’re basically doing the same thing as everybody else. You probably won’t fail spectacularly, but you are guaranteed not to succeed wildly. Thousand-percent improvement requires rethinking problems entirely, exploring the edges of what’s technically possible, and having a lot more fun in the process." (source) Others agree:
When funding new products, a good rule of thumb is that the new product must be at least 10 times better than the old way of doing the same thing or customers will stay with what they have.
— Ben Horowitz, co-founder Andressen Horowitz
A core insight is not something that locks you into a single path, but something that enables you to take your product in many different directions. It provides you with a significant "pivot space" should you need to expand or redirect your company's efforts.
It's important to note that when you have your core insight, the market for the resulting product may not yet exist. For example, when Intel developed the microprocessor, there wasn't actually a market for the chips. The world had a relatively small number of large mainframe computers in use, and just replacing those computers would not have justified the innovation. The team had to actively create markets that would utilize millions, actually billions, of these devices. It's your job to not only identify but also create the entire space around that core insight.
...at the time the first microprocessors were shipped, the total annual market for computers in the world was something like 10,000 units. The microprocessor would have been a commercial disaster if all we did was to replace those 10,000 units with cheaper processors.
…we had to ask big questions, like, ‘ How are we going to develop markets that can use 100,000 of these a month?’
— Gordon Moore, co-founder of Intel, author the Moore’s Law
Dominant Design, Use or Process
The majority of modern bathtubs have the same form and functionality as this 2000-year old exhibit. This shape represents the dominant design for bathtubs.
Dominant design is an implementation of new functionality that the market adopts as the exemplar for future implementations. The form of the iPhone is an example of a dominant design. When it was later copied by other phone manufacturers, Apple won lawsuits establishing their ownership of the dominant design. When evaluating your idea, you should ask whether your space already has a dominant design. If there is, then you should look at whether you are adding to the dominant design or competing with it. If there isn't, then you have the potential to own a valuable patent.
Sometimes companies innovate to create a dominant use or a dominant process. Dominant use is when you define the fundamental way that someone uses a technology, such as google creating the dominant use for search, maps, learning-based voice recognition, and other services. Dominant process is when you define the fundamental way that something is made, such as Samsung defining the dominant process for high quality, low cost manufacturing, or Stanford University defining the dominant process for spinning successful startups out of academia.
Innovation typically follows a double curve. In the first curve, innovators are creating the fundamental product, testing it and discovering the dominant design. In the second curve, innovators are refining the dominant design and aiming to identify the dominant processes and uses. When evaluating an idea, you should always aim to ask yourself whether you have a dominant design, process or use, or have a shot at defining all of them. If you do, then you have the potential to file a fundamental patent that is valuable far into the future.
Maximizing the Value of Your Intellectual Property
The key idea here is that you don't just patent your product, service or technology. Rather, you create an IP portfolio that protects your pivot space so:
a) you can afford to make some early (inevitable) mistakes and redirect
b) you maximize the value for all the directions you expect (or don't expect) your product family to take over time.
Never delay in protecting a core insight that leads to 10x change, a dominant design/use/process, or a new network effect to help a technology scale. You want to move quickly in order to get the earliest priority date possible. If you create the right IP and file patent applications in a way that enables you to expand your IP portfolio as your company evolves, you'll be leveraging your original idea for years, if not decades.
It is tempting to wait on patent applications or to file half-baked ideas. However, both of these strategies can significantly hurt you in the long run. In the former case, you lose your priority date and in the latter case you lose your breadth of coverage and waste previous money. Your company can't afford the risk of either. Developing your IP early helps you focus and push your idea and the team to its limits, articulating your company's potential pathways and making your position stronger. A startup built upon a broad IP portfolio that protects the space around your core insight is more likely to succeed in a competitive marketplace today and tomorrow.
At Zoic Capital, we look for companies with great, technologically sound ideas that have potential for an expansive IP portfolio. Our expert team can help you capture the value of your technology far into the future, by building on the core insight that applies to many future products and even industries.