Your Questions About Startups and Intellectual Property Answered

Two venture capitalists and a patent attorney respond to readers

30 September 2015

This article is part of our September 2015 special report on startups, which highlights IEEE’s efforts to attract more entrepreneurial types to the organization.

Turning an engineering idea into a product or business is no small feat. So that you don’t have to go it alone, our September issue on startups provided several ways IEEE can help. In this Q&A below, our experts address how to bring a product to market, protect intellectual property, and determine what a startup is worth.

The experts are IEEE Fellow Milton Chang, who runs Incubic, an investment company focused on biotech and photonics companies, in Los Altos Hills, Calif; IEEE Member George Jakobsche, a patent attorney with Sunstein Kann Murphy & Timbers, an intellectual property law firm, in Boston; and Ralph Sheridan who screens startups for Launchpad Venture Group, Boston’s largest angel investment firm focused on early-stage technology startups. Here is what they had to say.

Q: What are the necessary steps to take a product from just an idea to launching it on the market?

SHERIDAN: The path starts with the validation that the product concept is valuable to the marketplace. Does it solve an important need for prospective buyers? Can customers purchase your product from current competitors? Are there operational obstacles to adoption that must be solved? Armed with this knowledge, you can tailor your product design and begin to court investors on the potential rewards from a successful venture.

JAKOBSCHE: A key step is also protecting the product from being copied by competitors. Consult an intellectual property attorney to identify aspects that could be protected, such as by patent, copyright, trademark, and trade secret, and which forms of protection are best. Patents prevent others from making, using, selling, offering to sell, or importing infringing products.

CHANG: If you already work for a company that develops products, get involved with its commercialization department. Take an interest in business and management before you pursue your venture. Like any profession, you have to know the trade.

Q: What is the biggest problem for startups as they grow? Is it leadership, diversifying, the culture, or something else?

CHANG: All of these reasons can be a challenge. However, leadership is the catchall. It is fatal to run out of money due to a leader’s lack of focus or overly ambitious goals. And often, a company will stop growing when management becomes content. It’s important to implement bottom-up growth. In this type of culture, every employee is empowered to strive to reach his or her full potential, which will result in the growth of the business.

SHERIDAN: The single biggest problem is generating sales. Customers validate a concept and the startup’s ability to deliver and support the new product or service. Building a sales approach that reaches them and is compelling enough to get them to buy from you is the biggest challenge. Revenues early on not only create cash flow, but also provide confidence to investors to continue to invest in the venture.

Q: How is it that companies with no monetization plan are evaluated for millions of dollars? I'm guessing user base is a large metric for these companies, but are there other factors that set these companies apart?

SHERIDAN: Startup valuations tend to be determined by a combination of factors, including the quality, uniqueness, and need for the product or service as well as the team that runs it, the sales results to date, and confidence in future achievements. If a particular market is “hot,” however, valuations can be out of proportion.

CHANG: These companies may appear to be just lucky, but they are usually acquired for good reasons. The valuation is always based on how much the acquiring company can earn from the acquisition. Sometimes a company is acquired to prevent a potential acquisition by a competitor, and sometimes to stop a product from going on the market that could disrupt the competitor’s business. A company is not acquired until there is adequate validation of its potential, and there is almost always a reason behind an early acquisition.

JAKOBSCHE: For technology-based companies, intellectual property is often the most valuable asset. A proprietary manufacturing process or algorithm, particularly if patented, are valuable as are trademarks. Investors in a startup almost universally want to see how the company’s intellectual property is being protected because that may be all that is left if the company fails.

Q: Some fellow students from my research group are pursuing an entrepreneurial endeavor; however we are using university-owned equipment. How do we distinguish our business from our academic activities so the school cannot later claim our profits?

JAKOBSCHE: Obtain a written agreement ahead of time from the university disclaiming ownership of your inventions. Graduate students, especially those with fellowships, often work under contracts that grant ownership of inventions to the universities. Check with the university technology licensing office. It may be advantageous to have the school own the invention, especially if the university foots the bill for patent work and then grants you an inexpensive license.

CHANG: My suggestion is to initiate a discussion with the university as soon as possible while the value of the technology has not yet established. Royalty fees can only go up from there. In the meantime, you can more effectively use university resources when you have a license agreement. The university is likely to be accommodating because it wants to encourage commercialization from within.

SHERIDAN: The question of university rights depends on its rules. For example, Tufts University, in Medford, Mass., has a fairly rigid set of rules on intellectual property ownership by students and faculty and a sophisticated licensing office. There is an enlightened trend to link technology transfer offices with entrepreneurship programs. Schools such as Arizona State, Carnegie Mellon, Harvard, and the University of Cincinnati are pioneering these. The best guidance is to explore your school’s programs and initiatives for entrepreneurship.

Q: Once one has a working prototype, what is the next step to bring it to market, if one lacks of financial resources? This seems to be a big obstacle, especially when dealing with high-tech products.

CHANG: Beg or borrow! Government grants are easier to get than venture capital funding because venture capitalists, or VCs, invest only when investment risks are quantifiable. I believe in building a “prototype business.” That is, break down an ambitious goal into steps. It could go something like this: Once you have resolved technological issues using government funding, you may be able to convince angel investors to provide funds to build the prototype. You may then be able to convince strategic investors—companies that can use your technology or product—to provide additional capital. At that stage, you may very well find VCs clambering to get on board.

You also have crowdfunding available as an additional way to get seed capital. One of the companies I work with found crowdfunding to be an excellent way to seed the market, and it was able to use the advanced funding for pre-orders to get the products manufactured and shipped. None of this is easy, but when there is a will, there is a way.

SHERIDAN: The answer depends on whether it is hardware or software.  Assuming it is hardware, which is more infrastructure intensive, you could find a company sponsor that will support the device’s development. Sometimes contract manufacturing firms will assist with identifying capital sources. If you’re in the United States, don’t forget the availability of SBIR grants.

Q: I’m currently in the process of developing my product, which could be used by both commercial and non-commercial institutions. However, I’m not sure how to present it to them. Do I show them a basic version when it’s ready, or do I wait until I can customize it for each potential client? And more generally, what is the next step to take once a product is ready?

CHANG: Pick one based on the path of least resistance. A common mistake for startup companies is lack of focus. It takes all you’ve got to develop one business. Do your homework by getting input from the marketplace to make the right choice.

SHERIDAN: This depends on the goal. If you are using early customer feedback to refine the product, then you are bringing select customers inside the development process to ensure it meets their needs and has their support. Receiving feedback early from both commercial and non-commercial customers allows you to cost efficiently refine the product specific to their needs.

JAKOBSCHE: If you are considering filing a patent application for your product, particularly outside the United States, ensure you either file a U.S. provisional or non-provisional patent application before presenting the product to anyone, or present it only under a non-disclosure agreement. If you expect to make improvements to the product over time, file a provisional patent application now, and then file a follow-on provisional application after each improvement.

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