obvIPat - Obviously Patentable

The blog for inventors, in-house counsel, & entrepreneurs.

An End to the Chicken and Egg Syndrome for Startups?

by Bruce Jobse and Orlando Lopez

What comes first the IP or the VC, the VC or the IP? Please tell me…. If you’ve ever been involved with a start up company, you know this version of the traditional chicken and egg song. At their inception, most startups need venture capital funding for product development and protection of any intellectual property derived during the product development process. Venture capitalists on the other hand, would like to see an intellectual property portfolio, including one or more patents, before investing. Patents provide a market-entry barrier which helps to protect the VC’s investment (which is usually short-term) from competitors of the startup.

Until now, it has been almost impossible to develop a portfolio of issued patents prior to obtaining anything more than seed financing, due primarily to the long delays caused by the backlog of unexamined patent applications pending before the USPTO. For many startups, the issuance of patents typically occurs years after the initial rounds of VC financing, as well as after the product release. This conundrum has become worse in recent years as USPTO delays have increased, while venture capitalists have become increasingly more sophisticated and demanding regarding patent protection of a startup’s product or service. So, how does a start-up develop its intellectual property without VC financing, and how does a VC protect its investment in a startup that has no issued intellectual property? Well, relief may be on the way.

USPTO Director David Kappos recently announced a three-tiered patent prosecution regime, termed “Three Track,” that proposes greater control over the speed with which applications are examined by the USPTO. Under Track I, prioritized examination applicants would be required to pay a fee to receive a first office action within four months and a final disposition within 12 months of prioritized status being granted. Under Track II, the traditional examination under the current procedures would be the “default” mode for examination; applicants would need to do nothing to elect this examination mode to receive a first office action within 10 months, and a final disposition within 20 months. Track III provides for an applicant-controlled delay for up to 30 months prior to docketing for examination, similar to the current Patent Cooperation Treaty timetable. The proposed Three Track system will not replace the existing accelerated examination process which has not been utilized by many start-up entities.

Using Track I as proposed, startups would have an opportunity to develop an intellectual property portfolio in a relatively short amount of time, either before or during the process of seeking VC financing. VC’s should be receptive to this process, as the uncertainty of investing in a portfolio of unexamined patent applications could be resolved to their satisfaction prior to investing or shortly thereafter. Accordingly, it may be possible in the very near future to have the IP come before the VC.

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