Faced with limited funds and where to best allocate their resources, SaaS startups may find difficulty in determining the best strategy to scale their company. It is often argued whether a startup should start by attracting venture capital or begin by creating monthly recurring revenue (MRR) through customer acquisition. The difficulty in deciding the best strategy may very well determine the success or failure of an early-stage startup. However, one of the most overlooked strategies is to develop and monetize the startup’s intellectual property.
Often the most valuable form of protecting intellectual property is through a patent application. A patent application provides the exclusive right to make, sell, and use a proprietary technology. A strategic patent strategy will not only provide a barrier of entry for competitors, but will make your company more attractive to investors when seeking venture capital. It is unlikely that an investor would back a SaaS company without protection of their intellectual property when conducting their due diligence knowing that a competitor could easily replicate your proprietary features and functionalities. The advantages of being “first-to-market” are often short-lived as competitors can simply integrate the functionality of your SaaS in their platform’s next update. Another consideration SaaS companies must contemplate after going to market is to ensure that any patent application is filed within the 12-month grace period from the date of public disclosure, or risk their invention being time-barred under 35 U.S.C. 102 (a).
While it may seem to be an expensive or unnecessary cost for an early-stage startup, a strategic patent portfolio will enable the company to license their technology and immediately earn a royalty while retaining ownership of the technology. It will also allow a company to test the market with their SaaS platform while enjoying a strong defensive strategy and barrier to entry for any competition.
The value of a strategic patent portfolio and advantages of monetization of licensing can be seen by America’s largest technology companies. For example, in 2016 IBM set a record for having ownership over the most patents at just over 8,000. That same year, IBM acquired 12 businesses. While acquiring the revenue stream and clientele of these businesses is profitable, it’s likely that these acquisitions of the additions had negligible effects on IBM’s earnings. So why did IBM buy these companies? Most likely for their patents and subsequent monetization opportunities.
A further example of the benefits of a strategic patent portfolio is epitomized by Google’s acquisition and subsequent sale of Motorola. Google acquired the company for $12.5 billion, just to sell it two years later for under $3 billion. This acquisition propelled Google into the smartphone industry. Their reliance on Motorola’s Android operating system gave them a competitive advantage to not only exclude others from using the intellectual property, but to create a defensive barrier against Apple and other tech titans battling in the smartphone patent wars.
There are many different paths to building a strong intellectual property (IP) portfolio. What could determine your starting point when it comes to protecting your IP is influenced heavily by the current stage in development of your SaaS, as well as the stage of the startup. Technology or product maturity can be classified based on:
- Series A
- Series B and C (Growth)
- Series D+ (Scale)
SaaS startups can benefit greatly from various types of IP protection that can protect your code, software, or branding. Consider the following types of IP protection for your SaaS start up:
- Utility Patent: Protects the execution of your novel and unique software code
- Design Patent: Protects the unique design or ornamentality of your graphical user interface (GUI)
- Trademark: Protects your brand name, logo, slogan, sound, or color
- Copyright: Protects how your software code is written and how it’s implemented
- Trade Secrets: Protects your software by keeping your information secret
These provide legal protection for your proprietary technology, providing you a competitive advantage that would make potential investors more interested in endorsing the startup. Securing protection on your IP provides valuable assets for your startup while also assuring investors that their money and time will be protected from frivolous litigations.
For example, some of the advantages to having a trademark are:
- It identifies the source of your goods or services;It provides legal protection for your brand; and
- It helps you guard against counterfeiting and fraud.
Federal trademarks are valid for as long as you keep paying the renewal fees. The first renewal is between the fifth and sixth year after the registration date. The second renewal is between the ninth and tenth year after the registration date. After the first ten years, the renewal is every ten years.
Determine the Right Type of Patent Application for Your SaaS
After researching what you believe to be the novel features of your startup’s SaaS and determining the likelihood of patentability, decide which type of patent protection will best suit the startup and the SaaS:
Non-Provisional Utility Patent: This is suitable if your SaaS product’s patentable features include novel or unique functions, methods, processes, structures, or technologies
Provisional Patent (Utility): This is more suitable for a product in early stage development (before the MVP stage), or if there is a pressing need to obtain the earliest possible filing date
Design Patent: This helps your startup protect the novel aspects of any graphical user interface (GUI)
Draft and File the Patent Application for Your SaaS
Patent applications do not pertain to technical documents. Rather, they refer to legal documents that include scientific or technological information about your SaaS.
The language that you use when drafting the patent application is vital to the chances of your platform’s patentability. The services of a registered patent attorney can help you save time and money in avoiding costly mistakes that could cause the denial of your patent application.
Be Prepared for the Possibility of Office Action
A successful patent application gives you access to the broadest possible protection for your SaaS product. Keep in mind, however, that more than half of filed patent applications receive a first official action from the USPTO. Your application will be assigned to a USPTO examiner experienced in the technological field of the application. Office actions are nothing to be afraid of and are the examiner’s way of identifying legal issues with your application and can be amended with office action responses.
You or your patent attorney may participate in a back-and-forth process to overcome the cited issues and amend the scope of your application and claim set so it may be approved and registered.
IP Considerations for Startups
Although securing a seed round and getting the attention of more customers is important, you must also think about the long-term implications of your business moves. You might start to lose your competitive edge if competitors start integrating your proprietary features into their own SaaS products.
This is where the significance of a software patent comes in.
A software patent is an intangible asset for your startup. As the patent holder, you gain the rights to:
- The sole right to making, using, selling, or importing a SaaS product
- The right to seek legal remedy if other entities try to use, sell, or replicate a patented SaaS product, process, algorithm, method, tool, technology, hardware, or software
- The right to seek lost profits or royalties from a patent infringing party
- The right to monetize your SaaS patent through acquisition or licensing
Here are some of the best practices that are helpful when drafting your software patent application:
Identify the unique aspects of your software and be specific when articulating how it improves computer processes or functionality to avoid being flagged for abstractness, generic automation, or routine functionality
Mention all components, systems, and subsystems that play a role in your SaaS process
Before filing a patent application also consider:
Time: A provisional patent application provides a 12-month term to prepare for the filing of a non-provisional application. Your startup can use this “patent pending” period to develop and beta-test your application while also initiating MRR. A registered patent will then provide 20 years of protections and exclusivity rights from the filing date of application or corresponding provisional patent application.
Enforceability: As the patent holder, you can enforce your patent rights the moment your patent is issued. In this case, you have access to all the previously mentioned benefits of a software patent. Of course, the scope of your rights will still be limited to what is specified in your patent’s granted claims and specification.
While this may seem overwhelming to someone who has not been through the patent process before, an experienced patent attorney can guide you through the process and take the work off your hands so you can continue focusing on your new SaaS and business.
What Investors Want to Know About Your IP
Here’s a quick rundown of what investors want to see in your SaaS startup:
Ownership. Ownership of the IP rights to your products and branding provides investors with something for which to invest. Ownership also lets investors know that you have:
Freedom to Operate (FTO), or the ability to sell and license your intended goods and services. Further, that there are no roadblocks preventing you from entering the space. This leads us then to:
Knowledge of your competitors and their SaaS. This will prevent losing time and money to attorney’s fees and litigation, as well as to the revamping of your SaaS or branding.
Defensibility. This comes in the form of intellectual property protection in order to shut down any infringement suit. Similarly, the ability to exclude competitors from infringing your SaaS or brand.
Plan. Once investors give you their money, what will you do with it?
When it’s time to fundraise or IPO, make sure your IP is in order
The Rapacke Law Group is well-versed in intellectual property and business law for fast-growing startups. Our fixed-fee legal services include legal counsel regarding patent, trademark, and other IP asset protection for SaaS companies.
Schedule a free consultation with an experienced intellectual property attorney today!