Statutory bars: if you haven’t filed your patent within a year of printed publication, public use, offer for sale (even if confidential or not actually sold) it may not be patentable. In other countries, this is covered by the concept of absolute novelty – rule is that they’re generally stricter, have to get patent on file before the product ships or details published.
Office actions: USPTO responds the application
Prosecution/amendment: Pushing the patent through the process, amending to address issues flagged by USPTO
Issuance: Patent actually issued to the inventor
Not covered: Abandonment – abandoning the application may occur if you don’t respond in a timely fashion. Avoiding this is the responsibility of your patent attorney. You may also choose to abandon an application on purpose.
What to Patent?
Look to core technology that will exist across versions of the product, a fundamental piece of technology that provides you with competitive advantage
Note that in an ideal world, this technology may have applications in other fields
Note that you can patent things that aren’t actually in your product – you can patent alternatives to you product. You don’t have to have implemented the technology, merely filed the patent. May be used to preemptively protect future enhancements you are planning to add to the product to block competitors.
Walkthrough of Starbucks cupholder patent (#5,205,473) ; Noah’s Bagels patent on similar item (5,826,786) – note the citation of Starbucks patent as reference.
It has been resolved that you can patent software, business methods
Business process patent for Data Processing System for Hub and Spoke Financial Services Configuration (#5,193,056?)
Secure method and system for communicating a list of credit card numbers over a non-secure network (#5,715,399)
Patent clustering: For example – Razor blades have several patents, the blade, the packaging, the handle, the moisturizing strip. This allows you to block someone from entering.
Patent bracketing: People patenting information around another patent held by the innovator to force cross licensing. Example: a telephone patent holder, and a long distance routing patent holder will need to cross license because you can’t do one without the other.
This is part of my set of notes from the Startup School 2006 sessions at Stanford.
Ann Winblad is the co-founding partner of Hummer Winblad, a VC firm in Silicon Valley focused solely on software. She started off with a number of general observations on the state of the venture capital and software markets:
The market has been very constant over the past three years, with about $21B a year invested on average. Around 35% of all dollars invested go to software companies
Microsoft stock took the hardest hit it’s taken in the past five years, down 11%. The winning stocks? Saleforce, new analytics companies
Winning used to depend on platform shifts (PC to client/server to Internet distributed); now, if you’re an incumbent it’s like playing wack-a-mole with the competition. We’re at the beginning of a four-year step function of innovation. For software, the real boom is now.
The challenge for founders is really understanding the customers, creating competitive advantage, and turning that into a business.
Starting Your Software Business Plan
What is your idea? The goal is to hook them in 15 minutes. For example, consider one of their portfolio companies, Hyperion. Jim and Bob walked into Hummer Winblad office, and Jim unfurled a list of all the customers he was going to call – after one meeting, Hummer Winblad started due diligence. In another case, Voltage Security, Ann saw their pitch as a finalist judge in a business plan competition and immediately knew it was a fundable business because they had been able to distill the essence of their idea: “Voltage Secures Anytime, Anywhere business communications”.
Do you understand the market? Unmet customer need + growth – the VCs are expecting any startup to say it’s a billion dollar market. What’s really important is to talk about the customer, their needs, and if you solve that customer’s problem/interest, will you have an ongoing revenue relationship with that section of the market? Is it a vitamin or a painkiller?
Are you defining the market or jumping hurdles already in place? You have to define the market, as opposed to having the market defined for you. You need to be creating the barriers to entry.
Who are your competitors? Put together a picture of who you’ll be up against – even if you don’t show it to anyone, do this exercise.
Is this a product or a company? Companies do not live in the Products section of their corporate web site.
Will customers beg? Are you creating the Newton or the iPod? How is this product inspiring? Biggest challenge in the consumer market is to make the product inspirational. In Enterprise, it’s about tight fit to consumer need.
Who are your customers?
What is the secret sauce? What is really giving you that competitive advantage that no one else can reproduce? In the case of Voltage, it was math. What’s your advantage? Technology/IP? Business Process? Partners? Domain Knowledge?
Engineering roadmap: Can the product be built in less than one year? Anyone that comes to them that can’t bring the first release of the product to the market in less than a year is not going to get funded. Sit down, write out your engineering roadmap to show how you’re going to get there.
Can you attract excellence? 80% of the companies Hummer Winblad funded that were acquired were run by the founders. They are seeing the old world retiring, finding that most of the people they fund are doing it for the first time. Do not try to pack in your whole management team. The companies they’re funding are lean and mean, small. One company recently funded had five employees; another had three employees.
Do you know what you don’t know? It’s fine to go into VCs and say “These are our assumptions” – it’s important to know what are assumptions, and what are facts. Michael Porter’s value chain is a good guide. Who do I think will be competitors? What do I think my route to customers will be? Write down your top ten assumptions, and track how they change over time.
Do the numbers make sense? Do the numbers reach software economics (80% gross margins, 20% EBITDA)? Are services a major fraction of revenue? Is the total capitalization less than $15< ? Are COGS (Cost of Goods Sold) > 30%? Are sales and marketing commissions and quotas in line with industry? Does the Engineering plan match the Operations plan? Is the G&A < 10%, is it outsourced? Is the quarter over quarter growth? What’s the revenue per employee? How long will the initial investment last?
The Market Bats Last
“I only swing at strikes” – Warren Buffet
Ultimately, the VCs will call customer to ascertain if they believe in your product and team. Do the customers have budget to buy you product? Is there a common problem across customers, or does it need to be customized for each customer? And do you have a way to reach the customer (example: carriers in mobile applications)? How do you reach customers in a reasonable time, at a reasonable cost?
What VCs Bring to the Table
3 P’s: People, Partners Process
65 companies got their A round from professional investors in 2005
The money does give you some competitive advantage, but not a lot. It’s the partnerships that you can leverage that build that advantage.
Do I Need to Write a Business Plan?
Not at first, but they will eventually to see your thought process. Six pages should cover it. In addition, you’ll need a pitch presentation consisting of 10 slides to cover the basics:
Secret Sauce Overview
Customers (Potential or references)
Sales model and marketing outline
Business Model / Financials / Cash Flow
How would you respond to Joe Kraus’ philosophy of taking on money? It depends on the business in question. For one of the companies they funded, they only put in $650K – this company had major assumptions outlying that needed more interactions with customer to figure out which way to go forward. The VCs are interested in where this money will get you, and if it will get you to a milestone that will be of interest to follow-on investors. The worst situation is companies that try to take too little, and they haven’t achieved any milestone when the money is gone.
Do you have a lower limit on the size of company you consider funding? Do you consider companies that are going to exit via acquisition differently than via IPO? Hummer Winblad focuses on startups that are going to become big companies. Ask yourself: Could I describe this company as a public company on an S-1? Even in the case of companies that got acquired, they made a choice to get acquired rather than to go for IPO. But an IPO was always an option. You want to be in a position to turn down an acquisition. Anyone operating such they need to be acquired to achieve an exit is in a precarious position. Companies are bought, not sold.