A Fork in the Road: Production or Protection?

Start-ups, small businesses, and individual inventors—typically faced with budgetary concerns—often encounter the dilemma of where to allocate their limited funds. Frequently, entrepreneurs, especially when launching a startup business, need to decide whether to invest in their intellectual property (IP) rights, such as patents and trademarks, or rather in the development of their product or service. This predicament introduces risks that should be carefully considered. The investment in IP may delay the development and the launch of the product and the company itself, but the IP investment is in most cases a must. On the other hand, it is understandable that it is tempting for a startup company to invest in its own launch and growth to quicken its establishment and market presence rather than spend on IP. Serious risks are associated with each option, thus, the decision where to allocate that limited budget have to be carefully considered.

For instance, on an episode of Shark Tank show, we see the outcome of an inventor and entrepreneur decision. She invented a new product (a washable/reusable diaper) that turned out to be a market success. She presented a creative, engaging, and effective pitch to the Sharks. Very interested, the Sharks began to question her business strategies and the status of her success. Unfortunately, in the end the Sharks had to restrain themselves from investing when she revealed her weak IP protection. Although she did decide to invest in both IP protection and production, her IP protection hadn’t been well-balanced, apparently due to the same classical cause, the limited budget at startup. While she did have a patent, it apparently did not provide sufficient patent protection against her competition, likely due to narrow scope of the patent claims. As a result, her weak patent protection was no match for her competition, and her many competitors claimed significant profit that could have been hers had she been able to deter them in the first place. After years of being on the market with her innovative product, the market grew to about 70 million dollars in sales, but she had only a market share of about 3.5 million, due to the fierce competition with many sellers (including a former distributor) who apparently stole her idea and entered the market. Not only that she had a very small share of the market (5%), but the profit margins were low too, due to the difficult competitive climate.

This is a lesson to be learned by all entrepreneurs: A single facet of protection or a single IP tool may not suffice. When an IP attorney suggests for example a continuation application for patent to pursue a second patent with broader patent claims, that have to be carefully evaluated. A family of two or more patents is more likely to better protect the new product or technology. Similarly, securing other IP assets such as by filing trademark application(s), or employing other protective strategies (e.g., trade secrets), must be considered. The goal is to increase the business’ scope of IP protection, dissuading the competition from impeding on its success. Having multiple standpoints of IP protection could provide a more holistic armor for the business.

Of course, the converse situation rings just as true—budget cannot always support both business execution and proper IP protection, and sometimes the product will fail, so the funds spent on IP will be a loss too. However, decisions like these must be made very carefully. The entrepreneur should at all times be mindful of the advantages and disadvantages of investing in IP, and the risks involved on each side.