Efrat Kasznik (pictured left) is an intellectual property valuation expert who has close to 20 years of consulting experience. Kasznik, who is President of Foresight Valuation Group, works with clients by helping them evaluate, protect and ultimately commercialize intangible assets. She specializes in performing valuations and valuations of intangible assets for financial reporting, tax compliance, transfer pricing, litigation damages and business liquidations.
I was first introduced to Kasznik several months ago when I was trying to determine whether publicly traded corporations had an obligation to write down their patent portfolios and notify shareholders of the diminished value in the wake of the disastrous Supreme Court decision in Alice v. CLS Bank, which rendered many tens of thousands of software patents (if not more) worthless, or at a minimum worth far less. Ultimately Kasznik wrote The Impact of the Alice Decision on Corporate Assets.
Recently I learned that Kasznik has embarked upon a new initiative whereby she will begin working with high-tech start-up companies much earlier in their lifecycle. In our conversations leading up to this interview she explained to me that she sees start-ups make so many mistakes with their IP that by the time they have traditionally sought her business/valuation assistance there is little that can be done at time to salvage what was otherwise protectable IP. With this in mind I thought it would make an interesting conversation to talk with her about the mistakes she sees, the patent market in general and what she hopes to do to help start-ups moving forward.
Without further ado, here is my conversation with Efrat Kasznik.
QUINN: Thank you very much for taking the time to chat with me today. I know you have some interesting things going on, including a new initiative aimed at start-ups. When I heard about how you will be working with start-up companies to try and help them before they make mistakes, I thought it might make an interesting conversation to talk about the common mistakes you see and how you plan on trying to help these companies earlier on in the process before they begin seeking financial investment.
KASZNIK: Thank you, Gene. We are based in Silicon Valley, and we are an IP valuation and strategy firm. We work with startups throughout their lifecycle: from the early stage all the way to the exit point, and we see IP problems along the way. I would say that in the early stages, specifically, what prompted us to launch this service was that we’re seeing a “pain point”, and the pain point is in startups not knowing how to work with their IP attorneys. So what we’re seeing is companies that are disclosing information in the public domain with no understanding of the ramifications of that on the patentability of their ideas or with no understanding of the new patent laws and the “First to File” environment, and how important it is to file a provisional patent. And many times even if they’re talking to an IP lawyer, the law firms are not really set up to work with startups, so their prices are either too high or they will just give them a checklist and the company will just get really overwhelmed with all the information that is being requested and at the end of the day nothing gets done.
A recent example is one of our clients that was going to a big conference to launch her initiative with a lot of participants and realized that she needed to file a provisional. She already put money in escrow a year ago with a patent lawyer, and now that she needed a provisional done in two weeks, the lawyer pretty much told her he does not have time for that because she did not provide the necessary documents and it was getting too close for him to do anything. So how we can help startups in a situation like that is that we have an in-house IP lawyer, so the way we work with the startups is we try to bridge the gap with the law firm. So we’re trying to work with them in a way that solves the problem both for them and for the law firm to get everything they need in terms of an invention disclosure, so the lawyer only needs to actually basically go and file the patent. But we’re also doing it in a way that creates a quality filing. The law firms are compensated by filing applications. So many times it’s not done in a strategic way, there’s not a lot of thinking that goes into it and there’s no roadmap so there’s no strategy as to what the future noon-provisional filings are going to be. So we’re trying to interject ourselves in the middle of that process. And bringing the valuation expertise is helpful because we can actually help them build something that has value, so they’re actually building their IP in a way that achieves a host of objectives other than just protection. So that’s one problem we’re trying to solve: this “pain point” in how startups work with their IP lawyers.
The other problem that we’re trying to solve with this service, and that actually goes a little bit up the supply chain into the investors, is something I hear all time. We get calls from startups that are later stage so they have funding, they have filed patents and non-provisionals in many countries, and the complaint that we hear all the time is that there’s nobody in charge. So the problem is that there’s filings being done and there’s nobody in charge. There’s no central command and control function that actually decides on what gets filed, on any kind of strategy as it relates to competitors, as it relates to potential acquirers, all the good strategic points that should take place when a company is filing for IP are not happening because there’s nobody in charge. And the “nobody in charge” starts from the fact that usually in a startup there is no in-house lead IP person. There might be a GC, but there are so many other things to deal with, contracts and other issues, and a lot of times these people don’t have the expertise to build an IP portfolio. So that, I would say, is even a bigger problem than the problem of the early stage startup. And so, in a situation like that, we can get involved in actually getting things organized and getting some strategy to the filing and figuring out what has been spent and what needs to be spent, and working either with the company or with the investors to improve the quality of the IP portfolio going forward.
QUINN: It strikes me that what you’re talking about is really offering these startup companies the financial/business assistance that they need in order to responsibly figure out how to protect and what to protect. Because when I’ve dealt with startup companies, and I’ve done that a lot throughout my career, it is not at all usual for them to say that they don’t want a patent, we don’t want to go down this path. Its not that they don’t want a patent per se, but there are just so many different things that need to be done first. And if you’ve never done a startup yourself, you’ve never been involved in a startup as an entrepreneur or as an early stage employee, I don’t think most people realize the number of things that do need to be done in order to grow a successful business. So I do sympathize with the initial hesitation not to want to spent time on the patent process, although I do believe such a decision to be a mistake.
KASZNIK: That’s correct. So part of what I personally bring into it is I’ve been an entrepreneur, and I’ve been a CFO and co-founder of Silicon Valley startups, so I really understand the bootstrapping mode that a lot of companies are operating under. But you have to remember, too, that we’ve had a problem in Silicon Valley, I would say, until this year. And this year actually, due to the Supreme Court’s Alice decision, I see a huge tipping point in startups actually paying more attention to patents. Traditionally in Silicon Valley, especially in the software industry, there’s been a very strong anti-patent mentality as I’m sure you know. But that’s changing, with big companies like Google beginning to get more patents. Still, a lot of startups don’t understand the importance of having patents beyond just the protection of your own product. They just don’t get it. They don’t understanding how having an IP portfolio can actually help you in the market, can actually give you some assets for negotiations with your competitors and help you create a platform to launch multiple products. So they don’t really understand that.
QUINN: No, and it’s amazing to me because it seems so fundamental — you almost should have learned this in grade school, right? I mean I was big into baseball when I was a kid and we had the baseball cards and we would trade these baseball cards at recess and after school and so on and so forth. But if you wanted to trade a baseball card that meant you had to have a baseball card to trade yourself. If you didn’t have anything to trade nobody would trade with you. And that fundamentally is what a patent can be. If you have good technology your patent is not necessarily going to be used going out and suing somebody. These are tools, these are assets that can be used to help facilitate a deal with another company that has interesting things that you may want. They want part of your rights so you trade.
KASZNIK: Absolutely! And that wisdom is beginning to proliferate a little more. But still, you see the kind of advice that startups are getting from influencers in Silicon Valley who are extremely misinformed about patents. Take, for example, a VC firm like Andreessen Horowitz, which is a Tier-1 VC firm in Silicon Valley. And they’re writing a blog that says something like: why startups should not spend their first $25,000 on filing patents, and instead they should build products. There is so much ignorance in this saying. First of all, it shouldn’t cost you $25,000 to file a provisional patent. Second of all, building products and investing in IP are not mutually exclusive, on the contrary: they should go hand in hand. Then the post goes on to recommend that startups should freely share their ideas for feedback, just send it to ten people and ask for comments, and not be “too guarded” about sharing their ideas. Which, in the post AIA environment is exactly the wrong advice to give, unless you want your ideas leaking into the public domain. So that’s just an example of the mentality we’re dealing with. And these are the people holding the money, you have to understand. So startups are trying to follow their advice and not spend the money on patents. I have actually addressed this specific example in an article I just published on IP best practices for startups.
QUINN: I know. I mean it’s crazy. A lot of the startups hear that and they believe it to be gospel and then they just totally fail to look into the reality of how other companies have started. You look at—and I wrote an article not too awful long ago about the Twitter myth. You hear the myth, “oh, Twitter doesn’t have patents, they don’t need patents, they don’t want patents.” And it simply isn’t true. Twitter owns nearly a thousand patents. They filed a patent on tweeting practically right after they started the company. And there are misconceptions surrounding Google as well. Google filed two patent applications before they ever acquired the name Google or the domain name google.com. I mean there are all these myths out there, but if you actually look for the truth you can see right through the myths, but how many just listen to the myth? I do think the myths are getting burst and it is funny in a way that the real negative rulings from the Supreme Court and the erosion of patent rights over the last few years that seems to have finally woken people up to take a look and say, whoa, wait a minute, this doesn’t seem right.
KASZNIK: As I said, Alice has been a “tipping point”. I now hear startups asking me about Alice from all over the country. I’m getting calls from Texas and they know the name Alice in the software industry. So really with a startup you kind of look at them and there are two camps: there’s the hardware startup and there’s the software startup. The hardware guys include anything from wearables and IoT to medical devices, and these people usually understand much more that it’s important to have patents. Not to say that they don’t fall in Alice territory as well because a lot of the sensor technology is already patented, so what they really have to patent is data and then that falls back into Alice sometimes. And then there are the software people who really are the ones who are beginning to wake up. So that’s what we’re seeing.
QUINN: Yes, I mean the one thing I always tell the startups is that if you file something today by the time it’s going to be examined by the Patent Office the law will likely have changed once or twice. You know?
QUINN: So you have to file something if you are ever going to want rights. At least file a provisional patent application to preserve your rights because by the time the law changes, or your opinion of the patent system changes and you want to get a patent, it’s too late. You’ve told people, you’ve been out there selling it or demonstrating it and you just can’t get a patent any more with the U.S. being first to file.
But one of the things that always struck me as odd and over the years is how so many people really embrace the open source model. Although I will say that it seems that people embrace open source right up until the time that they think that they’ve got an innovation themselves and then they want to go and get a patent on it. And it’s like well wait a minute, why are you doing this you’ve got open source code in there. Then they tell me “but it’s mine, I want to get a patent on it, I created this innovation.” I know patents and open source are not totally incompatible. You can get a patent on it but you would have to share the rights with the people in the open source consortium that you joined. And for a lot of startups that’s an eye-opening moment. But that’s what open source is, that’s what you bought into.
QUINN: Do you see that?
KASZNIK: Yes. I see more and more the end of the process that you describe. The companies actually want to own their own ideas. That’s what I see. So I don’t see a lot of “Kumbaya” mentality anymore. I think maybe because of all the litigation that’s going on, I think that companies are beginning to realize that. When you see the leaders of the industry enforcing their rights in court, it trickles back down to the startups and I think they realize that. Really, for a startup, if you want to be acquired as a software company you have two options. If you’re a software company you either have a gazillion users or you have good IP. Otherwise nobody’s going to buy you. You’re either super successful like WhatsApp and you have accumulated millions of users or you have some very strong IP. So I’m not hearing a lot of open source arguments..
QUINN: I haven’t heard that much lately, although it does seem to come up every once in a while even still. So I don’t want to say that the open source movement went away, because it certainly didn’t go away, but I think over the years people have finally realized that like most other choices in life there will be an appropriate time, an appropriate place, and in an appropriate circumstance where it will make sense. And like a tool in your box you don’t always pick up the hammer. Sometimes you have to pick up the screwdriver and wrench, you know?
QUINN: And so open source for some people is the right thing but it is not the universal tool in your toolbox. And I think that that message has gotten out, which is good.
KASZNIK: Yes. The other thing to remember about open source, it’s considered a big headache in acquisitions: if the target company comes in with lots of open source elements it’s not considered a positive thing to have. So the tradeoff here is between getting access to free IP as opposed to creating your own IP. So that’s another thing to keep in mind.
QUINN: Right. I think we’ve talked about this generally already, but if you were to put it in a nutshell, what is the one piece of advice or if there’s a couple pieces of advice that you wish you could give startup companies when they first are forming before they’ve ever considered coming to you for help?
KASZNIK: In terms of IP or just in general?
QUINN: Just in general. If you had a startup like say a friend or a family member were to come up to you at a holiday party or something and say, ‘hey, I’m going to do a startup,’ what piece of advice would you give them say, you know you gotta watch out for these things?
KASZNIK: Okay. So the first thing we do is we assess the idea. And when we assess the idea we verify that the idea can lead to the creation of intellectual property. Because for me, if that’s not the outcome, then it’s not an idea worth pursuing.
There are three things to look at in an idea, which I actually covered in another article that just recently published. The first thing is ownership. So a lot of times we’re running into ownership issues. If the idea came from a university, or if it came from a previous company and you signed an invention assignment agreement with the company. You’ll be shocked at how many people are coming with ideas not understanding that they don’t fully own the idea. So ownership is very important.
The second thing we’re looking for is merit. So we’re checking: is that a good idea? From my experience of 20 years in Silicon Valley, it all really comes down to the connection between the idea and the founder. Some people are trying to sell somebody else’s ideas. That’s not a good idea. You have to come from the industry that you really understand and the most important thing is, it needs to be a problem looking for a solution, and not a solution looking for a problem. So some people come to me and say, ‘I have this great idea and it requires user education.’ But that’s not a good starting point. You want to come with an idea that’s solving a problem that’s very easy to understand, so if you explain it to me I can understand it very easily. So that goes to the merit of the idea. And another thing is, the idea addresses a market that has some scalable size, otherwise if you’re going for a very niche field, unless you’re the leader and you have significant market share, it’s not going to be a fundable idea.
The third thing that we’re looking at is: can you turn your idea into intellectual property? Is it something that’s either patentable, or you can keep it a trade secret that has value. Let me give you an example. I just had a wearable startup from Europe, I work with a lot of European companies as well, and they came to me after three years of R&D and we said, look, you know you can never manufacture this device profitably. So a lot of these companies that are in hardware they want to manufacture, but a lot of them are not capable of manufacturing. So what we suggest early on is maybe you want to license your idea to somebody who can manufacture. But after three years of development they really don’t have anything—they don’t have any significant patents because, based on their assessment, there’s nothing patentable. So if that’s the case, why spend three years of R&D? You should have figured that out a long time ago and shifted the way you do R&D so you end up with something patentable. Because, at the end of the day, you don’t want to spend money on R&D if there’s nothing patentable especially in the hardware space.
So these are the three things that we look at. We look at ownership, we look at merit, and we look at the ability to create intellectual property from the idea. So that’s the first thing we do with any startup. First assessment before we go into monetization.
QUINN: Yeah, you know, and it’s interesting to hear you say that because that’s something that Jay Walker says a lot. If you can’t own the solution then we can’t invest in creating it.
KASZNIK: Right. Exactly.
QUINN: And that seems so obvious to me. But a problem that a lot of innovators and entrepreneurs have is they get so enamored with what it is they’re trying to do they don’t stop and think about whether or not they can actually own that solution by protecting it via a patent. Because if you don’t have a patent and you’re doing something and you’re making money you can rest assure that there will be larger players wanting to get into your market and they’re going to have the channels of distribution, the name recognition, the brand loyalty and they’re going to just take what you’re doing.
QUINN: And it’s not personal it’s just business.
KASZNIK: Yes. And we didn’t even talk about litigation. As we know, there’s a lot of troll litigation, which startups can do very little about by way of hedging the risk. But most of the litigation would come from the incumbents, their competitors, and there having your own strong IP portfolio can go a long way. So a lot of startups understand that and build very strong IP portfolios, especially if they have the right funding and the right vision, like Nest did. I see these companies as the next generation of IP holders. There’s a lot of interesting things going on that will come out in the next few years.
QUINN: Let me ask you this since you brought that up. What do you think about those who are considering buying up as many software patents as they can get their hands on? Because right now the market is so rock bottom you can acquire these things for a song compared to what they’re probably really worth and compared to what they certainly used to be worth. Based on the belief that things can’t get any worse than they are, and that they’re maybe going to turn around. I mean we’ve seen the positive case finally out of the Federal Circuit. And I just can’t for the life of me think that our innovation policy in the United States should be to ignore, to totally turn our back on Internet innovations which by their very nature have to be predominantly software based.
KASZNIK: Right. So I don’t see a lot of people buying software patents. I think that segment of the market is fairly dead at this point. But what I’m seeing is a lot of people offering patents for sale. I see a lot of the patent-holding companies that have now all turned into startup incubators. So they’re offering patents for sale/license or all sorts of deals with startups. And I think a lot of the startups are roped into it without really understanding what they’re getting into. And I see situations when companies are offered access to IP portfolios that I know are not worth anything. But they don’t really understand that. And so they are being offered access to get these patents and tie it up with their product so they can sell the company at a higher price. So the problem is that these are usually junk patents. I mean, if whoever is offering these patents to the startups could do anything better with them, they would have done that. So I’m seeing people coming to me with these deals. And what my advice to them is if you’re building an IP portfolio around your company, you need IP that’s related to your product. Buying software patents from someone, the odds of these patents fitting your product is very low. The odds of these patents being good is very low. I see these things happening more now because I think people just have these arsenals of software patents they’re trying to get rid of, and they’re finding the startups and they are an easy target for these patents.
QUINN: Well, that’s interesting. I didn’t know that that was going on. That wasn’t exactly what I was talking about. I was talking more about companies—
QUINN: Right now these patents are out there but, as you say, people can’t do anything with them. They’re trying to get rid of them to get whatever they can out of them. And I just wondered if you had some money, and you certainly wouldn’t do it with rent money, but if you had a long view and high risk tolerance you might be able to acquire some things that could be meaningful down the road. But it’s a real speculative play.
KASZNIK: Yeah. I wouldn’t recommend to a startup where the funds are so scarce to buy some random patents, when what they really need to do is spend on product development or developing their own IP that would enhance their value for the next round of funding. Maybe for larger players that have money to spare. And if you believe that things are going to turn around it could be a good idea.
QUINN: Yeah. Yeah. I understand. I really appreciate you taking the time to chat with me about this.
KASZNIK: Okay, thank you, Gene. Thank you very much and happy holidays and stay in touch.
QUINN: Happy holidays. I’ll be in touch. Thank you.