Patent Financing: An alternative path to protection for startups

By Gene Quinn
July 11, 2016

Russ Krajec

Russ Krajec

Startup companies are always faced with at least several rather unpalatable dilemmas.

No matter how much you try and stretch, no matter the efficiencies you try and employ, the inescapable reality is that there are only 24 hours in a day and everyone needs at least some sleep. There is never enough time to do everything that needs to be done, let alone could be done, in order to maximize the possibility of startup success.

Similarly, no matter how much capital is available there will never be enough money to do everything that needs to be done at the level that it needs to be done. There will be certain things that startups must outsource to competent professionals, and many other things that should be outsourced to competent professionals that will be done by various members of the startup team.

This is the life of a startup, particularly a technology based startup. There will never be enough time, and there never will be enough money. Those who triage the best are often the ones that are most successful.

Enter patent attorney Russ Krajec, the CEO and founder of BlueIron, which is a patent financing company. Krajec is an angel investor, a registered patent attorney, a former Chief Operating Officer of a venture backed startup company, and an inventor on more than 30 US patents and applications. Krajec founded BlueIron to do something unique, which is to essentially take the cost out of acquiring patents for technology startup companies.

I recently had the opportunity to chat with Krajec on the record. We talked about the BlueIron model, why he founded BlueIron, and more generally about his philosophy for protecting early stage innovations.

Without further ado, what appears below is part 1 of my 2 part interview with Russ Krajec.

QUINN: Thanks, Russ, for joining me today. I thought maybe we could start was with a discussion about how you started BlueIron and what it is that you’re trying to do for inventors and entrepreneurs.

KRAJEC: So, BlueIron came from a frustration that I had as a patent attorney, and the frustration was that it was difficult for me to give good advice to my clients because I had this inherent conflict of interest. I could never tell an inventor that they should not get a patent because I was an agent of the client. If they wanted a patent on a dumb idea, I’m required to do that. And so with BlueIron, I wanted take away the bad parts of the attorney-client relationship, if that makes sense, and replace it with something where our interests are as aligned as possible.

QUINN: Well, let’s talk about that for a second, because I have a sense I know what you’re talking about, and there is in an inherent – I guess you’d say – conflict or tension between the attorney and the inventor. I suppose to some extent it comes down to something as simple as when you are a hammer, the entire world looks like a nail. So when you’re a patent attorney, you look at inventions and you’re getting paid to get a patent. You’re not really getting paid to think about whether the client should be getting a patent or whether this is something that should be kept as a trade secret or whether or not this is something that there’s a market for, or even whether the client has considered whether there’s a market for the invention.

KRAJEC: Oh, exactly. Take a simple example where the examiner calls with an absolutely crippling amendment that he wants to do to a claim, but he calls and he says, “Hey, I’ll allow this case, but here’s an amendment that I want.” And you look at it and you think, this will just kill the commercial value of this patent. It might be that the amendment makes the claim undetectable. It might read on a different actor than we want. There might be all kinds of problems with that amendment, but as an attorney, I am required to call the client and tell them about this. All they’re going to hear is the patent is allowed, and we don’t have to pay you anymore. But, my tension is, I want to tell them, “Hey, it’s not in your best interest to do this, and you need to keep paying me some more money,” but they see it as being disingenuous because my the goose that’s laying the golden eggs is about ready to get killed. So, I’m stuck with that tension, and I wanted to remove that. Besides, I got into patents because I was an engineer. I was an inventor, and I had an invention that I wanted to bring to market. And I had been through the patent process with large companies, but when I wanted to bring this patent to market, I went to a patent attorney and like well what’s the best thing for me to do to set this thing up for licensing. And he wouldn’t help me out. He would not tell me what’s the best thing for me to do. Clients look to the patent attorney as the expert in the patents and to help and guide them through the whole thing. But, as I learned later once I got into the business, independent inventors are looked upon as “walking malpractice suits.” So, attorneys are told, they’re trained, not to tell any advice at all to their clients because they don’t want the responsibilities for it.

QUINN: Yeah, or you got to do it very, very carefully. Lay everything out on the table and let the client decide, I suppose – and that’s even for those who are taking independent inventors as clients. I do take independent inventors as clients sometimes, and I try and give all my clients some broader business advice to at least try and get them to think about why they are seeking a patent, what they plan to do with it and after a search if it continues to make business sense based on what we might be able to protect. But I know a lot of attorneys don’t even want to work with independent inventors at all, which is unfortunate. But what I think I’m hearing you say is that through the BlueIron model you engage with startup companies who have something that’s interesting and then you do the patent work in a way that makes the most sense, for lack of a better way of putting it.

KRAJEC: Yes. We look at it as our interests are aligned in several different ways. One is we treat those patents as collateral for a loan, if you will, but even so, we want those patents to have commercial value, because if they don’t have commercial value, the collateral is worthless. So, just in that instance, we need the company to be successful so that our assets have some value. The second aspect is we really need that company to bring a product to market that matches the patent. Because assets where the product never makes it to market or are never commercialized are worthless, because they’ve never been proven and there’s not competition. Nobody wants to copy that technology, and nobody’s proven then it even works.

QUINN: All right, so then I guess now the next follow-up question to ask is about when the examiner comes to you and says, “Hey, I want this amendment,” and I guess the right solution, if have – if you’re a big company and you want to obtain a patent portfolio, would be – within reason as long as it’s not going to result in the patent being worthless – to take what the examiner is offering and then you circle around, file a continuation to keep it pending and continue to try and get broader claims on the disclosure. And I understand what you’re saying, a lot of times, clients don’t want to do that because they’re at the end and they’ve gotten something and now they want your bill to go away. So is this how you see yourself working with people to build a portfolio for their innovations?

KRAJEC: Typically, what we recommend to a startup company, is not to do the provisional route, which delays the patent, but actually go the opposite direction and try to do a PCT-PPH or Patent Prosecution Highway. I was a co-founder of a startup out in Seattle and we did about 60 or 70 PCT-PPH cases, so I got pretty adept at this. We can typically get a patent issued in 9 to 12 months using PCT-PPH. This is huge for a startup company because that patent is probably the only asset – the biggest asset they have at the time, and that sets them up for their next round of funding or the ability to do outbound licensing or cross-licensing.

QUINN: Yeah. Yeah.

KRAJEC: Oh, and by financing the patent, we take the cost off the table. When the startup is not sensitive to the extra cost that all these things have, we are free to get a much better patent than the startup would get otherwise. The cool thing is that it actually reduces our risk by expediting the patent, and it gives them a better asset – makes them more valuable as time goes on.

QUINN: So, how is this model being received? It would seem to me that for a startup companies that have innovations they need to pursue, this would be something that would be quite attractive because, from what I know about startup companies, they have a lot of ideas and they never have enough capital to pursue all of them.

KRAJEC: It’s been very, very well received, not just the entrepreneurs or inventors like you mentioned, but the investors as well. Angel investors or venture capital investors want to know that their capital is being deployed well. So, the less money that is spent going to the patent attorney, the better, as far as they’re concerned. But also, they want to know that the due diligence is being done on each one of these patents so that they can be assured that assets going to add real tangible value to the company at the next round of funding or the exit event, or for just as the company grows and matures.

QUINN: I guess the next question I have is sort of an interesting one, because on some level it would seem that investors may not be interested in patents that are encumbered, you might say. Does that come up when you’re dealing with venture capital folks or angels?

KRAJEC: All the investors want is to know that the company has access to this asset, and typically we use a conventional commercial lease-back model. The startup company has an exclusive license, so they have full control of the asset, and they have a buyout option that can be exercised at any time. And the buyout cost is reasonable, is predictable, and it’s known ahead of time. So from them, it is purely a matter of financing while the startup company has excruciatingly high cost of capital. Angel or venture money averages 30, 40, 50 percent per year. Our financing is much lower than that, it’s a better use of capital. If at some point in the future, the company may be able to get a bank loan where the cost of capital is much cheaper, and it makes sense to exercise the buyout option. The patent financing is purely an analysis of Net Present Value in these scenarios.

QUINN: Oh, I guess I didn’t realize that there was that buyout option. So that means that you really are just no different in some ways than an angel investor who in the next round of funding is going to be bought out. The VCs are going to move forward in their own direction and will buy out the angel. The difference here, rather than an angel bringing contacts and business acumen to the table you’re putting in real value on the patent portfolio side in the meantime.

KRAJEC: Right, and all of our agreements are transferrable, so if the company’s sold to an acquiring company, the acquiring company can look at it and say it makes financial sense to keep paying the license agreement, or it may make sense to exercise a buyout. There’s no requirement that they buy out BlueIron at any time.

QUINN: That makes this deal even better. It seems to me that it really would be a positive deal for startup companies or people who are cash-strapped, because the costs of getting the patent are quite a lot, you know. And you look at the cost that the patent office charges, and you see that there are fees for this and the fees for that, and they add up quick enough on their own, no doubt. But if you’re going to do this alone – there’s a certain element of attempting to taking out your own appendix. I always liken it to that T.V. commercial, the one where the guys is sitting at the kitchen table with a butter knife and he’s on the phone talking to this surgeon and the surgeon says, “Insert the knife.” And he says, “Well shouldn’t you be doing this?” And the answer is yes, you should, unless you have absolutely no other option. If you have an option to have a professional be doing this for you, then you should have a profession do this for you because by the time you know that this is the million-dollar idea or in some cases, the billion-dollar idea, it will be far too late to do anything about it.

KRAJEC: Yes, that’s very true. We typically do a lot of due diligence ahead of time to make sure that the market is big enough to support a patent. We like to term these as investment-grade patents. What we want is something that’s solidly researched that we have claim scope that’s directed at a group of infringers – potential infringers or licensees.   We really want to make sure that the patent is well-examined. One of the ways that we believe we could get patents that are well-examined is to write a good patent application. And what I mean by that is a patent application that you could understand. When I draft a patent application, I envision pushing that across the table at an infringer and having them pick the patent up, look at it, and understand it. I want them to get what is being said in it. I want them to understand the figures just by looking at them. I want the thing to be reasonable and easy to comprehend, and that benefits us in multiple ways. One is we get a better examination because the examiner understands the invention. We’re not playing hide the ball or anything like that. The other thing is when our client companies try to sell or license those assets, it makes the whole conversation go smoother because they are not arguing about what that patent really means. Also, if it ever got to a judge or jury, they would also be able to understand it and make a reasoned, solid decision about it.

QUINN: So, I guess, when you say that you’re looking for investment-grade patents, and we’re talking about startup companies, exactly what kinds of companies do you envision working with? I know a lot of times, folks who are doing business, like angels and VCs and people who do financing, have a comfort zone in one innovation area or technology area. Do you have one of those innovation or technology areas that you prefer? Is there a particular profile for an inventor or a company you like?

KRAJEC: We are agnostic to technology, and we’re happy to work in the biosciences, life sciences, as well as electrical, mechanical, and software. What we look for are big markets, and we also look for a client who we can be their partner over several years. Our experience – and I’ve sure you’ve seen this as well – is that first patent that comes out of the gate for a startup company is often the worst one of the batch because there’s a technology risk.   I mean, we don’t even know if the thing works. We don’t know if it’ll work at scale, or whatever. There are also market risks because the startup company only has a guess at what the market’s going to need, but over time, they’re going to refine that and pivot and hone in on what the market really needs. And so over time, they’re going to iterate and their business plan and their business strategy will start to homogenize. We see the stronger patents being the second or third or fourth patent that comes out of a company. These actually have a lot more commercial value than that very first one.

 

CLICK to CONTINUE READING: In the final segment of my interview with Russ Krajec we pick up our conversation discussing his recently published book — Investing in Patents. We then shift into talking about the proper use of provisional patent applications and how so many unfortunately do nothing but harm. We then continue to talk about prosecution strategies and how getting the patent is not the end goal for a startup, but instead just the beginning.

 

The Author

Gene Quinn

Gene Quinn is a Patent Attorney and Editor and founder of IPWatchdog.com. Gene is also a principal lecturer in the PLI Patent Bar Review Course and an attorney with Widerman Malek. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 1 Comment comments.

  1. mike July 11, 2016 3:28 pm

    Excellent topic and a great source for information, Gene – thanks!