Remember the old saying: “The early bird gets the worm, but the second mouse gets the cheese”? Indeed, in the current intellectual property world, the early birds (aka the “first movers”) are not faring so well and the second mice (aka the “fast followers”) are having a field day.
Here is why: say you invest in a startup that came up with some innovative solution to a known problem and is first to bring it to market. The sky is the limit, right? In reality, this “first mover” advantage is –in most cases- limited to one year or two at best before someone else will see the potential of the new approach and come up with its own solution. Then, a third competitor may show up and so forth… While the startup probably had an initial 100% market share due to a temporary de facto monopoly, such share rapidly decreases as soon as others start selling to the same customers. Worse, many times, one of those fast followers is a large entrenched company that has deep R&D teams, seemingly unlimited budgets, well-known brands and established distribution channels in many key geographies that took decades to build. They can play catchup really fast. In other words, the only thing going for the startup at that point (assuming it could not possibly achieve this scaling up over such a short period of time) is the uniqueness of its technology and its ability to out innovate others. This in turn is only true if the new technology it brings to market is adequately protected against free riders; otherwise one is simply doing others’ bidding and subsidizing their R&D… In short, innovation without protection is simply a form of philanthropy!
Therefore, the innovative company is actually taking all the risks of creating a new market (or displacing an old one) while others are simply waiting on the sideline for the right moment to grab the cheese, unless of course you were able to attach some enforceable rights to your R&D that can act as a valid deterrent. Such rights are normally secured either via patents, trade secrets, copyrights, exclusionary contracts, or any combination thereof. Trademarks may also play a role, but rare are early stage companies where branding alone is sufficient in attracting and protecting sales.
Up to very recently, there was enough faith in the integrity of the intellectual property ecosystem to make innovative companies and individual inventors alike confident that if they brought something useful to society, they would be rewarded accordingly. For as long as a market driven economy existed, this has worked relatively well as the rules were well known and largely predictable. If you had a secret, it was going to stay that way. And if you had patents, people who would copy you would do so at their own risks.
These two simple and powerful premises are alas things of the past and first movers are largely left facing …a better mouse trap, which leaves them at a great disadvantage relative to those who will follow in their footsteps. The root causes for this unfortunate new normal are twofold: 1) In a world where hacking and corporate espionage have been elevated to an art form and are even sponsored by certain governments, it has become extremely difficult to rely on trade secret protection to keep a company’s crown jewels under wrap. While the news is littered with stories of Fortune 500 companies and governmental agencies alike suffering from computer breaches, this is just the tip of the iceberg and one can easily infer that if you can hack the White House, a small company server will be no match for even the mediocre hacker. Actually, the stealing of IP is so rampant these days that NSA Director General Keith Alexander has called cyber-espionage “the greatest transfer of wealth in history“. A few years ago, Symantec placed the cost of intellectual property theft for U.S. economy at $250 billion a year, with cybercrime a further $114 billion annually.
So keeping all your sensitive on a non-networked device may be a clever and obvious defense mechanism in theory (albeit not that great for group collaboration). Unfortunately, studies have shown that in as much as cyber espionage is a scourge, 80% of leaks of corporate trade secrets result from voluntary or accidental disclosures made by current or former employees. You can reduce those risks with a well-defined and executed trade secret protection plan, but this requires constant discipline and vigilance and, unless one joins the dark side too, it is often extremely hard to detect, let alone prove that your secrets have been stolen.
Which brings us to patents. Because of the inconvenience and uncertainty of relying solely on maintaining trade secret protection, most small companies have historically relied on patent protection to deter competitors and protect their turf while they are building their nascent business. This in turn has become an easy “check the box” metric required for many investors (“Do you have any patents?”), regardless of the fallacy in believing that the mere presence of a patent is enough, or that all patents are created equal, which they definitely are not. But until recently, there was a legitimate expectation that if you were first to make it to the market place (the mouse trap), you’d get the cheese most of the time and whoever came after you would have to find another cheese, or pay you to get a piece of it…
It would appear that those days are gone, at least for now. With an invalidation rate that still exceeds 75% in most cases when patents are challenged in the US, the predictability of patent protection has become all but illusory, as many innovators have recently discovered. We have discussed the details in many of our previous newsletters; so no need to repeat all the statistics. What is new though is that we are now starting to witness the impact this phenomenon has on the innovators’ psyche and their natural motivation to innovate. As a result, patent filings by small entities and individual inventors are down this year for the first time in ages. This should not come as a surprise; it does not take a genius to understand that if you remove the main incentive for a certain behavior, people will adapt and their behavior will change over time. It is true with sports, taxes, love and, innovation. Indeed, what is the point of taking all the financial risks to bringing new products or solutions to the marketplace, if these are immediately for anyone to grab for free because the protection one has relied on traditionally has been substantially eroded?
At the end, there are still ways out of the IP conundrum while we are waiting for the pendulum to swing back a bit. But relying on traditional approaches no longer suffices and only a well- defined multipronged IP strategy will help even the playing field and protect innovations.
When was the last time you checked yours?