The role of complementary assets
4. Discussion of results
In this section, the insights from the analyses will be evaluated and discussed against the issues found in the literature review.
4.1 Development
In the literature review the categorization of accessible and exclusive domain of knowledge by Gollin (2008) was used to examine how the IP domain is put together. Gollin (2008) pointed out the difficulties related to examining the market and the issues an innovator may face when existing IPR was not covered and examined before the patent application was sent in. The firms included in our sample have problems examining the market because of multiple types of IPR protection formats needed to cover their inventions in the IP domain. If a patent is also covered by trade secrets it can be extremely difficult to perform a novelty test. In these situations agencies or the patent offices are the only means of finding out if an invention is already protected by another company. In this situation a start-up has no chance of examining the patent market on its own as the application is not a part of the public domain before the application is finalized.
The next insight that needs to be discussed relates to the challenge of determining the right timing of engaging into the protection process. The issues faced by the firms in the research sample are very much related to the dilemma stated by Junghans and Levy (2006) - they want to protect their idea early, but they also want to make sure that the patent claims cover as much as possible. Gollin (2008) suggests an innovation triage model suggesting that patents which only advance organizational goals and not add high value to others should use a low protection strategy. However, this suggestion runs counter to the strategies chosen by the start-ups, as it could be seen that start-ups which take patents in order to attract investors (they want to advance organizational goal) are choosing a high protection strategy even though the patents may not add any value to others. Junghans and Levy (2006) also point out that the alignment between legal, R&D and financial departments are important for determining the right timing of entry. But as all the start-ups are quite small-sized, none of them has a dedicated legal department and it was impossible to identify any alignment problems.
The last major issue that was discovered in this category was about patent drafting. The benefit of an early filling strategy (Junghans & Levy, 2006) is that additional technology can be protected after the first filling. But this requires extraordinary clever work when it comes to forming the first claims in the patent applications. If the first claims are too narrow, additional technology cannot be added, and the benefit of an early filling is ruined. Instead, as it was seen in one of the firms in our sample, it can lead to the patent applications being cancelled which make the total cost of patenting even more expensive. The issue here is related to the need of making broader patent claims which cover the current technology being developed and eventually additions that will be developed in the following 12 months. The hard part is then to avoid citation of prior art, as it can be seen negatively by the investors, as well as become a troublesome procedure to rewrite the claims afterwards.
In general, it could be seen that the start-ups are using the IP protection types that are more easily available for them. The literature review showed that electromechanically companies
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have their focus on patents (and not on trade secrets) as electronic or mechanical components can be difficult to protect by trade secrets Gollin (2008). The same applied to the case companies. One of the firms focused on trade secrets as it was easy for them to protect their key competences, while two other firms, both dealing with mechanical constructions, have focus on patents as main priority. An important factor for the new companies dealing with trade secrets is to make sure that their knowledge is not moved to the public domain, as secrecy will be lost and competitors can exploit the knowledge Gollin (2008). One of our firms faced such situation, as they were afraid of cooperating with another company in China where they do not have full control of their trade secrets. Once trade secrets are lost, especially in a young start-up, the company will be weakened as it may be the only IP they own.
4.2 Finances
One of the previous insights indicated that it is important prioritize what to patent. This was found to be important for most of the companies in the research sample as their funds were limited, and they therefore carefully had to prioritize how much knowledge they can afford to patent, and what instead should be kept as trade secrets. The literature by Gollin (2008) stated that this dilemma causes early start-ups to have a disadvantage compared to multinational corporations with high IP budgets. This is correct when you want to compete against incumbents, but all of the start-ups operate either with disruptive innovations or in niche markets where the competition isn’t very high. Therefore the focus of patents has not been to eliminate competitors, but to attract investors by showing a sumptuous patent portfolio. Only one of the companies in our sample has mentioned the importance of keeping competition away.
Dealing with cost-revenue balances was not something the case companies were very familiar with. Junghans and Levy (2006) point out that lone investors or start-ups are having trouble with planning of costs and explains that they are most likely to make miscalculations with a consequence of poor budgeting. It could be seen from the interviews, that using fixed price strategies or basic calculations was more the rule than the exception among the interviewees, which very much clarifies that there are an issue here for start-ups. Junghans and Levy (2006) indicate that it is important to keep a positive cash flow throughout the application process. This can be done by, for example, having license negotiations with third- parties. The worst scenario is if a company (like one of the companies in our case) does not plan for the possibility of getting their investment back and end up with heavy and unpredicted patent cost burdens as it is described by Cahill and Rose (2009).
4.3 Human Resources
In general, human resource issues do not seem to be a concern for the start-ups. Gollin (2008) addresses the issue related to process of granting ownership rights, but as the start- ups are usually working with contracts, this issue is usually settled from the beginning, i.e. before any dispute could arise. Non-disclosure agreements (NDA) are also something that is being traditionally used as an important factor in securing especially trade secrets. In o ur case, almost all of companies were aware of having trade secrets, but not all were fully aware of what exactly was a trade secret. If trade secrets are not made clear for the employees, someone may leak valuable information without knowing it, despite being subject to a NDA (Gollin 2008).
One of the larger HR issues described in the literature review is how every type of IP protection can be violated at some point. There clear recommendations about the best type of action that could be taken (Gollin, 2008). But as none of the start-ups have had the need
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to enforce, it was not possible to examine how they have handled such situation. In general, enforcement was not among the biggest concerns for the start-ups.
4.4 Strategy
What was most interesting here was that the IP cockpit did not take investor relations into account. In our case the majority of the companies use patents as a value-driven factor for attracting new investors. Instead the cockpit focus on licensing income, share in revenues and administrative costs just to name a few, which is factors that the start-ups have disregarded at this stage of their business strategy. The companies indeed want to generate money through their patents in the future, but it has not been a factor at this early stage and other factors have instead driven the value of their IP. What generates value in the start-up phase of a young company is therefore not the same as for an older innovation company. It is interesting to see the issues that start-ups are too young to have experienced and therefore do not use time on. For example enforcement has not been a problem for the case companies and it is not an area of interest for the start-ups. This can be a drawback later in the companies’ life, as they have not calculated in the cost of enforcement. On the other hand may it might not always be necessary to react on copyist, and it can be useful for a start-up to have a strategy about when to engage in enforcement. Clifford and Bill (1996) recommend a “Do Nothing” strategy based on a cost/benefit analysis. If the cost associated with enforcement are too high and the infringing county is a small market, or part of the least developed markets, a company may consider not to do anything and instead enjoy their brand name being spread.
The companies have not dealt with licensing of their inventions yet, therefore haven’t any of them experienced problems with blocking rights as it was described by Gollin (2008) or problems regarding drafting of license agreements. It was only one of the companies that were seriously considering licensing to third-parties and the issue was not how to shape the agreement, but whether they could trust that their knowledge do not leak from the third- parties, especially when it comes to countries like China or India.
Junghans and Levy (2006) use the term ‘strategic alignment’ to describe the synergy between the internal and external environment in a company. When asking the companies about their personal goals versus the goals from investors most of the companies stated that there was a good balance. Not because their goals were the same, but because the diversity in goals was seen as a positive thing. One of te firms explained, that if it was all up to them they would never get the products out as they would be stuck in the developing progress. On the other hand the investors are pushing to release the products as fast as possible so they can generate an income.
A topic not disused in the literature but related to the IP strategy of the start-up is the level of openness. Most of the interviewed start-ups find it difficult to find a balance between keeping the idea secret or talking and discussing the idea with other people or companies. When discussing this issue with one of the firms, one of the executive managers suggested another level of openness. He disregards patents as they eliminate the best practices. He has therefore considered the possibilities of following an open-source strategy instead. Most of the literature mentions open-source as a strategy for software developers but the firm on our sample is from the transportation industry and develops physical products. Would an open business model as it is described by Chesbrough (2006) be more interesting? Chesbrough (2006) mentions two perspectives; the defensive and the offensive. What the firm under question is doing now is following a defensive strategy, where only they can utilize their patents by eliminating others from using their knowledge. If they instead switched to an offensive strategy other companies could utilize their patents and the firm would still be in control of the rights. This approach would reduce some of the R&D expenses as the firm would have other companies helping with getting the best out of their patents. Chesbrough
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(2006) suggest using innovation intermediaries for the communication between the parties as it gives many opportunities for companies to open up their innovation processes.
4.5 Commercialization
The idea of adding the commercialization aspect is to see if a company’s IP practices have an effect on the choice of commercialization strategy. The framework suggested by Gans and Stern (2003) could be used to see if a company has followed an appropriate commercialization strategy according to their specific market situation, dependence of incumbents or competitors and imitation aspects.
One of the firms in our sample has chosen a collaboration strategy with a partner - an engineering service. At the same time, the partner is also their competitor as they are offering a competing technology/service. The benefit of the new service from our firm is that it can perform the service faster and cheaper than the old method provided by the partner. Therefore it is also in the interest of the partner to license out the patent so they can provide a better service for their customers. It be seen that in this case the collaboration strategy and IP strategy were very much interrelated. Our firm had a good business idea but due to various reasons it was not possible for them to start a company on their own. Therefore it was necessary to partner with the company holding the licenses that were necessary for the commercialization of their business idea.
During the interview it was found out that the partner was the incumbent and, according to them, preventing incumbents from imitating their innovation was completely possible. If incumbents wanted to imitate what our firm was doing, they would have needed to hire new employees and develop an equally good testing method. The next step is to look at the factors that drive the commercialization strategy. Gans and Stern (2003) suggest that the company has to demonstrate that their solution adds value to incumbents’ customers. This has already been demonstrated as the solution by the firm in our sample is both quicker and cheaper which is a benefit for both the customers and the incumbent.
5. Conclusion
The objective of this paper has been to address the IP issues and practices related to new technology start-ups. This has been done by interviewing young start-ups and generating insights by adopting a grounded theory approach. The questions and structure of the interviews have been generated via insights from the literature review. The commercialization strategy of one of the companies has been examined to find out if there was a link between the strategy and the company’s IP practices. For most of the interviewed technology start-ups, patents represented a key corporate asset and were used for both protecting and as a part of the overall business strategy. Most of the issues addressed in the literature review were also something that the start-ups themselves had experienced. However there were some issues that were not part of the companies’ considerations at this time, or some issues were not seen as problems at all. Most noticeable was that cost- revenue balances were not a practice familiar to the startups. Instead patents are used as a means in attracting investors and taking without keeping attention to the scope of license opportunities, i.e. without focusing on enforcement and without getting a revenue stream from each patent. This is a big issue as the patents may end up being a high cost burden for the start-ups if they do not use the means available to generate an income.
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