Tuesday, September 20, 2016

No Budget No Problem! Three Fundamental Concepts To Build A Successful Startup Business

Three fundamental concepts for building a business are organization, intellectual property and focus.

1. Organization.

When companies look to purchase or to perform a commercial collaboration with a startup, one of the first items they examine is the company’s fundamental written agreements. It may seem unnecessary for an early stage startup, but fundamental agreements such as incorporation documents, operating agreements, business plans, and marketing plans are key to providing a basis for any collaboration.

Though these agreements may sound expensive and outside of the budget of the entrepreneur, they can be completed in a cost-efficient way that will return many-fold the investment, in time and money, in these agreements.  In particular, the return on investment will be (1) a reduction or elimination of internal disagreements based on the implementation of fundamental agreements that define the responsibilities of the founders, and (2) the ability to quickly and efficiently enter into commercial collaborations, and to obtain funding, if necessary.  A company prospectively looking to collaborate with a startup will want to review such agreements to ensure that there will be no problems regarding extraneous investors, friends or ex-workers that will arise later to claim that they own part of the business or part of the technology.

2.  Intellectual Property.

Intellectual property is a key element in the success of a startup. However, there are two issues that need to be addressed regarding intellectual property: (1) the costs involved in obtaining intellectual property and (2) recognizing intellectual property as a commercial asset. While the cost issue drives funds away from the startup, having commercial assets will drive funds to the startup. Thus, intellectual property is “a necessary evil” for any startup as the basis for its commercial assets.

Because intellectual property is a necessity, the entrepreneur must understand the costs and the risk/reward relationship of filing for an intellectual property right in the U.S. and other countries. In order to manage intellectual property costs, a strategy that provides cost-effective and efficiently obtained intellectual property is necessary from the earliest stage of the startup. An often overlooked aspect in developing this strategy is ensuring that the startup’s counsel understands the entire spectrum of any new technology, e.g., from initial disclosure of the technology to commercialization, and not only the preparation and filing of a patent application or other intellectual property right applications. Having this understanding will ensure a cost effective IP portfolio (important to any startup), and a portfolio that is continually positioned to discuss collaborations and commercialization, even at the early stages of the technology development core to the startup. 

All intellectual property is not the same. A startup needs high-quality intellectual property that will be commercially viable for various types of collaborations, e.g., a joint venture for the creation of additional intellectual property, a license, or as an asset in a merger or acquisition.  Intellectual property (and most particularly patents) have little or no value if they are not broad enough to cover the startup’s products and to ensure a presence in any industrial field. Moreover, haphazardly filing multiple patent applications without evaluating the value of such applications, can quickly drain the startup of valuable funds, and thereafter confuse the company’s business plan by focusing too broadly.

3. Focus.

After the startup’s fundamental agreements and intellectual property have been established, entrepreneurs should focus on commercialization of products and services, and on developing their technology. Entrepreneurs should implement a “feedback system” in the development and commercialization of their technology.  Specifically, marketing and commercializing intellectual property will provide comments and advice that can be evaluated to make any necessary adjustments for the marketing of a product or service, and the modification of intellectual property rights.

Core to a successful marketing plan is having direct marketing into the area of your product or service, and in recognizing the competition and potential collaborators. A common misunderstanding is that a startup company has to take the technology all the way to the product or service by itself. Getting collaborators and co-developers to support and expedite the development and commercialization of the technology will provide success. Although collaborators will take part of the profits or equity, most startups do not fail because of bad ideas; rather, they fail because they do not have a focused, cost-effective plan to move the technology from discovery to commercialization. Many companies start with important technology, but get bogged down in extraneous intellectual property, and in trying to take the technology to commercialization by themselves. This can be extremely difficult, as often many different experts may be needed.

Entrepreneus will find it a difficult sell when asking venture capitalists or angel investors for funding for salaries and development, while filing to provide details on how they intend to manage the journey from technology development to commercialization. This is a death knell for any startup trying to raise money, because it signals to potential investors that not all of the issues that need to be addressed have been recognized by the startup. Most often this results in a denial of any funding or investors obtaining large amounts of equity in the company (including the intellectual property) for basic funding amounts. 

Applying the three steps above will result in a focused approach to technology development and marketing and commercialization, and lead to an effective, efficient and successful tech startup.

- Joseph J. DiDonato

updated on 10/1

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