The Philippine Innovative Startup Act of 2019 defines a startup as “a person or entity that aims to develop an innovative product, process, or business model” (RA 11337, Sec. 3g). Innovation, according to the same law, is the creation of “new ideas that results to the development of new or improved products, processes, or services, that are then spread or transferred across the market” (RA 11337, Sec. 3b). Thus, novelty, or the state of being new, is in the DNA of every startup. Without creating a new or improved product, process, or service that the market would use, there is no startup.
Any product or process or an improvement of a product or process that is novel, has an inventive step, and is industrially applicable can be protected by a patent (RA 8293, Sec. 21). A patent is an intellectual property right granted by an authority, usually a state or a jurisdiction, giving the patent owner a limited monopoly to prevent third parties from using or benefitting from the protected product or process without the owner’s consent. So, if you are a startup founder with a new or improved product, process, or service that you want to bring to the market, are you not better off fencing your innovation and having control over who should benefit from your patented technology?
A study on startups who protect their innovations using patents found that there is an increase in employment growth by 54.5% or around 16 employees on average and a 79.5% increase in the average sales growth translated to approximately $10.6 million in accumulated sales over five years. The chances of getting funded in three years also increase if a startup can claim a patent to its name.
If startups are the vehicles upon which innovative and patentable products, processes, or services are delivered to the market, why is it that 9 of 10 startups fail in their business? And if the survivorship rate is only 10%, why do founders need to bother with the expense of protecting intellectual property, more so “costly” patents?
Looking closely at the reason why startups fail in the first place, CB Insights reported in 2019 that the top three reasons are: running out of cash or failing to raise new capital stood at 38%; absence of any market need came at a close 35%; and being outcompeted placed at 20%.
Studying the companies cited by CB Insights in the top three list that offered technological solutions at the core of their business model will show the following:
- Daqri, an augmented reality founded in 2010, raised US$275 Million in 2017 before closing its doors in 2019. Daqri had 217 published inventions on the World Intellectual Property Organization’s (WIPO) Patentscope.
- Aerion Corporation, which sought to address the noise created by the sonic boom of jets, filed 29 patent applications during its 17-year lifetime and managed to create a US$11.2 Billion sales backlog for its AS2-designed jet at the time of its closure in 2021.
- Quibi, a mobile streaming service that wanted to compete with Netflix and Disney Plus, closed in October 2020 after six months and US$1.8 Billion funding was raised but still managed to have five patent applications published in Patentscope.
- Reach Robotics, founded in 2013, had 11 patents published in Patentscope and secured US$7.8 Million in funding before shutting down its Mekamon robotics platform in 2019.
While these four companies do not exist anymore, their stories give us an insight into the relationship between creating a technological startup, securing investor funding, and protecting intellectual property.
Failure in the Eyes of the Beholder
What does it mean to “fail” for a startup? Suppose the goal of every startup is to create a business that will bring its innovative product, process, or service to the market, and it was able to do so despite closing shop afterward for whatever reason. Can it be said that the startup succeeded?
Techcrunch, for instance, reported in 2013 that Daqri’s AR technology was powering 1,000 campaigns of media conglomerates like Twentieth Century Fox and Sony. If this was the case, then Daqri had already reached its business objective about four years after its creation by its founders. Even before bringing its product and services to its customers, Daqri filed its first patents on SPATIAL LIGHT MODULATORS and HOLOGRAPHIC SYSTEMS in 2010.
On the other hand, Aerion Corporation secured its first patent grant for its AIRCRAFT WING AND FUSELAGE CONTOURS in 2000, decades before its scuttled plan to build a US$375 million manufacturing facility in Florida, USA that could have fabricated supersonic jets at the price of US$120 Million apiece. Not a single aircraft was produced.
Before the closure of Reach Robotics in 2019, its audience was still able to play around with its platform and robots. Reach Robotics launched two versions of its Mekamon gaming robots and platform, first in 2016 and an improved one in 2018. The supporting patent for Reach Robotics’ GAMING ROBOT was filed in 2015 and granted by the US Patent and Trademark Office in 2020 and the China National Intellectual Property Administration in 2021.
Quibi just crashed and burned without even streaming any content. And yet it was able to get a patent granted.
Although neither Daqri nor Reach Robotics reached IPO status or became the subject of an acquisition, they both delivered on their promise: to bring innovation to the market.
Funding the Failure
Startup founders have big dreams. No founder created a startup for the primary purpose of failing. And no founder wants to be the subject of a post-mortem. Unlike being a founder of another micro, small and medium enterprise, however, startup founders need to prove not just the viability of their business but also the technological superiority of their solution compared to state of the art. If the odds are stacked against the founders succeeding in bringing their innovation to the market, is there a point for investors and venture capitalists to put their money in startups? Apparently, yes, going by the same list of failed startups reported by CB Insights.
Daqri benefitted from two rounds of funding, the first one in 2013 for US$15 Million and the second in 2017 for US$260 Million. Aerion reached Series C of funding for an undisclosed amount in 2019, while its Series B round in 2010 brought US$27.1 Million. Reach Robotics had eight rounds of funding that raised US$7.8 Million from 2014 to 2019.
Among the four companies, Quibi raised an enormous war chest in its short existence, with US$1 Billion in a venture round in 2018 and US$750 Million in a private equity round in March 2020.
Given that hindsight is 20-20, we can speculate on the founders’ excitement during the first funding rounds when they were pitching their ventures to potential investors. Failure was far from their thoughts. Their pitch decks would have emphasized their growth projections until they reached IPO status. Not one founder would’ve believed that patent protection should have been done at a later stage after their business models have been validated to convince an investor to risk its money with their startups. Instead, they would have filed at least one patent application and stated “patent pending” on their sales documents and investor pitches.
Failure is Such Sweet Sorrow
What happens to the patents (and all intellectual properties) of a startup that closed? All the intellectual properties of a startup are considered assets as they are, in fact, property and have value, especially where the USP of the startup is closely informed by its patents. As assets, the patents are put up for sale together with the rest of the other startup assets, and the proceeds will then be used to pay its employees, suppliers, and creditors. This process is the usual course of liquidating any company, including startups.
With the failure rate of startups, founders’ interests are then best served if they also plan their exit strategy (excluding successful ones like M&As or IPOs) with the same aggressive attitude as they pitch their business models to investors. Kato et al. (2021) argue that patenting makes new firms more attractive as targets for a merger while enabling startups to choose voluntary liquidation as another successful exit strategy. Founders who already know it is time to pull the plug are thus in a better position to find better value for the patents of their startups than when they are cornered in a fire sale.
An option that founders can explore is to set up a holding company that will own the soon-to-be-shuttered startup’s intangible assets, including patents. Because many jurisdictions protect patents for 20-year periods from the filing date, the founders can earn more revenue by assigning all their patents to the holding company and allowing the latter to license (and even cross-license) the patents as its business model. (Although not caused by a forced liquidation, fifteen top universities in the US recently established a University Technology Licensing Program ostensibly to “centralize licensing expertise and administration and provide a ‘one-stop shop’ for licenses to many of the Members’ physical science patents” but this deserves a separate blog.) Having another company to take care of monetizing the dead startup’s patents is far better than just letting this intangible asset lapse into the public domain.
The Philippine startup experience in using patents as a critical tool in raising funds is fledgling at best. In its 2019 Policy Brief on “embracing Industry 4.0,” the Department of Trade Industry, one of the three lead agencies mandated to implement the Innovative Startup Act of 2019, “intellectual property” and “patents” were just mentioned once. For its 2021 Policy Brief entitled “Startups,” the DTI did not even use the words “intellectual property” and “patents” at all. The 37-page PricewaterhouseCoopers 2020 Philippine Startup Survey, however, included “intellectual property” as part of its interview with JG Digital Ventures, Inc. CEO Jojo Malolos.
Unless patenting (and protecting intellectual property, in general) becomes part of a Philippine startup’s DNA, it will be challenging to do any proper post-mortem, as every forensic analysis will require posing the question: “What if?”
 Revelar, 2019: https://www.pinoyipworks.com/2019/09/20/what-is-the-worth-of-a-patent-for-a-start-up/, quoting Farre-Mensa et al., 2017.
 Kotashev, 2022: https://www.failory.com/blog/startup-failure-rate, quoting Startup Genome Project 2019 Report
 Malyy and Tekic (2018); Role of Startup’s Intellectual Property in VCs Investment Decision-Making: Evidence from Russia