I will admit it. I am an Apple junkie. Our house is home to two Macs, two iPhones, an iPad, and an iPod Touch (not to mention a few old devices gathering dust in a bin). But I am also a bit torn on the patent battles that continue to rage between smartphone companies. The iPhone, for example, completely revolutionized the mobile phone industry and all of the other device manufacturers "emulated" it. If you don't believe me, check out this graphic. But the headlines over lawsuits, injunctions, and other forms of legal maneuvering are becoming daily reading. Now it's about to get worse. Apple was granted a number of patents this week that will only make the patent battles more absurd. In particular, the United States Patent and Trademark Office granted a patent to Apple relating to the iPhone's graphical user interface for displaying electronic lists and documents, which, in particular, according to Patently Apple "covers UI modules covering blogging, email, telephone, camera, video player, calendar, browser, widgets, search, notes, maps and more importantly, a multi-touch interface." If you thought the battles over software patents so far were ridiculous (and many serious people do), these new patents should bring it to a new level and keep patent lawyers salivating.
With all of the talk in the news recently about the increasing hostile patent wars between tech companies (see the ongoing Apple v. Motorola saga that was thrown out of court in a big way today), it would seem natural that startups would be getting in on that trend early to protect their ideas. However, an interesting report that came out this week seems to indicate that that is not necessarily the case.
"Despite the overall decline in application activity, those companies that have chosen to pursue patents have done so more aggressively than ever. This is indicative of the increasing dichotomy in the marketplace, in which some thought leaders are actively speaking out against certain types of patents while patent portfolios are being bought and sold for lucrative amounts."
That sounds right to me. Many of my startup clients will about the feasibility of obtaining a patent early on. There is a common perception that they need to formally protect their idea to maintain a competitive advantage. That still may be true in some industries (see, e.g., biotech and semiconductors), but for many entrepreneurs starting companies in the ecommerce and web space, the time and expense of obtaining and protecting a patent is just not worth it.
The day that we have talked about for more than two years is finally here. ICANN - the non-profit corporation in charge of assigning domain names - is throwing open the doors and allowing a slew of new domain name naming conventions. The Internet is about to get huge (er). Up until now, web sites were limited to such generic top-level domains (gTLDs) such as ".com", ".net", and ".org". The group added more in the past few years including ".xxx", ".biz", and others, but now they are allowing customized gTLDs. It could be a brand (.mcdonalds), an organization (.youthhockey), or just about anything else. Approved applicants will maintain that gTLD and use it to host all of their company information, control who has access to the name, and even be able to sell space in the gTLD.
But before you jump to register ".thing", the registration process alone will cost you at least $185,000 plus the investment in maintaining your little slice of the web. However, if you are a business or a group with the resources, it could be an invaluable new way to maintain your presence on the Internet.
The U.S. House of Representatives and Senate have each passed similar versions of a bill that will make big changes to the patent system, with only conference committee changes standing in the way of it becoming law. The America Invents Act makes several changes to the way patents are filed and protected, but the biggest one for small businesses and entrepreneurs is the change from the current "first to invent" system to a "first to file". Under the current system, if you invent a patentable invention, you have one year from the time you disclose it to file the necessary paperwork with the U.S. Patent and Trademark Office. This time is typically spent improving the concept, working with collaborators, or speaking with investors who could help fund the project. The new system takes away that "grace period" and gives to the first person to file the paperwork the right to patent the invention, regardless of whether they participated in the invention or not.
For example, an entrepreneur or small business might not have the necessary funds to file the patent on their invention in the first place (a patent can cost $15,000 or more to file). If that inventor describes the invention to investors as it tries to raise the money, the investor would be able to file for the patent before the inventor had raised the money. This will cause major changes to the way that entrepreneurs and investors interact with the investment community and would give a decided advantage to investors or corporations with deep pockets to trump the rights of individual inventors. That will have the effect of stifling innovation rather than supporting it.
Any inventor or entrepreneur is going to have to reevaluate their processes and be much more careful with their intellectual property once this bill becomes law, which is expected in the near future.
I have received more inquiries recently about the possibility of using crowdfunding to fund a business. Crowdfunding is a method of using small donations from the public as a way to raise money without losing control over a project. It has been used successfully to fund many different types of projects over the past few years including movies, music, fashion, and art. Now that same model is starting to be applied to business ownership - but that is a much different and risky proposition. Here's why. If you have never seen crowdfunding in action, you should check out sites like Kickstarter, RocketHub, and Quirky which allow artists, designers, inventors, writers, and others to raise money to fund some creative project they are working on. Donations are pledged online and, once a certain set amount is reached, the project gets funded by those small donations. The key here is that backers of the project are making a donation to support the project but they receive no ownership in the project other than perhaps getting a free copy of the finished project as a gift. But this simplicity is what makes the project-based model successful. First, potential backers can easily wrap their heads around, say, a new short film or a book, and donating a small amount of money is a low risk proposition. So a project gets completed, and backers may get a free copy of the project to keep. A win-win.
But now companies are trying to expand the model beyond project financing to funding business concepts, which can be another avenue to funding without turning to angels or VCs. The problem with taking money from a large number of people in exchange for ownership in a company is that this is exactly what the U.S. securities laws - both on a federal and state level - are guarding against. In general, any securities sold in a company must either be publicly registered or must qualify for one of the enumerated registration exemptions. Generally speaking, selling ownership in a company to people without a large net worth (so-called "unaccredited investors") may trigger a number of disclosure and registration obligations on the company, and specific laws of each state where investors are located will have an effect as well. As the number of investors and states involved goes up, so do the costs. So tackling a financing project like this should be done with the careful counsel of a securities attorney because these rules can be treacherous to navigate and could result in penalties and rescission.
Some may opt for services from companies like Profounder, which was recently launched to provide assistance with this kind of financing for a flat or small percentage fee (in addition to all of the filing fees). Sounds like a great option for companies to raise money, but be very careful here. The securities laws were written pre-Internet, and are certainly not optimized for the rapid changes in technology. Just because you can do it does not mean you can get away with it. And compliance requirements under state securities ('blue sky") laws vary and are notoriously different. Again, seek out an experienced securities lawyer to help guide you through.
Have you tried crowdfunding? What was your experience like?