Whether it’s a Pre-Seed or a Series A Financing Round, a Freedom to Operate (“FTO”) Analysis can be the determining factor for a Venture Capitalist (“VC”) Firm when deciding to invest $50 or $50 million in your Startup Company.
Increasingly, VC Firms are becoming severely risk-intolerant to potential “high-risk” investments, specifically with Early Round Funding. That’s why it’s critical to make sure that your Startup’s Intellectual Property (“IP”) (i.e., Patents, Trademarks, Copyrights, and Trade Secrets) is both protected and provides your company ample room for growth. This is especially true for Startups in “innovation” fields, such as Blockchain, Fintech, Life Science, or AI/Machine-Learning, where most, if not all, the company’s valuation is derived from its IP. The harsh reality is that there is no guarantee a VC Firm will invest in your Startup. However, you give yourself the greatest chance of success when can show a VC Firm that not only do you have a clear path to market, but you also present a clear exit strategy from any potential investment.
What is an FTO Analysis?
Your Startup does not need to open itself up to potential legal action. At best, you could be forced to pay royalties. However, at worst, you could end up paying triple in damages, along with the substantial legal costs associated with discovery and court time.
For example, consider a Startup electric car manufacturer. Currently, the automotive industry is rapidly converging with the AI/Machine-Learning industry, especially around self-driving cars. Because of this, a company, like Apple or Google, could potentially hold a specific software patent required for self-driving. Without conducting proper analysis, the Startup could potentially use this technology, and be unknowingly infringing upon Apple or Google’s patent. Apple or Google could then decide to sue the Startup, catching them off guard, opening the Startup to millions in litigation costs and damages, crippling their business before it even starts.
This is why a FTO analysis is so critical. FTO analyses provide your Startup the ability to develop, make, and market its products without infringement to third party’s patents. Being able to present a clear patent strategy along with a significant patent portfolio will be the driver in enticing VC Firms to your company.
It helps establish what patents exist in your field, and which of these patents have potential bearing on your product. This includes, presenting information on the patent scope, the validity and expiration date, the patent owner, and any pending legal disputes, while also providing recommendations on actions you should take in response to these findings. By performing an FTO analysis, your Startup can significantly limit the risk of future litigation and avoid unnecessary expense.
Types of FTO Recommendations:
- License or Buy Third-Party Patent
- Invalidate/Litigate the Third-Party Patent
- Wait until the Prior Patent Expires to Bring Your Product to the Market
- Continue Research and Development under Safe Harbor Exemption (Life Science and Pharmaceuticals)
In addition, FTO analysis can also identify new opportunities for your Startup. An FTO analysis done early in product development can provide your company the opportunity to modify its invention’s design and avoid potential infringement before reaching the “Point of No Return,” or requiring you to take a license for either a competitor’s or third party’s patent. Similarly, performing an FTO analysis can help you steer clear of areas within your field filled with litigation.
5 Common Startup Mistakes Avoided with an FTO Analysis:
1. Ignoring Your Competition’s Portfolio:
Successful patent and IP management must include not only your own, but also your competition’s patent and IP portfolio. By learning the competition’s IP strategic plans, your Startup will be able to avoid both present and future infringement.
2. Failing to Obtain Proper and Valid Title to Your IP:
As a Startup, it is critical to have good title to all of your Startup’s IP portfolio, especially when presenting it to a VC Firm. It is much easier to ask for funding when you have proper title under one entity. It does not look good, and can be very expensive, when you have to beg a disgruntled employee who left the Startup several years prior to sign over title.
3. Failing to Properly License Your Technology:
Some of your Startup’s key technology may be licensed from either universities or other companies. You must know not only the scope of the license, but also any limitations on specific territory. The license must be broad enough to cover your Startup’s goals.
4. Failing to Conduct Trademark Searches:
Trademark searches are usually fairly inexpensive. Make sure that your Startup’s name, product’s name, and any potential future product names are all searched and available before you decide to publicly disclose them, or a VC Firm begins investing in your Startup.
5. Ensuring that Your Hiring Practices Protect your IP:
A major area covered by an FTO analysis is transfer of title from your employees to your Startup. The FTO looks both at the contractual obligations of your Startup, but also any employees hired from a competitor. Hiring former employees of a competitor without first determining what confidential information they can handle can result in a number of potential problems for you Startup.
Through an FTO analysis, your Startup can avoid these potential mistakes before they become a serious issue. Generally, it is far less expensive to handle the problem initially than attempting to correct it down the road.
A FTO analysis will give your Startup the best chance for commercial sucess. By providing a VC Firm with your IP portfolio and comprehensive strategy, it will put your Startup in a much stronger position to convince a VC Firm to invest in your company. While an FTO can be expensive, they are still significantly less expensive than any potential litigation costs. Whatever route you decide to take for your Startup, whether it’s taking your product straight to the market, licensing your patent to third-parties, or asking for funding from a VC Firm, conducting a FTO analysis gives your Startup the greatest chance to succeed in an ever-expanding, highly competitive, “innovation” market.
At Smith & Hopen, we have more than 20 years of experience in monitoring and protecting IP rights. We have the skills and knowledge required to help assist you through every stage of the Patent and IP Strategy process. With a team of highly-skilled patent attorneys, we are always in a position to achieve optimal results for our clients. Get in touch with us today to secure your rights and your place in the market.