Markman Advisors
Patent Valuation, Monetization and Investments


Markman Advisors Patent Blog

Startups want a strong patent system—they just don’t know it yet.

Zachary Silbersher

This week’s edition of The Economist addresses an interesting spin on the prospects of budding Silicon Valley startups living under the shadow of Big Tech.  The fantasy of getting bought is being supplanted by the reality of getting taken out.  The Economist argues that startups now live within a kill zone maintained by Big Tech—either sell out on our terms, or we’ll coopt your technology and launch our own product.  While antitrust may be one solution to give more leverage to innovators, what about patents?

For a long while after Microsoft’s 1990’s strategy to “extinguish,” startups enjoyed free reign.  The idea of cobbling together a few techies with some business sense and a half-cracked idea of how to do something new with your phone could feasibly translate into VC funding.  Now, however, the tides have changed.  Startups coming anywhere near internet technology are more likely to find themselves in the “kill zone.”  Big tech, including all the regular names (Alphabet ($GOOG); Facebook ($FB); Apple ($APPL); Amazon ($AMZN); Microsoft ($MSFT)), is now more mindful of identifying encroaching startups and taking them out.  Snap is the most notorious example.  After spurning Facebook’s offer to purchase the company, Facebook essentially cloned Snap’s essential features and dampened the company’s growth.

The Economist identifies three reasons why startups are more vulnerable now to the kill zone, and why Big Tech is now more adept at spotting them.  First, Big Tech is armed with better data to identify encroaching startups.  Google and Facebook have their hands on unique data regarding how users spend their time on the internet and what they do.  Further, Big Tech has a track record of investing in startups only to turn around and launch its own competing product soon after.  Second, Big Tech is awash with compensation incentives to lure top talent away from rolling the dice on a startup.  And third, there are few disruptive technologies on the rise that could provide a platform for startups to break through.  The Economist concludes this is why VC funding is more interested these days in technologies currently distanced from Big Tech, such as cryptocurrencies or synthetic biology.  (Although the rumors are that Facebook is dabbling in cryptocurrencies.)

Big Tech’s kill zone may already be self-reinforcing.  Compared to even 10 years ago, Big Tech has become so entrenched and institutionalized that most startups today are “built for sale, not for scale,” quotes the The Economist of an investor in tech.  Yet, if the kill zone discourages early stage funding, and if Big Tech turns more frequently to knocking out startups rather than buying them up, then the startup fantasy may soon wither.  Assuming that startups are a boon for innovation, The Economist rightly observes that one obstacle to perpetuating the kill zone may lie within antitrust enforcement.  If regulators decide to crack down on Big Tech’s appetite to swallow up nascent competitors, that may help the pendulum swing back in favor of startups. 

Yet, what is notable in The Economist’s article is that there is no discussion about how intellectual property either can or should be a consideration.  The Economist portrays numerous examples of Big Tech just co-opting a startup’s tech and launching its own version.  Yet, there is no corollary discussion of the consequences for Big Tech of violating the startup’s IP.  This is not a criticism of The Economist.  Instead, it is an accurate reflection of the force and esteem that intellectual property has these days, or rather the lack thereof.  Big Tech is obviously not worried about patents owned by startups because Big Tech rightly believes those patents have no bite.

That, in itself, is due in part to the lobbying of Big Tech to diminish the value and corresponding threat of patents.  Over the past half-decade alone, the value of software-based U.S. patents has diminished due to a series of Supreme Court cases (including Alice and Octane Fitness) and the implementation of the IPR process, among other reasons.  Companies like Cloudflare have made waves and attracted accolades by publicly attempting to shame companies that enforce patents without simultaneously practicing them.  But while those publicity campaigns make lots of techies feel great, they are also probably shooting themselves in the foot.  Companies like Cloudflare—indeed, most tech companies except for a select few—are not immune to the kill zone. 

Patent law does not require that enforcement of a patent requires its owner to practice that patent, and no serious scholarship has suggested that should be the law.  Indeed, if that was the law, that would only reinforce the kill zone.  Big Tech already has a penchant for coopting technologies from startups it views to be encroaching.  If patents were strong, Big Tech would only have to run a startup out of business in order to diminish any threat wielded by the startup’s patents.  Companies like Cloudflare may come to regret what they wished for. 

Moreover, Cloudflare, like others, has bought into the convenient fallacy that patents owned by purported “patent trolls” are “silly,” but its own patents are no doubt super strong.  Indeed, Blackbird has pointed out that the validity of Cloudflare’s own patents would be implicated if Blackbird’s patents are invalidated.  Blackbird stated that, if Blackbird’s patent does not survive appeal, then “all of Cloudflare’s patent assets may be worthless and I imagine that their investors must be worried about that. They may have won the battle but they could lose the war because if they’re correct, competitors could jump right into the market and copy Cloudflare’s technology.”

The kill zone, and the changing dynamic between Big Tech and startups, seems like it should open a new discussion about the value of patents.  How can we make patents and the system that enforces them better so that startups have more leverage against Big Tech?  Given that The Economist did not even think to ask this question unfortunately reflects the dampened climate for protecting intellectual property in the U.S.  Startups and any company arguably near the kill zone should not be celebrating that fact.