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Markman Advisors Patent Blog

Will patents save the unicorns? No, they won’t.

Zachary Silbersher

This is the year of the unicorns.  Or maybe just the year of unicorns going public.  Firms including Lyft, Uber, AirBnB, WeWork and Pinterest either have, will or are contemplating going public.  Last week, The Economist published an interesting briefing on unicorns.  The primary thesis is that they are overvalued.  At heart, their users are not faithful, and barriers to entry won’t stop competitors from encroaching on their base.  Yet, for all the reasons unicorns try to downplay this concern, there’s no mention of patents and IP as a line of defense.  Why not?

Though the term unicorn was coined in just 2013, there are approximately 156 unicorns today.  The Economist identifies numerous reasons for their proliferation.  Among them, the pretense that software is eating the world, and there remains a lot more to eat.  That, combined with an infrastructure that exists today that permits companies to grow and scale their networked bases with previously unfeasible haste.  Unicorns today promise, “vast potential markets; limited physical plant and staff; high margins; imposing barriers to entry.” 

Despite their proliferation, unicorns are posting losses galore.  Even stranger, investors don’t seem to care.  One explanation is that, unlike other businesses, unicorns harbor the promise of limitless growth fueled by innovative disruption.  The Wall Street Journal quoted an IPO expert: “we’re seeing that as long as these companies have a compelling growth story, investors are actually telling them to not focus on short-term performance. 

Yet, behind these compelling growth stories, The Economist’s briefing is asking hard questions.  The most pressing question is: “If all this dearly bought growth has not supplied profits, what will?”  What makes Uber, Lyft, AirBnB or WeWork so special?  A lot of today’s “disruptive” unicorns are obviously following the same script.  Create a network, let people connect in ways previously unimaginable, and create a market to sell things that could not be sold before—a taxi ride, a hotel room, a place to work. 

The problem is that today’s consumers are saavy and promiscuous.  Ride hailers typically toggle between Uber and Lyft.  Spotify users buy stuff from Apple’s iTunes.  Nothing is really stopping someone else from taking existing office space and renting it out to small businesses at competitive prices—perhaps with more beer on Friday afternoon. 

The Economist explains that unicorns today have several answers for why these concerns will not stifle long-term profitability.  First, unicorns promise more growth, more customers, higher margins.  Yet, unicorns going public today are already much more mature than those during the dot-com bust.  If they are still struggling with profitability, what’s to change?    

Second, unicorns tout that their customer base is itself an asset, and they can always sell more stuff to them.  The most popular example is Uber’s transition into food delivery by harnessing its existing driver fleet for Uber Eats.  Yet, the irony here is that this underscores how low the barriers to entry are for networked “uberized” startups, which makes unicorns look more, rather than less, vulnerable.

Finally, unicorns claim that profitability is just around the corner, and when growth is large enough, economies will scale and margins will soar.  Yet, that may or may not happen.  With increased volume comes increased expense.   

            Where are the patents? 

What is most interesting about all of this is that there is no mention of IP.  Unicorns are going public.  Many of them are unprofitable.  Customers are promiscuous.  Barriers to entry are not necessarily insurmountable.  Charges of being overvalued are not frivolous. 

In response, unicorns somehow maintain their growth stories that continue to fuel increased attention from investors.  They promise more growth, more product lines or just more customers.  But they never point to their patents.  Why not? 

Isn’t that what patents are supposed to be for?  Aren’t these disruptive tech companies supposed to be doing innovative things—moving fast, breaking things, making life better for all of us?  If so, shouldn’t they have IP that will be their first line of defense against promiscuous customers and competitors easily taking over their market share?

The Economist’s primary reason that investors should be suspicious of the existing valuations of today’s unicorns is that they haven’t proven they can hold onto their own customers.  “The big worry is that [unicorns’] losses reflect not temporary growing pains but markets which are contested and customers who are promiscuous.”  This is born out by the plights of existing unicorns.  Lyft’s share price is falling post-IPO because, for one reasons, ride-sharing customers are not faithful to a single firm. 

If patents in America had the teeth envisioned by the inventors of those patents, then presumably patents would be the answers to the concerns over valuations of unicorns.  Maybe not all the answers.  But some good ones.  If customers are not faithful, and barriers to entry not enormous, a unicorn’s primary line of defense could be that its disruptive innovation has been reduced to practice in issued patents that can used to enjoin copycats.  (In today’s patent climate, it almost sounds silly to say it that way.)

There are two conclusions to draw from this.  The first is that today’s unicorns may be disruptive, but perhaps not that innovative.  Yes, they are using the internet to connect people in ways that may be literally mind-blowing for those of us born before 1980.  But perhaps none of these companies are really all their cracked up to be because customers are too savvy and their too easily ursurped.  Hence, the valuations are too high.   

Alternatively, unicorns are truly innovative.  The very idea of uber may seem somewhat obvious to some people.  But, presumably, creating uber required solving thousands of smaller technological problems unique to that technology and that business.  Protecting a selection of small, but critical solutions in the overall business should theoretically gird against encroaching competitors.  Using patents to accomplish that should seem feasible.

And yet, many of those solutions are likely software solutions.  The last five years has seen the gutting of software patents.  The fault for that lies with the lobbying efforts of the big tech firms, namely the FAANGs of our world, among whose ranks today’s unicorns are eager to join.   

For an investor in Uber or Lyft, how do you assess the risk that Google will not launch its own ride-sharing app?  Google clearly has the resources, time, feasibility and know-how.  In a well-functioning patent system, patents would save the unicorns against this risk.  But patents probably won’t save the unicorns.