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Topic 2: IP Protection

Intellectual Property and Related Protections:

The innovator/entrepreneurial community needs greater financial protection, timely IP processing, and ability to influence policy

 

Need:  
Inadequate financial protection of innovators discourages starting the kind of new enterprises that have generated much of our commercialized value-producing, innovation. Additionally, the USPTO (United States Patent and Trademark Office) has effectively moved away from its intended purpose of protecting small entity rights. The slow processing of IP protection leaves innovators vulnerable and makes it difficult for founders to secure early-stage funding.  Finally, there is a need for small firms to have a larger voice in all areas of innovation policy.

 

Situation:
Small entity entrepreneurship relies on the inspiration, passion, drive, and risk-taking of the start-up founders.  The natural incentives for financial gain have, over time, seriously eroded. Current stock issuance and liquidity practices favor the investors and dis-incent the founders.  As a result, Founders often do not get the just rewards for the huge investment in time and energy they make, and for the great financial and reputational risks that are required.  This environment dis-incents potential entrepreneurs from entering the game.


Additionally, the USPTO has developed such a severe backlog that many young entrepreneurs regard them as an obstacle to innovation. IP legal fees skyrocket; the result is a great deal of IP is becoming abandoned. Patent prosecution commences as a first stage in commercialization; the issuance of a patent is often a requirement for the new company to enter into a serious business relationship.  This process can take several years in hot markets like software or business models or the internet. Typically a first office action is not received for up to a year. During this time entrepreneurs hands are tied. Frequently the new company has gone under before the patent is issued! Many young inventors are simply ignoring the system and sprinting toward the market, hoping they can generate revenue quickly enough to then protect themselves from larger predatory competitors.

Finally, small businesses, including startups, do not have an effective "voice" in contrast to venture capitalists and large prime contractors, who have extremely effective lobbyists and the ear of government. As a result, start up funds may now be gated by promises of VC support, and innovative small government contractors are routinely abused by large prime contractors, as well as government auditing agencies such as DCAA and DCMA. In simple terms, we have a system that often does precisely what it should not do - favor large and powerful companies and discriminate against the real needs of innovative small companies.

 

Federal Government Role:
The Federal government can move to modify stock classification and liquidity practices to provide strong incentives to both founders and investors.  The former are the initial and often largest risk-takers, without whom no entrepreneurial innovation happens; the latter are essential to support the entrepreneurial process over its lifecycle.

Patent reform is actively being worked on in Washington, but unfortunately it is tilting the benefits of IP protection toward larger wealthier entities and away from the entrepreneurs and small business’ who ultimately create most of the jobs. There is another great opportunity here to streamline and cost-reduce the process in order to prevent the massive hemorrhaging of IP that is occurring.

Finally, there is much that the government can do to address the structural bias against small firms.  Possible measures that can correct the situation measures include: 1) providing a top-down directive to government funding and auditing agencies to treat small businesses with support and respect - as first class citizens, rather then step children, 2) appointing small business czars in each agency to make both funding and auditing agencies more small business friendly and nurturing to innovators, and 3) authorizing innovation funds targeted specifically towards bridging the "innovation valley of death" between good prototypes and industrial strength field deployment.

 

Recommendation Summary:  
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restore financial incentives to founders
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reduce time and cost associated with establishing IP
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give small firms a greater voice and remove negotiation disadvantages.

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