Raising Venture Capital In The United States: Intellectual Property Protection Is The Key

By Christopher J. McHattie, Neeraj R. Joshi and John B. Baldini

arendra Modi, the newly elected Prime Minister of India, punctuated his first visit to the United States by making a memorable appearance at Madison Square Garden on September 28, 2014. A crowd of 20,000-plus raucous supporters who had traveled worldwide to reach New York City welcomed Mr. Modi and enthusiastically cheered the Prime Minister’s bold statements regarding the new direction in which he and his party are going to take India. Mr. Modi commenced his speech with an anecdote which he hoped demonstrated India’s transition from a nation of “snake charmers” to a nation sporting expertise with another animal – a “mouse” – as in a computer mouse. Central to Mr. Modi’s speech was his outlining of three advantages India has for accelerating its growth: democracy, demographics, and demand. Juxtaposing these three D’s with Mr. Modi’s self-acknowledged symbolic journey from tea vendor to Prime Minister underscores the new Indian government’s emphasis on entrepreneurship and robust technological progress. Judging from the crowd’s excitement level, there is reason to hope that India is once again on the move and a country with which America and the world will want to do business.

Even before Modi’s U.S. visit there was reason for optimism that the commercial ties between the United States and India will improve. In particular, recent developments and changes in law and commerce have coordinated the two countries’ approaches and spurred venture capital funding of startups and the intellectual property (“IP”) protections underlying those startups. That funding has come from both government and private sector sources. In turn, that has led to a surge in confidence for innovators, small businesses, government officials and the venture capitalists behind those investments. These developments reflect the fact that India’s entrepreneurs are increasingly turning their attention to setting up technology companies, such as mobile-based software startups. Cloud computing and software in particular has led to a spike in innovation. That spike in innovation has led to a corresponding spike in investment, both private and public. Both countries recognize that the fuel that will continue to drive this investment is technology born of entrepreneurial innovation and good management. They also recognize that the venture capital that underpins entrepreneurial innovation thrives best in an environment that provides solid intellectual property protection.

India’s venture capital industry is still nascent compared with the United States and other developed economies. The Indian government’s plan to create a ₹100 billion fund to boost India’s startup industry promises to change that. The plan has been greeted positively as a boon toward promoting entrepreneurship. While the details of how the plan will work and funds be disbursed have yet to be disclosed, it has the potential to motivate more Indians to consider start-ups to meet market needs, particularly in the technology sector where venture/early stage investment has recently increased significantly.

India’s “10,000 Startups” Initiative & the MSME Project

Moreover, India’s National Association of Software Companies (“NASSCOM”), the lobby group for India’s information technology industry, has funded, accelerated and mentored 150 companies of the 500 shortlisted from a pool of 7,000 applicants. NASSCOM’s goal is to encourage 10,000 technology startups in India over the next decade. Impressively, Google, Microsoft, Verisign, and Kotak Mahindra Bank (and others) support the venture. After the March 2013 launch, 332 out of 4,000 applying startup companies were selected to receive a unique chance to meet venture capitalists, investors, and mentors. This 10,000 Startups Initiative is just one example of why knowledge and development of venture capital and technology development is in the forefront of India’s emerging economy.

India’s Union Ministry for Communications and Information Technology, too, plans to launch a scheme by November 2014 to “provide financial support to Micro, Small and Medium-scale Enterprises (MSMEs) and start-up companies to help them with international patent filing.” The ministry plans to encourage patent filing within the next three months, boost innovation and promote opportunities for growth.

Regardless of these new opportunities for Indian entrepreneurial innovators to raise incubator, start up and venture capital in India, the new environment could well see those entrepreneurs also looking for such capital in the United States. For that to happen, it will be critical for Indian entrepreneurs not only to innovate and manage their enterprise successfully, but also to ensure strong worldwide IP protection for their innovations.

IP Protection is the Foundation Upon Which Successful Entrepreneurial Innovation is Built

The common theme in all recent developments in the venture capital sector is the recognition that investment is driven by sustainable business models adequately protected by IP. It cannot be gainsaid that venture capitalists are not interested in investing in technologies or companies that do not possess a favorable place in the marketplace. This favorable place in the marketplace is created, in part, by an attractive IP portfolio which preserves the right to exclude others from manufacturing, using or selling a technological breakthrough—in short, a monopoly on the “must have” technology or solution.

Oddly, the importance of IP is not often understood. For example, in an article entitled Want Venture Capital? Here Are 10 Must-Haves, the magazine Forbeswoman advises the would-be entrepreneurial innovator to “1.) Target a large, lucrative market 2.) Address a big market opportunity 3.) Produce a maximum return on investment 4.) [Raise] outside money to scale 5.) Build product traction 6.) Differentiate yourself from your competition 7.) Put together a top-notch team 8.) Be prepared to give up a board seat 9.) Connect personally 10.) Be coachable.” What is not mentioned is IP.

Yet, in reality, IP has to be one of the first areas of inquiry. Joseph G. Hadzima, Jr., of the MIT Sloan School of Management recently developed a formula for evaluating a company’s patents as a predictor of future success. His company evaluated the patent portfolios of 9,000 venture capital-backed companies. Their “analysis demonstrated that 86% of winners had strong (versus typical) IP portfolios.” This finding shows that IP supports are the very foundation of all ten Must-Haves.

The Critical Role of Due Diligence

The Indian entrepreneurial innovator looking to raise venture capital in the United States must also conduct due diligence for prospective venture capitalists. For example, in the case of an investment in an online company, any investor would want to confirm traffic flow and the sustainability of that traffic flow. Similarly, an investor considering an investment in a pharmaceutical company would want to confirm efficacy of the existing portfolio and any new ones in the pipeline, and confirm that appropriate patent protection is in place. In such a case, the prospective investor will read, and in some cases even attempt to reproduce, efficacy studies, and call upon patent attorneys to review not only patent applications but the field of the invention generally to ensure: (a) the patent has actually issued, (b) it covers the material composition of the product(s), (c) there is no flaw within the filing history upon which an attack to invalidate the patent might be based, and (d) the patent is not invalid based upon prior existing compositions.

The following is an example of a fairly standard IP Due Diligence inquiry directed to an information technology company operating a series of domains:

Intellectual Property

1)   Documents relating to the Company’s IP rights (including patents, trademarks, service marks, trade names, corporate names, copyrights, trade secrets, etc.), and all registrations, applications, royalty agreements and licenses held or granted with respect thereto. In particular:

  • Identify all patents and patent applications;
  • Identify all trade names under which the Company operates and all trademarks used by the Company for its products and/or services and provide copies of all registrations and applications relating thereto;
  • Identify, and provide registrations and agreements relating to, all material copyrightable works created by or for the Company, including written materials, web designs, software text, graphic materials and original designs produced by the Company;
  • Agreements relating to the creation, ownership and/or use of the Company’s computer hardware and software;
  • Identify any off-the-shelf software used by the Company in the operation of its business;
  • Royalty agreements and licenses held by or granted to Company relating to the use of IP;
  • Agreements or arrangements for sharing of IP, technology or research and development, including product development agreements, technical assistance agreements or arrangements and confidentiality agreements between the Company and any affiliates or third parties;
  • Identify all employees who have recently been hired from, or left to join, competitors;
  • Describe policies and procedures for protecting trade secrets; and
  • Identify all domain names and web sites.

2) Describe all pending or threatened infringement actions by or against the Company.

The America Invents Act of 2011

Consideration of a company’s IP in India would not be enough, as IP protection in the world’s great economies is also essential. The U.S. is now operating under a new patent law (the America Invents Act of 2011 [“AIA”]). Among several changes in the U.S.’s patent laws, the AIA amended the previous law and introduced a “first to file” system (versus “first to invent”), which was designed to bring the U.S. in conformity with the rest of the world (including India). The amendment was not without its detractors who thought that it would create a “race” to the patent office that only big business could afford to run. In practice, however, these fears have proven to be unfounded.

This is so partly because the AIA contains streamlined challenge provisions for Inter Partes (“Between the Parties”) Review (“IPR”) which enables startups and small businesses to cost-effectively challenge the validity and enforceability of issued patents. This avenue was previously prohibitively expensive. The prior system of patent procedures was a costly, time consuming and arduous process that inhibited the development of new companies with innovative products. A patent is typically at the heart of any innovative technology or new idea. The AIA streamlines the process for challenging validity or infringement of patent. This levels the playing field for new players, particularly budding entrepreneurs. For example, 20 proceedings were filed in just the first month that the AIA came into effect. This has been a steadily-increasing trend—more than 180 proceedings were filed in June 2014.

In conclusion, recent developments in law and political policy in India and the U.S. have led to increased confidence within the venture capital community in both countries, especially for small start-ups. This new environment and a recognition of the critical importance of intellectual property protection will help drive the engine of further innovation because it protects what is innovated– it is a self-fulfilling circle of encouragement.

Christopher J. McHattie is a principal of The McHattie Law Firm, LLC in New Jersey and Florida, and of counsel to Bartlett, McDonough & Monaghan, LLP in New York. Mr. McHattie concentrates on general corporate matters, complex commercial and intellectual property transactions and litigation, and intellectual property counseling and prosecution. In connection with the foregoing he draws on his decades of experience to provide pragmatic results oriented advice and to produce desirable results. Mr. McHattie graduated from Seton Hall University and New York Law School. He can be reached at cmchattie@mchattielaw.com.

Neeraj R. Joshi is an associate in The McHattie Law Firm and of counsel to Bartlett, McDonough & Monaghan, LLP in New York. He concentrates his practice on intellectual property matters, particularly patents and trademarks. An attorney who has taught courses in law and public speaking, Mr. Joshi draws on his versatile experience when helping clients achieve goals and attain impactful results. Mr. Joshi graduated from Rensselaer Polytechnic Institute and Seton Hall University School of Law, where he earned a concentration in intellectual property and coaches moot court students. He can be reached at njoshi@mchattielaw.com.

John B. Baldini is a principal with The McHattie Law Firm, LLC and of counsel to Bartlett, McDonough & Monaghan, LLP in New York. He concentrates his practice on intellectual property matters, including patents, trademarks and copyrights and employment law. Mr. Baldini draws on years of business experience to provide pragmatic results oriented advice to prosecute and protect various classes of Intellectual Property, and to provide advice and counsel on employment and litigation matters. Mr. Baldini graduated from Rutgers University-New Brunswick and Rutgers School of Law-Newark, where he graduated Cum Laude, received the Order of the Coif, and ranked No. 1 in class. He can be reached at jbaldini@mchattielaw.com.








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