Patent depending

Written by Chris Atchison

Sharon Vinderine never guessed that being a mother of two would also make her a mother of invention. But the 36-year-old serial entrepreneur became just that in early 2005 when she was overcome by a bath-time wave of inspiration. “I have two kids 15 months apart and bathing them at the same time was a bit of a nightmare, especially without a second set of hands to hold the towel,” she recalls. “So I played around and tried to come up with something that would make my life easier.”

The result was the remarkably simple, yet utterly practical Kangaroo Towel: a plush bath towel with a hole in the top to go over a parent’s head and a pouch in front to hold a wet baby. Vinderine — who sold MIPPS Inc., her wireless Internet provider, to Primus Canada in 2003 before launching product-ratings company PTPA Media Inc. in 2007—understood that with more than 300,000 babies born in Canada every year, her marsupially modeled towel could pack a big retail punch.

But like so many entrepreneurs, Vinderine was in possession of a multimillion-dollar idea that could be copied by a competitor. The Kangaroo Towel’s secret sauce — which is nothing more than its basic design concept — was instantly obvious to any manufacturer she might hire to make the product, any investor she might approach to fund it and any retailer who would sell it. How could she stop them from taking her product to market without her, and how much would that effort cost?

Her predicament was one that perpetually plagues inventors. They struggle to determine the value of an innovation and just how much money they should devote to protecting it. Because few, if any, products or  services can make their way into the marketplace without the help of third parties, it’s also a matter of knowing when to lay their cards on the table. While the risks involved in divulging too much information about an invention or innovation to a potential retailer, investor or manufacturer are high, so too is the risk in divulging too little. Similarly, employing traditional methods of intellectual property (IP) protection is a balancing act between security on one side and cost on the other.

Consider non-disclosure agreements. In theory, NDAs prohibit interested parties from discussing your idea with a third party and provide some recourse if the concept is stolen, says Cory Furman, a partner with Regina-based intellectual-property law firm Furman & Kallio. In practice, however, they are merely a deterrent: NDAs cannot physically stop a party from sharing your idea or appropriating it for personal gain, and recourse can come only if you take — and succeed in — what’s sure to be costly legal action against the transgressor.

Vinderine experienced a similar scenario when dealing with a large U.S. distributor interested in licensing the Kangaroo Towel. Following 10 months of negotiations, this summer the parties signed a contract containing clauses to protect Vinderine’s concept. Soon after that, says Vinderine, the distributor “disappeared.” She remains unsure of whether the company will try to copy her idea. “[Contracts] have no meaning unless you have a lot of money or waste a lot of money to defend them,” she laments.

As serial entrepreneur Alan McMillan points out, venture capitalists and manufacturers are often reluctant or may refuse outright to sign NDAs for fear of legal reprisal if they mistakenly reveal some of that confidential information in conversation. Now a managing partner of Toronto-based venture capital firm Omazo Ventures Inc., McMillan says due diligence is crucial in determining your comfort level with a potential partner before laying any of your intellectual property on the discussion table.

In 2005, McMillan had filed software patents and secured about $3 million in financing from venture capitalists to launch his database software company Avokia Inc. The firm specializes in software that optimizes database functionality and ensures business continuity during system failures. A year later, he launched into a second round of fundraising with Walldorf, Germany-based business software giant SAP and other VCs to fuel the company’s growth. But Avokia withheld information during the technical due-diligence phase of those negotiations to protect what McMillan refers to as his product’s “secret sauce.”

“They didn’t need to know actually how we did it to realize that what we were doing was pretty interesting,” he explains. “The only reason they would want to know how we were doing it would be to satisfy their curiosity or to steal the idea from us. Therefore, we could quite legitimately stop the conversation and say, €˜That’s an area where we’re not comfortable going into,’ and they were comfortable saying, €˜That’s fine.'”

McMillan viewed the request for information as a test. Experienced investors will often probe to ensure that a company is protecting its IP, thereby protecting their eventual investment in the product. SAP and the other VCs were satisfied and invested $7.4 million in Avokia.

In some instances, however, entrepreneurs will need to chum the waters. That’s when a staged approach to pitching an idea can come in handy. Toronto-based Suzanne Loomer, a valuations leader at accounting and consulting firm BDO Dunwoody LLP, urges entrepreneurs on the hunt for investors to provide just enough information during initial fundraising meetings to pique investor interest, perhaps using an executive summary to outline the concept. “You’re going to sell the idea, but not put the formula up on the board,” she says. Once the field of potential investors has been narrowed to one who appears serious about making an investment, you can begin to reveal more details. A staged approach is useless, however, when the product is so simple that it can easily be reverse-engineered, as in the case of the Kangaroo Towel. Other VCs or manufacturers won’t entertain delays, and will want to see the nuts and bolts of a product before they sign on. That’s when it’s time to open the curtain on the mother of IP safeguards: the patent.

If a product is new and industrially applicable, Furman strongly advises clients to file a patent application to protect it. The very definition of a patentable idea is broadening as companies increasingly attempt to patent conceptual innovations such as branding and marketing methods. But patents still provide a solid layer of IP protection. The problem is they can be oppressively expensive to file (a simple Canadian patent costs no less than $4,000), can take years to be issued and are virtually impossible for companies to defend if they lack the money to fund a protracted legal battle with alleged patent violators.

The simple lesson for entrepreneurs is that any investment in IP protection should be commensurate with the product’s commercial value. That’s often tricky to define. It’s typically handled by a team of valuation experts, but ultimately relates to the cost and eventual profits associated with its production.

Rather than filing patents, Vinderine invested about $60,000 in the production and marketing of her baby towel, establishing distribution channels and a brand that give her a comfortable lead on would be copycats. (She took the further step of selling through independent boutiques that don’t have the interest or financial wherewithal to run with the idea.) She’s now setting her sights on producing a lower-end version of the $40 towel to meet the pricing needs of big-box retailers.

McMillan would agree with Vinderine’s approach. “Nothing beats brand and market share,” he says. “Having IP protection is not enough to actually raise investment — and certainly not enough to sell your product.”

Originally appeared on PROFITguide.com