I've written earlier that [startups shouldn't solve technically challenging problems](https://invertedpassion.com/startups-shouldnt-solve-technically-hard-problems/). I still maintain that but wanted to reflect on a few caveats. The first caveat is that my original point was mostly to do with startups that exclusively rely on a _specific_ technical innovation as their main advantage. Such specific innovations are generally protected by patents but that's not a sufficient protection for a startup. To understand that, it's important to understand what patents are for, how they're granted and how they're enforced. ### What are patents? Patents are exclusive rights to an invention given to the inventor. A patent must be: a) new (without any prior art); b) non-obvious; c) sufficiently detailed so that a skilled person can replicate the invention. Once granted, a patent prevents anyone else to sell for 20 years whatever is described in the patent. The backbone of a startup is one or more claims. It is these claims that ultimately the inventor seeks to preserve as their exclusive property (till the time patent is valid.) In theory, this seems an obvious protection/moat for a deeptech startup. But there are a couple of issues that work _against_ a startup when it comes to getting protection from a patent: #### 1. Patent does not mean commercially useful This is an obvious point, but worth emphasising. A patent is granted for an invention, but it doesn't imply that the invention is of any commercial worth. In fact, it's estimated that the majority of patents are worth less than their patent filing fee. #### 2. Strong patent applications require large investment into legal fees The[strength of a patent](https://henry.law/blog/own-higher-quality-patents/) lies in how long is its claims section and how well are claims supported in the application. Such strong patents cost money. [Such patents can cost up to $20,000](https://www.ipwatchdog.com/2015/04/04/the-cost-of-obtaining-a-patent-in-the-us/id=56485/) A big company can afford it, but probably a scrappy startup can't and hence they often go for simple patent applications which contain fewer claims. But fewer claims means a potential competitor can simply work around your patent by making simple modifications. #### 3. The onus of enforcing patent lies on patent owner Once a patent is granted, the responsibility of keeping a watch for patent infringement lies on the patent owner. This means that if a startup ends up creating something commercially useful, it shows to the world what's possible (and [hence resolves uncertainty](https://invertedpassion.com/startups-thrive-under-uncertainty-of-the-right-kind/)). A big company can then knowingly or unknowingly infringe the startup's patent. [Patent battles go on for years and cost millions of dollars](https://blueironip.com/what-are-the-costs-to-enforce-or-defend-a-patent/). Even though patent trial funding and insurances exist, startups are still disadvantaged as compared to better funded big companies who can afford the best IP lawyers out there. ### So what moats exist for a deeptech startup? A patent by itself isn't a strong protection. In general, deeptech companies have weaker moats compared to consumer/software companies. This is because for the latter, [network effects make up a strong moat](https://invertedpassion.com/never-stop-creating-network-effects-in-your-business/). But it's possible for a deep-tech company to build a business moat via following ways. [Combining all of the below is even better](https://invertedpassion.com/use-all-your-unfair-advantages/) than pursuing a single path. #### 1. Funding to be able to file strong patents and defend them As seen above, a startup has to be sufficiently funded to file strong patents and then have enough money to litigate those who infringe its patents. The plant-based meat company Impossible Foods provides a good case study of this. They've been developing a plant based burger that tastes like beef. Over time, they've developed a thicket of patents around their burger. ![[Screenshot 2022-03-10 at 2.11.42 PM.png]] (via [here](https://sethitzkan.medium.com/opinion-software-to-swallow-impossible-foods-should-be-called-impossible-patents-71805ecec9de)) Just recently, [they filed an infringement case against a competitor Motif Foodworks](https://www.foodnavigator-usa.com/Article/2022/03/10/Impossible-Foods-accuses-Motif-FoodWorks-of-patent-infringement-over-flagship-heme-ingredient-Motif-blasts-lawsuit-as-baseless-attempt-to-stifle-competition). This shows me two things: - It's easy to replicate technology invented by an innovator - Innovator has to be well funded to defend its patents (Impossible has raised $2bn so far) #### 2. Traditional moats: brand, distribution, exclusive contracts, etc. Of course, nothing prevents a deeptech company to have non-technical moats such as brands, distribution network or exclusive contracts. SpaceX is a great example of this. One of the moats they have is exclusive long-term contracts from NASA that won't be given to other competitors. This is mostly because in space-launches the history of launches matters and building a history of safety is a strong moat in itself. This video goes into more details about the moat of SpaceX. <iframe width="560" height="315" src="https://www.youtube.com/embed/vmSt0Gp1gio" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe> Of course, this moat is due to regulatory requirement that prevents competitors. The same type of [moat exists for pharma where FDA gives exclusive right to market a drug for five years](https://twitter.com/paraschopra/status/1499313500711112705?s=20&t=PyZbwvajgpytS1yyeAoccQ) after approval. And, I think similar moat exists for startups working on nuclear fusion. The sheer regulatory requirements mean that, like rocket launches, the history of demonstrated safety would be an inbuilt moat. #### 3. The ability to out-innovate competitors: internal knowhow and culture around innovation [Tesla famously gave away its patents](https://www.tesla.com/blog/all-our-patent-are-belong-you) for competitors to copy and still managed to become a huge company with a market cap of $900bn. How? I think the answer lies in a given company's ability to continuously innovate and, perhaps more importantly, its ability to tell the story of how it continuously innovates. Telsa does that exactly. Part perception, part truth - Tesla's moat lies in its ability to be always innovating. ### Summing up A single patent is probably worthless, but all other ways of building moats still exists for a deep-tech company. So, the question a deep-tech company should really be focused at is not so much what to patent but rather what would be hard to copy for a well-funded competitor. <iframe class="signup-iframe" src="https://invertedpassion.com/signup-collector" title="Signup collector"></iframe>