Startup founders have a lot to deal with. From raising money, to finding the right advisors, to hiring the right employees, to actually executing on their business ideas — the demands placed on founders are extreme. For many of them, it may seem like there is an endless checklist of tasks to complete and decisions to take. Among those decisions are IP-related issues, such as what trademarks to pursue or whether patent protection is available to protect at least one of the startup’s product offerings. Fortunate are the founders who has access to competent IP counsel to help guide them through those critical decisions. Even more fortunate are the founders with the budgetary wherewithal to follow through on procuring a robust intellectual property portfolio early in the startup’s lifespan. But how many founders enjoy such good fortune?
It is not hard to imagine that there are a whole host of founders who do not enjoy access to competent IP counsel right away. Likewise, even fewer founders are able to allocate precious resources toward IP procurement without reservation, which can make decisions about IP fraught ones for founders, who are asked to balance their immediate need to preserve resources with the potential future need to stop infringers. Making things more complicated is when a founder is under pressure to procure IP as quickly as possible to attract or satisfy existing or prospective investors, many of whom subscribe to the prevailing wisdom that IP is important to a startup’s prospects.
Let’s explore some of the reasons why that prevailing wisdom has taken hold and remains a potent consideration for investors considering an investment in a startup. For one, investors like to see some external proof that the founder or company they are investing in is innovative, rather than just a copycat market entrant. Likewise, investors know that prospective customers — whether large retailers or individual consumers — are drawn to innovative products and services and look to whether a startup can say that its core products are patent pending or patented as proof. Additionally, investors are drawn to founders that are IP savvy, often interpreting that savviness as proof that the founder is truly committed to the startup’s market goals and is a true believer in the startup’s mission. Lastly, investors realize that most startups are likely to fail in some way, whether that be an outright failure or a need to reposition away from the founding idea to one that actually shows commercial promise. In those common circumstances — especially when the startup goes belly up — the startup’s IP may be the only actionable asset available to the investor to recoup some or all of the investment.
For those reasons, it makes sense that investors like to see a startup invest in IP early on, even when resources are at their scarcest. But as with much prevailing wisdom, there is often a disconnect between the actual belief — such as that IP offers value even for a bankrupt startup — and concrete examples that provide support for that belief. That is why I was pleased to see recent reporting on at least one high-profile example of a startup company that failed, but also saw its patents sold in bankruptcy to the prospective benefit of at least some of its investors.
The company in question, uBiome, had sported a valuation of over $600 million at its peak, based on the expected market uptake of its microbiome testing products, which included self-administered and doctor-directed products designed to offer individualized wellness checks for consumers. Underlying the testing kits were what the company referred to as “a patented combination of full metagenomic and marker-based sequencing.” At one point, uBiome was reported to have had at least a half-dozen issued U.S. patents, along with over 100 pending applications. As with many startups, uBiome touted its patent portfolio when it announced a successful fundraise, thereby directly linking its innovation with its commercial prospects and investor interest.
But things quickly went sour earlier this year for uBiome, with news in April of an FBI investigation into the company’s billing processes. That investigation eventually led to the removal of the company’s founders. By October, uBiome had been liquidated, with the company’s patents put up for sale at auction. A few weeks ago, it was reported that a Korean company’s U.S. subsidiary had purchased uBiome’s patent estate, pending bankruptcy court approval. The price? A little under $8 million, representing around 1% of uBiome’s peak enterprise value.
Ultimately, it may (or may not) be surprising that a failed startup’s patents could only command 1% of the company’s former value at auction. Either way, however, it is important to remember that the very same patent portfolio had ostensibly paid a key role in helping the company reach its previously high valuation. The story of uBiome can therefore serve as a guidepost for other startup founders, especially those struggling to justify investment in IP. That said, investors will continue to insist startup founders take precisely that step in many situations, guided as they are by a concern about recouping their investment in risky ventures. While it may be too late for many of uBiome’s investors, the company’s investment in IP paid off for somebody, just as it may for the IP’s new owners. At minimum, the patent portfolio’s sale probably redounded to the benefit of at least some of uBiome’s creditors. For them, at least, recouping one percent is better than zero.
Please feel free to send comments or questions to me at email@example.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.
Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at firstname.lastname@example.org or follow him on Twitter: @gkroub.
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