How do new software companies survive?

Factual Questions
1

I’m thinking baout the issues surrounding copyright & patents. Per my understanding, copyrights protect the code and are easy to obtain. Patents protect the idea and are very expensive to obtain.

How does a start up software company invent a product/service and prevent a larger one with deeper pockets to push through a patent to force the new company to give up the idea or potentially pay a fee that will be larger than its cash on hand?

It seems to me that the patent issue is stifiling innovation. What am I missing?

2

Well, the code is what’s valuable, so the copyright is sufficient to protect it.

Patents don’t protect the idea, anyway. The protect a tangible device, and are really not applicable to computer code.

If we were talking about a hardware device, then patent protection is required. But it’s not that expensive (though much more expensive than a copyright), and even a small company could afford it – expecially if they get startup money.

3

[QUOTE=RealityChuck]
Patents don’t protect the idea, anyway. The protect a tangible device, and are really not applicable to computer code.
[/QUOTE]
I don’t quite follow. What about so-called ‘software patents’? For example, patenting the use of a logical XOR function to highlight a mouse pointer against a background.

4

[QUOTE=RealityChuck]

Patents don’t protect the idea, anyway. The protect a tangible device, and are really not applicable to computer code.
[/QUOTE]

I think Research In Motion would disagree with you. They just paid $600 million to settle a software patent dispute involving how emails are distributed to Blackberries. The patent protected a software design, not a tangible device.

For instance, Amazon.com has a patent on one-click ordering: they actually sued BarnesandNoble.com over it, and won. Again, no hardware involved.

5

Wikipedia has a very comprehensive article on various problems with software patents.

Cost is not really one of them: even if it costs $10,000 (a rather high estimate) to obtain a patent, that’s still peanuts compared to personnel costs for even the smallest startup business.

6

From Wikipedia:

Is this incorrect? It seems it is since Research in Motion paid out cash for a dispute.

What about the IT genius working in his garage on a great product? If he can’t afford to protect it, he shouldn’t expend the effort?

I can’t escape the notion that the deck is stacked against the individual.

7

This is all substantially correct. The individual cannot do the proper research to determine if his invention is infringing on someone’s patent, hire lawyers to do that work for him, or adequately defend himself when (not if) someone sues him for a patent violation. Since software patents are ridiculously overbroad (due to the massive, massive incompetence of the USPTO), it’s very difficult to find a field where there are no relevant patents.

Of course, ‘relevant’ and ‘able to be used against you’ aren’t always the same thing. Since legal defense is so expensive, even if the trial does not progress to completion, a company can effectively quash a startup by suing over a patent that is not, in fact, relevant to the startup’s field of endeavour. The startup goes broke paying for legal fees and when the trial is kicked out by the judge, the startup is already broke.

8

[QUOTE=Derleth]
This is all substantially correct. The individual cannot do the proper research to determine if his invention is infringing on someone’s patent, hire lawyers to do that work for him, or adequately defend himself when (not if) someone sues him for a patent violation. Since software patents are ridiculously overbroad (due to the massive, massive incompetence of the USPTO), it’s very difficult to find a field where there are no relevant patents.

[/quote]

Two things. First, I believe the OP was worried about the case where a large company patented something after the small company sold it.
Second, most companies do not attempt to research patents in an area. My understanding is that knowing infringement is worse than inadvertent infringement, and doing a search is evidence of knowing infringement. (IANAL, but I do have some patents - some basically software patents, in fact. One for an XOR gate also, but a different XOR gate.)

Someone can not get a patent if there is prior art. There are ways of disclosing a patentable idea, such that while you don’t get a patent, no one else can get one also. (IBM had a monthly or quarterly publication consisting entirely of disclosures 20 years ago or so.) So if the software company can do a relevant disclosure (and the contents will be obvious once the product is sold) they might be safe. Might, since everything I’ve seen makes me agree that the patent situation is a total disaster.

9

Voyager: My post was predicated on the issue of submarine patents, which lie in wait for years if not decades and then surface to disrupt a whole field after that field has been populated by businesses. Here is an article about a specific case where submarine patents played a pivotal role. (This specific troll got shot down after a court case. Court cases are damnably expensive, even if you are vindicated. Had the troll gone after smaller firms, he might still be viable today.)

Large companies, which already have war chests of patents, can engage in cross-licensing deals to protect themselves from some of these patents, or simply pay the danegeld and go about their way. Small companies and individuals either go broke quickly by paying the danegeld or go broke slowly by fighting the patent troll in court.

10

In the USA there are definitely Software Patents

  • it strikes me as a stupid idea

The LZH compression algorithm recently came out of patent

From observation, small software companies are fast on their feet and can get a product to market in a fraction of the time it takes a larger company.

At that point the larger company can try to muscle in, but often it makes more sense for them to buy out the upstart.

11

[QUOTE=FRDE]
At that point the larger company can try to muscle in, but often it makes more sense for them to buy out the upstart.
[/QUOTE]
Well, maybe and maybe not. Too often ‘not’. Remember that a buyout is a victory condition for the startup: The founders get a fat check and can (potentially) dodge work for a while with a much better résumé the next time they need some bread. A lawsuit, or the serious threat thereof, is very much a defeat: Even if they are poor enough to be essentially judgement-proof, they will be stopped from working in that field without so much as a cent to show for their efforts.

12

[QUOTE=ice1000]
<SNIP>
How does a start up software company invent a product/service and prevent a larger one with deeper pockets to push through a patent to force the new company to give up the idea or potentially pay a fee that will be larger than its cash on hand?
<SNIP>
[/QUOTE]
If a company already has a patent on something, then you will be forced to pay or abandon your project. But otherwise they will have to contend with the idea of “prior art” when trying to obtain a patent. IANAL, so take a look here to get a start. http://www.tms.org/pubs/journals/JOM/matters/matters-9106.htmlIf it were as simple as a large company being able to sue a small company - whether the large company can win or not - MS would not allow any startups.

13

[QUOTE=ice1000]
How does a start up software company invent a product/service and prevent a larger one with deeper pockets to push through a patent to force the new company to give up the idea or potentially pay a fee that will be larger than its cash on hand?
[/QUOTE]
For a start-up that is backed by investors and has cash, they will be aggressive about filing patents as they develop the ideas. As has been mentioned, US patents are not prohibitively expensive and investors are always anxious to build IP through patents. They feel that this builds value (e.g. makes them a more attractive buy-out target or IPO). If a larger company is simultaneously developing the same idea, then it is likely whoever successfully files first will get the patent. The larger company may have more resources to file or they may have more process to wade through.

If the larger company sees the start-up’s product and decides to ‘steal’ the idea and patent it, then it is likely they have missed their chance. This would be unlikely for typical software patents anyway since the larger company would not usually have access to the source code. It could apply to look-and-feel patents, but they would still be behind. If the start-up and larger company are working together, then it is likely they have NDA’s with each other and are mutually protected.

For a start-up that is just a guy at his kitchen table, the problem is much tougher. Typically, the developer would just ignore the issue of patents and hope for the best. If the software is successful, then the IP could be protected or the code changed. If the software is not successful, then the point is moot.

The challenge with software patents in general, is that there are a lot of them (I think 100k in the US). No company, large or tiny, can really be sure that their code is not infringing. As a result, most companies just code away and hope for the best. Larger companies often adopt a policy of building patent portfolios in order to have something to trade if it is found that they infringed. When I worked at a modem company in the 90’s this was standard procedure. I don’t remember us paying or getting paid for any patents. We just traded rights with our competitors whenever an infringement was found.

14

Here is a link to a short movie about software patents. It provides one viewpoint, so it is more IMHO than GQ, but it is still useful for understanding the factual answers to the OP.

15

Software developer here. Most of my career has been spent in software startups.

Some of the companies I’ve worked for had patents and copyrights on their code; most didn’t worry about it. If someone wanted to steal their idea, it would take years for them to bring a product to market, and then they’d have to establish a name and prove themselves. Those aren’t trivial tasks.

You’re missing a couple things here. First of, “idea” to “product” can take a huge amount of time and effort. The paradigm of one programmer sitting in a dark room writing the killer app is over; today’s software applications are the product of dozens of person-years of development. Regardless of if an idea is original or if someone “steals” it from a small company, you can’t get around the effort to create the product.

You’re also missing the point that the software itself is just a small part of the whole. If right now, you had a legal copy of the source code to, say, an MS Word competitor, you have a HUGE way to go before you can make a profitable business out of it. You need developers to maintain and update the code; you need to establish a market presence; you need to be able to sell and support the product. The software and code itself is one small part of a successful business.

16

[QUOTE=ice1000]
I’m thinking baout the issues surrounding copyright & patents. Per my understanding, copyrights protect the code and are easy to obtain. Patents protect the idea and are very expensive to obtain.
[/QUOTE]

Most software companies large and small don’t depend on patents as a key part of their business strategy, especially when they’re starting out.

Instead, they keep their key technology as a trade secret, focus on non-technological differentiators, and use sales and marketing savvy to make their way.

My software company is a start-up. We do have patents, but we’re not relying on them to be successful. We rely on solving customer problems. Customers come to us and stay happy with us because we provide problem-solving “smarts” and excellent customer service.

The patents protect us from some other company inventing the same stuff, patenting it, and then suing us.

Companies succeed because they have intelligence, energy, experience, a deep and appreciative understanding of their customers, and luck.

Many software companies fail because the founders are more interested in either technology or money than in customers.

Unfortunately, the free-market economy leaves out people who spend lots of time, money, and effort developing something and then only want enough money from it to continue inventing. They often get beaten out all the way around by entrepreneurs who care less about technology than about business.

I’m chiefly thinking of the Wright brothers here. They were always circumspect about their technology and fought patent infringement hard, because they wanted to make enough money to continue their research without having to spend time in business.