|July 5, 2012|
Previously published on June 28, 2012
He wanted protectable intellectual property. The venture capitalist didn't say protected IP or protective IP, just protectable IP. Was that sarcasm or was he distinguishing among types of intellectual property?: protectable versus unprotectable. “Unprotectable” sounds like the title of a movie starring Charles Bronson.
Maybe he was suggesting that he wanted patentable inventions so he could apply for exclusive rights from a government, rather than, say, know-how. There are no “know-how patents” (although governments do grant rights for some types of know-how, such as non-exclusive licenses for the practice of law or for cutting hair).
Still, I stumbled over “protectable” not only with intellectual property but with any property including tangible personal property and real estate. When I go to a clothing store, I don’t ask to buy a protectable tie (but my clothier will gladly spray my ties with SCOTCHGARD brand grease and oil repellant). When I bought a house, I didn’t think to ask for a protectable one. I did require one with clear title but not protection against eminent domain, foreclosure or a tornado.
Furthermore, my home security service will not protect my home, it will only tell me that my house has been broken into or is on fire. It won’t stop the burglars or render my house fire-proof. My security service will not even tell the burglars through an intercom to “please leave the premises now!” or “please sit on the front porch quietly until the police arrive!”
Protection for intangible assets other than intellectual property is similarly illusory. Anyone paying attention recently to intangible assets, such as sovereign bonds, stocks, and commodities, will tell you the same thing: diversify, because you can’t protect any one asset class. The same is true with intellectual property.
The VC should rethink his needs. Here's why.
Many venture capitalists look for patents and possibly registered trademarks, and sometimes, registered copyrights, as a basis on which to support the value of the investment. Fine. After all, a company management team that has paid attention to its intellectual property and is dotting the “i’s” and crossing the “t’s” is a better-run company. But right there is evidence of my point. A better run company is not running itself (although a badly run company would be no worse off if it did run itself). The management team is running it. The collective skill of management is a form of IP, namely, know-how. An investment in a better-run company is based at least implicitly on this “unprotectable” know-how because of its value. What venture capitalist has not said the strength of the management team is the most important asset of a company?
But could management know-how really be protectable IP?
Yes, but let’s first gain a better understanding of the concept of protection. Your management team can be kidnapped. They can make the mistake of all flying on the same unfortunate plane or riding on the same errant bus. (Of course, a really valuable management team doesn’t make the mistake of traveling together.) But believing you can’t protect management knowhow is just as much in error as believing that patents provide absolute protection for a business’ innovations. You could have ten patents with their exclusive rights only to read an article in tomorrow’s newspaper about a new technology that makes all ten patents obsolete. Getting patents provides some measure of protection but not absolute protection (and it is still better to get the patents than to allow your competitors to help themselves to your technology). Keep in mind that perhaps that new technology you read about was developed by your competitor because you had ten patents.
So how do you protect your management team’s collective know-how. First, what brought your management team together in the first place may be a founder with a vision. As long as the management team embraces that vision, they will have a strong reason to come to work. Their compensation system and benefits package will make it possible for them to come to work. But the protection cannot stop there because our world is not a static one. You need to clone their know-how, that is, your management team needs to download their know-how to others through coaching and succession planning to make your organization more robust against the departure of individuals. They need to increase the collectiveness of their know-how through cross training. They need to add arrows to their individual know-how quivers both formally and informally by going to workshops and seminars, and by reading widely. They need to write down what they decide, the basis for their decisions, and what alternatives they considered and rejected, to build an institutional memory apart from their mortal selves.
They also need to agree to disclose ideas to the company promptly, to hold those ideas in confidence and not disclose them to third parties without a non-disclosure agreement in place first.
Finally, good management is sensitive to changing circumstances that affect relationships and acts to deal with those in a straightforward way. The management team needs to communicate and work together as a team despite differences. Indeed those differences are important.
A venture capitalist should understand that having the right intellectual property and acquiring more of the right intellectual property is more important than trying to select businesses based on the type of protection - patent, trademark, copyright -- that applies to its intellectual property. No protection type will provide ultimate protection and the most important type, know-how, can be protected if you know how.