Why Innovative Companies Need IP-Moats
Authored by Harish Daiya, CEO of Lumenci
"Innovation disrupts the status quo to establish another status quo, rinse and repeat."
We live in an era where the economy is driven by innovation. Companies are continuously iterating on ideas and building innovative products and services. While growing market share is every company's primary focus, gaining competitive advantage through IP-Moat is also critical.
Rate of technological disruption
Technology has the power to disrupt existing business models, and technological disruptions have accelerated in the past decade. Each new disruption gives way to new business models and products and opens doors to further innovation.
There are countless examples of how vital technological innovations have changed market leaders in any given category or industry. For one, banking witnessed a sea change with the innovation-driven by Fintech companies in the early 2000s, which was further disrupted with Decentralized Finance in the 2010s. To put the rate and magnitude of disruption into perspective, to reach a market cap of $75B, JP Morgan took 200 years; PayPal took 20 years; Coinbase took less than 10 years.
Similarly, the modern OTT industry saw several iterations to reach where it is today. Blockbuster and Netflix were competitors in the DVD rental market. In the late 1990s, Netflix had the foresight to bet on internet adoption and changed their business model from pay-for-use to subscription model — which eventually transformed into a streaming service. Suppose Blockbuster had the foresight to develop IP-Moat around video streaming while it was still a viable competitor to Netflix. In that case, the entertainment industry's leader board might look much different than it is today.
Why are business moats necessary?
For decades, business moats have been a means for companies to create a competitive advantage. The technological landscape is changing rapidly for every traditional or emerging business model, making it difficult for both incumbents and high-growth start-ups to stay competitive. Innovative companies need to build business moats to remain competitive.
"The key… is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." – Warren Buffet
Companies can build business moats via brand, network effects, data, cost of switching, pricing model, or intellectual property. A company's IP-Moat refers to its ability to build a competitive edge by converting innovation into patents, using IP to generate competitive leverage during M&A, and generating revenue from its IP (patents, trademarks, and copyrights).
It is essential to protect the innovations developed under existing R&D programs, but it is equally important to anticipate and safeguard future technology shifts. A sophisticated IP-Moat acts as an anchor while the engineering and R&D teams adapt to the ever-changing tides of technology. Building internal IP processes to enable the executive teams to foresee the shifts in the technology paradigm is an essential ingredient towards building IP-Moat.
- IP-Moats are an equalizer for start-ups – In a disruptive marketplace, building the right patent portfolio in a rapidly evolving technology environment can provide a competitive edge and acts as an essential business tool for long-term success.
- IP-Moats have a compounding effect - Companies that continuously evolve their patent portfolios and consistently maintain high-quality patents have a significant long-term advantage over competitors.
- IP-Moats improves M&A leverage – Building a strategic patent portfolio aligned with the business strategy can create leverage during M&A negotiations.
- IP-Moats improve valuation – A strong patent portfolio provides the freedom to operate and keeps competitors at bay. The ability to exclude competitors from practicing your patents can create a defensive position that increases valuation.
- IP-Moats generate revenue – Patents can be licensed, sold, used in joint ventures and research partnerships. It is referred to as patent monetization and can turn into a significant source of revenue to offset R&D expenses.
Many innovative companies, including high-growth start-ups, tend to ignore the importance of patents due to the opaqueness of the process and its outcome. Ignoring the importance of patent protection can result in lost opportunities as rapid disruptions challenge market positions.
Strong IP-Moats can act as insurance against rapid technological disruption and possible loss of market share – build your IP-Moat to safeguard your journey towards market domination.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.