The Good, The Bad, And The Ugly Of Software Patents

I always advise software startups to file patents to protect their “secret sauce” from competitors, and to increase their valuation. The good news is that a patent can scare off or at least delay competitors, and as a “rule of thumb” patents can add up to $1M to your startup valuation for investors or M&A exits (merger and acquisition).

The bad news is that patent trolls (non-producing companies that make their money from licensing patents) can squeeze the lifeblood out of unsuspecting entrepreneurs, as exemplified by the recent mess around Lodsys suing small Apple IOS developers. This patent holding company has charged infringement and demanded royalties from every app developer for the iPhone and Android, for a feature most agree has been in apps for many years.

Yes, the software patent process is a mess. I say this with conviction even after I survived the process, and have a software patent pending. Consider this list of commonly recognized software patent flaws, as summarized from my research, Paul Graham’s “Are Software Patents Evil?” original essay, and the “Enough is Enough” emotional Lodsys article by VC Fred Wilson.

• Process is onerous, expensive, and time consuming. Count on spending $10K to $20K per patent just for a USA application today, unless you do most of the work. Even after your application is accepted, the issuing process takes a lifetime in today’s technology (4-5 years). Then you need to repeat the process for every country of interest.

• Patents have become a tax on innovation. A lot of companies, like Lodsys above, buy up software patents that are over-broad, and hold startups hostage after the fact, through royalties and litigation. They know that these entrepreneurs don’t have the skill or resources to defend themselves. Patents only help the big guys who want no change.

• Software technology changes rapidly. Software changes fast and the government moves slowly. The USPTO has been overwhelmed by both the volume and the novelty of applications for software patents, and they can’t maintain a qualified staff. Patents currently last 20 years, which is way too long in the software business.

• Patents granted that don’t meet the criteria. To be patentable, an invention has to be more than new. It also has to be “novel” and non-obvious. Moreover, patent law in most countries says that software “algorithms” aren't patentable. So lawyers routinely frame a software algorithm as a "system and method" to meet the criteria.

• Valid patents have been overturned by unpatented prior art. Until mid-2013, the USPTO still operated on the doctrine of “first to invent,” rather than first to patent. This hit RIM (Research In Motion) a few years ago, and cost them $650M to recover. At least that shouldn’t happen again, as the US process is now consistent with the rest of the world.

• Applying for a patent is a negotiation. As a result, lawyers always apply for a broader patent than they think will be granted, and the examiners reply by throwing out some of the claims and granting others. They don’t insist on something very narrow, with proper technical content.

• Different rules around the world. What I have described so far is the situation in the US. In Europe, software is already deemed not patentable, and other parts of the world are somewhere in between. In some countries, software patents are not recognized, and in others they are not enforced. We need a global solution.

So what’s the answer? I would argue to simply eliminate the software patent – since software is an implementation and is already covered by trademark and copyright law anyway. Others put their hopes in patent reform legislation, to tighten the definition of software patents and targets trolls. This legislation seems stalled in its tracks for now, due to lobbying efforts of the bio-pharmaceutical industry, along with universities and trial lawyers.

Either way, new computational technology algorithms would still be patentable, as long as the algorithm meets the defined requirements for novelty, usefulness and inventiveness. I’m a big supporter of building and protecting a portfolio of real intellectual property, and maximizing your startup’s valuation, but it shouldn’t be just a legal game.

Marty Zwilling

Right Entrepreneurs In The Right Place Get Funded

I’m a strong believer that investors invest in people, before they invest in a business plan, or an idea. But I continue to learn that there are a host of other factors, maybe not even related to you or your business, that could keep you from getting the funding that you need. You may not have control over many of these, but it helps to know, for planning purposes, what is really happening.

Obviously, a key factor is always the state of the economy and the mood of the venture capital community. The good news is that both of these are looking up these days. According to the Silicon Valley Venture Capitalist Confidence Index® for the First Quarter 2014, the Q1 increase marks seven consecutive quarters of positive sentiment among Silicon Valley venture capitalists.

On the other hand, venture capital doesn’t get smoothly spread across the geographic and demographic landscape, and the number of active firms has dropped sharply. An older but still relevant study, published by CB Insights, Venture Capital Human Capital Report, summarizes a variety of characteristics for private early-stage Internet ventures funded in the US. The significant findings include the following:

• Founders need to live in the right place. No surprises here. California (Silicon Valley), New York (NYC), and Massachusetts (Boston) are the places to be in the US for venture capital attention. Almost 80% of the funding handed out in the US consistently comes from these three locations.

• Whites and Asians lead the race. 87% of funded founders are white, which is not too far above the US population of 77% white. More notably, the second largest group receiving funding was Asians, at 12%, despite comprising only 4% of the population.

• All-Asian founding teams raise the largest rounds. Asian teams in California raised median funding rounds of $4.4M, significantly higher than the $3M raised by mixed or all-white founding teams. In other locations, the trend was more equal, even somewhat reversed in New York and Boston.

• Wunderkinds don’t have the magic touch. The average age of founding teams getting funded is in the Gen-X 35-44 year age range. However, the highest median funding did go to those in age range 26-34 years old. Amazingly, no founding teams in the Gen-Y 18-25 year range received any funding in California.

• Experience does count. Fully 39% of founders funded were formerly CEOs or had founded prior companies. Other common previous roles were executives in Sales, Marketing, and Product Management, all suggesting that VCs back experience.

• More founders generally means more money. Overall the majority of companies have two or more founders, but over a third are led by one founder. More founders does not necessarily result in larger funding rounds, but the highest median funding generally goes to companies which have two or more founders.

• Going solo works better on the East Coast. Co-founder companies are the norm in California, but 40-50% of the startups in New York and Massachusetts have only one founder. In New York, these solo efforts even raised more money, with a median of $4M.

If you don’t live in these corridors, don’t assume that you can simply incorporate in the state, or email your proposals there and be considered a local. At minimum, you need to get an introduction from a local player, or better yet, set up a local office and network there. Investing is all about people-to-people relationships.

If you are from outside the US, especially Asia, experts tell me that the focus is even more on relationships. George Wang, founder and chairman of the Beijing-based Chinese Professional Network (CPN), recommends that anyone from the West wanting to get involved in Chinese start-ups slow the pace down and “Spend six months and get to know the place and the people.”

If you need funding, focus first on the human side of venture capital, before you rush to pitch your plan. The evidence confirms that from a funding perspective, a successful startup is more about the right people being in the right place at the right time, versus the technology or solution.

Marty Zwilling

How To Recognize The Greatest Boss You Never Had

Everyone can recognize a great boss a mile away, so why is it so hard to find one? We all remember a few that are “legends in their own mind”, but that doesn’t do it. In fact, the clue here is that the view in your mind is the only one that matters, rather than the other way around.

Almost every one of us in business can remember that one special manager or executive in their career who exemplifies the norm, who commanded our respect, and treated us like a friend, even in the toughest of personal or business crises. In commemoration of Boss’s Day this past week on October 16^th, let’s all tip our hat to that unique and rare business person we wish everyone would emulate.

I’ve asked many peers for the traits or attributes they saw in that person, and most will list the following positive functional traits of a good boss:

1. Leadership. Shows outstanding skills in guiding team members towards attainment of the organization’s goals and the right decisions at the right point of time. As Drucker said, "management is doing things right; leadership is doing the right things."

2. Plan and delegate. Possesses foresight and skills to understand the relevant capabilities of team members, and then scheduling tasks and delegating to the right people to get tasks done within deadlines. You are a guide, not a commander.

3. Domain expert. Demonstrates complete knowledge of his field and confident about that knowledge, with the common sense to make quick productive decisions, and ability to think outside the box.

4. Set clear expectations. Employees should always know what is expected of them. One of the easiest ways to do this is to set deliverable milestones for each employee over a set period of time. Then review the performance vs. the roadmap or deliverable at least six months prior to a performance review and discuss ways to improve.

5. Positive recognition. Immediately recognize team members, publicly or privately, when they complete something successfully or show initiative. Congratulate them on a job well done. Most employees are not motivated by money alone. Good managers know that employees want regular recognition that their job is being done well.

In my view, these are all necessary attributes, but are not sufficient to put you in that great category. Most people recognize that it takes more to be great, but the attributes are a bit more esoteric, and harder to quantify. Here are a few of the great ones:

1. Active listener. Shows traits such as listening with feedback, optimistic attitude, motivating ability, and a concern for people. Listening to what is said as well as what is not said is of the utmost importance. It is demoralizing to an employee to be speaking to a supervisor and be interrupted for a phone call. All interruptions should be avoided.

2. Shows empathy. This refers to the ability to "walk in another person's shoes", and to have insight into the thoughts, and the emotional reactions of individuals faced with change. Empathy requires that you suspend judgment of another's actions or reactions, while you try to understand them, and treat them with sensitivity, respect, and kindness.

3. Always honest. Simply put, today’s managers live in glass houses. Everything that a manager does is seen by his employees. If a manager says one thing and does another, employees see it. Managers must be straightforward in all words and actions. A manager must “walk the talk.” That also means recognizing weaknesses, and admitting mistakes.

4. Sense of humor. People of all ages and cultures respond to humor. The majority of people are able to be amused at something funny, and see an irony. One of the most frequently cited attractions in great personal relationships is a sense of humor.

5. Keep their cool. A great manager is an effective communicator and a composed individual, with a proven tolerance for ambiguity. He/she never loses their cool, and is able to correct the team members without emotional body language or statements.

Whole books are written on this subject, but hopefully you get the picture. Great managers and bosses must do the technical job well – and they also must do the people job very well. Now that you understand these things, I’m not sure why it is so hard to find a great boss. I guess an even harder question I should ask is why is it so hard to be one?

Marty Zwilling

Public Company Executives Rarely Adapt To A Startup

Mid-level or even top executives who “grew up” in large companies often look with envy at startups, and dream of how easy it must be running a small organization, where you can see the whole picture and it appears you have total control. In reality, very few executives or professional stars from large corporations survive in the early-stage startup environment.

The job of a big-company executive is very different from the job of a small-company executive. The culture is different, the skills required are different, and the experience from one may be the exact opposite of what you need for the other. I agree with the seven survival challenges from Michael Fertik, in an old Harvard Business Review article, for executives making the transition:

1. Empire-building skills are counter-productive. Establishing and wielding influence may help you move resources in your direction in a large business. Similarly, acquiring a larger footprint of direct reports is often a sign of success at large businesses. These instincts kill you in a small company, where requiring more resources is a negative.

2. Forget your staff and entourage. This is one of the harder transitions for people joining small businesses. The axiom applies to all matters, tiny to large. Small-company heroes are consistently self-reliant. At a small company, if you're constantly demanding more support, you risk turning your net impact into overhead-creep rather than value creation.

3. Never cover your a$$. There's no place for CYA in a small company. This attitude sows division and mistrust at exactly the early stages when the business most needs to build precious esprit de corps. When you're considering a job at a small company, look for colleagues and founders who don't tolerate CYA.

4. Go faster. Large companies move slowly because they are usually in reasonable financial condition, with less urgency, have a lot to lose from making bad decisions, and have built layers of management sign-off over the years. These conditions don't apply in a small business. Speed gives you the greatest chance of success.

5. Be very selective about the problems you attack. Managers at large companies often have the obligation and luxury of thinking about problems that may arise at some future time if things go well. Startups spend little time on this — the risks of enormous success are so remote they aren't worth major planning.

6. Get used to dynamic budgeting. Large companies usually operate with annual budgets, and often the budgeting process is locked down months before the start of the fiscal year. At start-ups and smaller businesses, budgeting can happen opportunistically, monthly, or even on an ongoing basis.

7. Understand that your daily impact is huge. Many of your managerial decisions will have enormous and possibly fatal effects on a small business. Larger companies rarely face life-or-death opportunities or threats. Small companies can face them daily. The most practical way to adapt is to focus on learning to evaluate and trust your judgment.

I’ve spent years in large-company environments, and many years later in startups, so I’ve seen and felt the pressures of both. One positive aspect of having worked in a large company is that they usually provide actual training and education for a new role, rather than all “on-the-job training.” This transfers well to startups, and should give you an advantage.

On the other side of the ledger, big company executives tend to be demand-driven by initiatives handed down from the top. In contrast, when you are a startup executive, nothing happens unless you make it happen. In startups, you have to drive multiple initiatives concurrently or the company will stand still. Well defined and well documented processes don’t exist to guide you.

For startups, the time to do the people filtering and fit analysis is before the hire. Look at previous company results, and listen for evidence of self-sufficiency, problem solving, and a thorough understanding of your product, technology, customers, and the market. Most importantly, don’t assume your favorite Fortune 500 executive is the best role model for your entrepreneurial startup.

Marty Zwilling

Do You Have The Commitment To Succeed In Business?

We’ve all heard the old joke “In a bacon-and-egg breakfast, the chicken is involved, but the pig is committed.” This quote epitomizes the true essence of commitment. We all know at least one small business owner who claims to committed, but seems to treat the business like a part-time hobby. They don’t put personal skin in the game, and are quick to give up when things are tough.

There are no middle roads to real commitment, and if you are not ready to fully commit to all the rigors of owning a business, you are better off sticking with some lessor role taking orders some someone else. For your calibration, here are some characteristics that you and others need to recognize in yourself as a truly committed entrepreneur:

1. Actively seeks leadership and responsibility. Many people need the comfort of following, rather than leading. When things go wrong, it’s then easier to point to someone else as the scapegoat. As an entrepreneur, the promises anyone makes on your behalf are yours. You need to be ready to accept “the buck stops here” and make it work.

2. Exhibits surging raw ambition. Successful entrepreneurs are generally ambitious and confident in their abilities. They may have many ideas, some of them are more workable than others. Failure is viewed as a learning opportunity, so it’s no disaster that some ideas don't actually get done the first time.

3. Minimum positive feedback required. As I’ve said in previous articles, it’s lonely at the top. If your psyche is one that needs regular positive feedback, and a commensurate paycheck, to stay motivated, you need to find a real job rather than an entrepreneurial one.

4. Social life is not the highest priority. If you find yourself unable to clear your head of work-related thoughts at the end of the day, that’s committed. Social relationships are important, and you do need to blank out work from time to time, but if social priorities are at the top of your list, you probably won’t enjoy the role of entrepreneur.

5. Comfortable with unpredictable working hours. Some people need a predictable schedule, for family reasons, or just peace of mind. Entrepreneurs need to be flexible, and assume there will be long working hours. If you are annoyed rather than exhilarated at the long or unpredictable schedule at your startup, you are involved but not committed.

6. See vacation as an interruption. Most entrepreneurs I know can’t remember the last time they had a “real” vacation (without bringing their work along). This may not be healthy, but it illustrates the level of commitment that you are competing with in the marketplace. If you insist on vacations “without checking in,” go and work for a big company that gives you a holiday allowance.

7. Haven’t even thought about retirement. Many people involved with startups are working hard, but are looking forward to retirement. The committed entrepreneurs wouldn’t think of retiring, even if they made millions from the current project. They enjoy work too much to stop, and can’t wait to start their next venture.

Making a commitment is a serious matter and one which should not be taken lightly, especially in a startup venture where the team needs to pull its weight together to achieve goals. Individuals who need structure and workload predictability won’t be able to maintain the high levels of enthusiasm and motivation of a startup team.

This isn’t a statement of right or wrong, just different strokes for different folks. The next time you have the urge to chuck your day job and live the dream of being your own boss, remember to test yourself for how committed you really are, before you jump off the cliff!

Marty Zwilling

Apply Lessons Learned To Gain From Startup Failure

Your startup is gone, it’s never coming back, and you are in mourning. An entrepreneur whose business fails grieves similarly to anyone who has lost a loved one. The pain of losing a business is not only about a significant loss of income, but can send your entire identity into turmoil.

Most entrepreneurs define themselves by their business projects. They calibrate self-worth by what they accomplish or do not accomplish. In other words, if a project fails, then they are failures. If a project takes off, then they are wonderful. It’s the universal entrepreneur reaction.

The loss of a startup is very much like losing your job, as characterized by Debbie Mandel a while back, so don’t be surprised if you experience:

• Sleep disturbances, and difficulty waking up in the morning
• Eating and craving the wrong foods or stimulants
• Fatigue
• Irritability
• Cocooning at home
• Loss of ambition; the perception that there are no other opportunities out there
• Submissive or abusive behavior

The knee-jerk reaction is to ask, “Why me?” or to cast the blame on the powers that be: “The economy killed me,” “My partner was a jerk,” or “Investors stole my business.” However, the blame game is an energy drain and will leave you without the energy to move on.

We have to assume responsibility for our actions, rather than play the part of a victim. Try answers like: “My timing was wrong,” “I picked the wrong partner,” or “I’m better at bootstrapping.” Everyone will respect your integrity, and you will be ready to tackle the world again more quickly.

Similar to Dr. Kubler-Ross’ five stages of grief for a death, losing a business requires processing each stage in order to adapt to the changing daily activities. Everyone falls down, but not everyone picks himself up. Here are some suggestions to survive the normal stages and turn failure into triumph:

1. Denial: The psyche needs to protect itself and absorb what has happened little by little, instead of all at once. Recite the business loss story over and over to take the sting out of it; distract yourself with positive friends, outdoor activities, or your community center.
2. Anger: Release anger in a healthy way through exercise, visualization and breathing. Exercise intensity or length of time should correspond to your anger level. Reinterpret the scenario with compassion; be kind to yourself, and everyone else.
3. Bargaining: This is “the what if or I should have” stage. Be aware of negative thought streams to objectify them, and have a logical discourse with your thoughts. Then you can invest your energy into moving on.
4. Depression: The sadness sets in and the feelings need to come out. Maybe you need to have a good cry. Laughter is always a wonderful pick-me-up. It will release feel-good chemistry. This will help reset a realistic optimism. Tap into positive friends.
5. Acceptance: This is the point where we think and feel that the loss really happened. We accept the blow to our self-esteem and the disappointment. This is the time when we are ready to rebuild our balance and confidence.

It is how we handle this failure that will determine our next success. Because we are acquainted with loss and failure, we will not fear it again like the first time. Paraphrasing Thomas Edison in finding the right filament for the light bulb, now you know a thousand things that don’t work.

Thus, the best way to stop mourning a failed business is to start another one, relishing all the lessons learned from the previous experience. Investors are convinced that entrepreneurs often learn more from a failed startup, than a successful one. If you approach the next one with a newfound sense of passion, your peers, investors, and your customers are likely to do the same.

Marty Zwilling