Traction is the new IP

By boris, October 18, 2012

“Traction is the new IP” sums up perfectly how the technology space has evolved over the past decade due to the nature of the web. Barriers to entry are no longer created by patents or by tech differentiation alone, but by superior traction in the marketplace.

In today’s web landscape, word of mouth drives adoption and can lead to “winner takes all” (or almost all) in both B2C and B2B markets. Category leaders do very well, while the #2, 3, 4… players struggle to attract customers and financing.

This trend is particularly true in markets that are highly susceptible to network effects, such as online auctions and social networks. In these markets, we often see one major company emerge and take all of the value created in its respective category.

Even beyond auctions and social networks, the web tends to prefer the category leader. This is true in most SaaS categories, including enterprise applications. Consumerization of IT has accelerated the pace of software adoption in the enterprise, placing greater significance on market traction and momentum.

In the past, the adoption of an enterprise tool was primarily driven by the quality and aggressiveness of a sales force to win over more customers. The pace of adoption was kept in check by the limited size of the vendor sales force, as well as by gatekeepers (CIO/IT department) on the customer side.

However, now individual employees get the ball rolling by using a product. If that product proves useful, adoption ripples between colleagues, departments, and companies, without any discussions between a sales rep and IT department. Again, word of mouth can lead to a strong market leader, creating a significant barrier to entry for anyone else.

Know your market dynamics

If traction relative to your competitors defines the success of a company, it’s absolutely critical for any entrepreneur to understand the dynamics happening in his or her market. It’s also important to realize how little value investors therefore put on IP when investing in a company.

The same logic holds true for most acquiring companies. Let’s take my own portfolio as an example. To my knowledge, only 4 out of my 35 portfolio companies have filed for patents. Three of those have since been acquired and patents did not play a significant role in the acquisition process.

So, in this new market dynamic, should you go for patents?

If traction is the new IP, the question still remains if your startup should file a patent if you see an opportunity. Here are a few things to consider:

  • Treat a patent only as optional value: It can take up to 10 years to get your patent granted. Most startups have either been acquired by then or are in the deadpool.
  • Most investors and potential acquirers will not separately value patents unless they are granted (which again, can take up to 10 years).
  • If you want to file a patent and have limited financial resources, consider filing a provisional patent. This is a lower-cost first patent filing that at least gets the process going and gives you a year to test your idea before filing a full patent application.
  • Limit the exposure you give patent opportunities in your investor pitch – it sends the signal that you might be focusing on the wrong priorities.
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