How to pitch your IP without giving away the secret sauce. PART 2 OF 3: The Patent Paradox and the Trade Secret Alternative

Series Preface

This article is part of a three-part series on how founders can pitch intellectual property convincingly without revealing their “secret sauce”, written by IT technologist and angel investor Dr Anthony Harris.

Author Bio

Anthony has been a member of Cambridge Angels since 2019. Before that he was a member of Cambridge Capital Group (CCG) and continues as a member of the Oxford Capital co-investor circle. He has been angel investing for over twenty years, has invested in more than fifty companies, and is somewhat unusual in that he makes a living out of angel investing as well as investing in the capital markets (he was an early-stage investor in Amazon, PayPal, Google, Microsoft, PayPal, Motorola, Apple, Palantir and many other tech success stories). According to him he does this by ‘investing in things I know with a few fun investments along the way’ (Flit, and Oxitec being just two examples). Anthony originally studied computing at Oxford Brookes (when it was Oxford Polytechnic) and then went on to work in R&D and development in the computing industry (mainframes and microcomputers), including some time working in Silicon Valley. In 1989 he founded Software 2000, an OEM software house which he used to suggest was ‘the most successful company you’ve never heard of’. The company’s royalty and licensing business transformed inkjet and connected laser printer technologies world-wide, won four Queen’s awards for export, numerous other industry awards, and grew to $150m valuation with offices in three continents. Anthony exited in 2007 to a management buy-out and went on to study for an MA at Oxford, an MA(Res) at Reading and his PhD at Cambridge (Sidney Sussex). He has been mentoring on the ‘Accelerate’ programme at the Judge Business School since 2014 and continues to help start-ups with advice on intellectual property and business finance. He has just finished a research fellowship at Clare Hall (Cambridge) and is now a fellow and director of studies for computer science at Emmanuel College (Cambridge). Anthony sits on the board of Cambridge Angels as our treasurer and is on the boards of Flit and ScaleXP, two Cambridge Angels portfolio companies.

In Part 1 of this series, Tony explored the “pitching conundrum” founders face: how to clearly explain what their product does and why it is defensible, while navigating opaque vetting processes and pitching to sophisticated investors without giving away the secret sauce.

You can read Part 1 here: www.cambridgeangels.com/news-ecosystem/how-to-pitch-your-ip-without-giving-away-the-secret-sauce-some-part1

The Patent Paradox

Many founders default to patents as the answer, because patents are a familiar choice and having a patent, or ‘patent applied for’, feels like proper IP protection. Patents carry prestige and are often one of the first things that investors ask about. They also have recognisable value and can often be capitalised to add substance to a young company’s balance sheet. Many investors are unwilling to enter into confidential disclosure agreements (CDAs/NDAs) so having a patent gives a measure of strong IP protection when pitching to an unknown audience. However, there is alternative approach to filing patents (trade secrets) which, if executed well, can make a company more valuable to investors, not less. Before discussing trade secrets it is important to understand the pro’s and con’s associated with patents.

The uncomfortable truth about patents is that at some point along the way they require inventors to tell the world exactly how their technology works. Filing a patent means eventually disclosing your invention in sufficient detail that someone ‘skilled in the art’ (i.e. an expert in your field) could theoretically reproduce it. That full specification becomes publicly available through publication, normally 12-18 months after filing, regardless of whether your patent is ultimately granted or not. There is really no alternative to ‘full disclosure’ of the invention in the patent application because a common defence in patent litigation is ‘non-reproducibility’. In other words, if somebody can demonstrate that your invention cannot be reproduced using the details in your published patent then they can apply for it to be struck out. It is a mark of an inexperienced founder/inventor to suggest that they have only disclosed ‘some’ of their invention. Such a comment would normally make me very unlikely to invest in the venture.

For a software company, this publication/disclosure rule is particularly problematic. Software patents are difficult enough to apply for and get granted but the patent must describe your algorithms, data structures, and specific implementation choices in enough detail so that somebody else can do what you do. Obviously, these are the exact details that constitute your competitive advantage and, once this information is published, then your competitors can study it, reproduce it, potentially design around it, and even create variations themselves that replicate your tech, but maybe from a different angle. It’s a risk whichever way you look at it.

Patents also come with a significant price tag. Filing, prosecution, and maintenance of a single patent can easily cost thousands in the UK, and substantially more in the US, Europe, and beyond. That's before considering the time overhead: managing the prosecution process, responding to examiner rejections, and maintaining the patent portfolio over many years if you want global protection. When the patent eventually expires your IP is free for anyone to use so that, for many technology companies, this feels less like protection and more like an expiration date on your competitive advantage.

The Trade Secret Alternative

Trade secrets operate on fundamentally different principles to patents. They represent confidential business information (including your algorithms, methods, and data), that provide your competitive advantage and which remain undisclosed outside of your company. There's no patent office, no formal registration, no expiration date. As long as you maintain confidentiality and can demonstrate that you took reasonable steps to protect it, your trade secret remains protected indefinitely. Internally you need to restrict access to your trade secrets and to document how you do that. In my own company we developed proprietary imaging/halftoning technology, a novel imaging pipeline (based on display-list technology), and a colour management system. These were well ahead of other technologies in the market and so we wanted to keep them as our ‘trade secrets’ rather than publishing what we were doing. This strategy worked well for us because once competitors had worked out what we were doing, we had already innovated beyond our previous techniques and shifted the goalposts.

Probably one of the best known examples of a trade secret is the formula for Coca-Cola. Despite it being one of the world's most valuable trade secrets for over a century, Coca-Cola have never patented it. They have kept it confidential, protected it through NDAs, and physically restricted access to it. That strategy has served them better than any patent would have because the moment you patent a formula; the world knows the formula exists and eventually gets to use it. By keeping it secret, Coca-Cola have preserved their competitive advantage permanently. A similar example is the Aero chocolate bar where the chocolate recipe is not documented but you can find an ancillary patent which explains how to generate bubbles in chocolate by using nitrogen in a reduced pressure environment. So, in this case, one aspect of the technique is protected through a patent but the chocolate recipe remains a ‘trade secret’.

For technology startups the flexibility offered by a trade secret is extraordinary. You are not forced to choose between disclosure (patenting) and no protection (keeping quiet) so you can actually demonstrate robust IP protection to investors without surrendering your technological secrets. What is not to like!

In Part 3 of this series, Anthony explains how founders can prove IP value, defensibility, and exit potential without revealing the details that actually matter.