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Tech Industry

VC firms: Be wary of patents

Venture capitalists dished out words to the wise at a conference focusing on fundraising in the high-tech industry.

SANTA CLARA, Calif.--Tech companies trying to attract venture investments will often find their patents are worth no more than the paper they're written on.

That was one word to the wise offered by a panel of venture capitalists Tuesday during Garage Technology Ventures' Capital Summit conference on fundraising at the Westin Hotel here.

The panelists dished out a range of tips on landing early rounds of funding. Their advice comes at a time when many VC firms have scaled back new investments in companies as more time and money goes into keeping existing portfolio companies alive.

"When we hear an entrepreneur say they have a patent and that is their defensible strategy for protecting their business, that concerns us," said Steve Jurvetson, managing director with Draper Fisher Jurvetson. "They need to think of building a company that is still defensible even without a patent."

Such a concept may seem at odds for an industry that relies so heavily on filing patents to protect intellectual property and touts the number of patents amassed. Nonetheless, patents can serve as a huge expense for young, struggling tech companies.

"It's very expensive to defend a patent in a lawsuit. It's something that a start-up can ill afford," said Jos Henkens, a general partner with Advanced Technology Ventures.

Venture capitalists such as Henkens prefer that companies make their pitch based on the strength of their underlying technology.

Other selling points include the prospect of hitting profitability within at least three to four years of receiving a first round of funding, said Philippe Bouissou, a general partner with Allegis Capital.

And that prospect is more important than the health of a company's particular sector, said Ann Winblad, a partner with Hummer Winblad Venture Partners, which invests in software companies.

Companies seeking funding, meanwhile, should be prepared to wait as long as six months between pitching a business plan and receiving money in the bank after a venture capitalist completes the due diligence.

"You need to get enough money in the (first funding round) to where you only need one new investor in the next round," advised Doug Leone, a partner with Sequoia Capital.

Leone said his firm invests in tech companies in sectors ranging from semiconductors to services and, on occasion, it looks to invest in sectors that other VC firms are avoiding.

Despite the pullback in funding by a number of venture firms, Leone said, "We think this is a great time to build a company if you have an eye toward profits and not an eye toward building an empire."