Testing with Predators
I need to test my product in the field before I can release it widely, but the companies where I need to test the idea are also capable of copying it and building a competing product themselves. Do you have suggestions on how best to protect myself as I test my product?
All new products should be tested with customers during the development cycle. In addition, some products can only be tested in widespread live deployments, like enterprise software and some medical technologies. Your concern is real.
Many startups fears that larger early customers will copy what they see. The good news is that most larger companies are beset by inertia, laziness, and long development cycles, even when internal champions for a new idea exist. Most companies would rather buy something already working and developed than commission a new internal cycle with budget and risk. If a potential beta customer can copy today, it can also copy when the product is widely released, so you are realistically only able to control the time until you hit the market widely.
So how do you get the larger company to play nice? Your test site agreement should ideally contain clauses to protect the confidentiality of your information and restrict their ability to use what they learn from you. You might even ask for clauses representing that they are not developing in your area and a covenant that they will not do so for a period after the test. Few startups, however, have the commercial ability to get away with such an aggressive ask.
What would cause a company to agree to test early and also not engage in copying? Some fear their competitors will gain access to your technology if you go elsewhere. Perhaps you offer some exclusive period, by geography, product line, or customer segment for a limited time in exchange for the testing. You could offer discounted pricing or other favorable economic terms. You might even offer the opportunity to invest. One of my favorite tactics for startups is to turn potential predators into investors, which aligns their interests with yours.
I am concerned about how easy you believe your product is to copy. You should also engage in a systemic intellectual property strategy exercise to protect your inventions prior to initiating discussions. You will not get anything issued through a national patent office quickly, but multiple pending applications and the threat of broad claims issuing in the future often scare larger companies into good behavior. Larger companies rightly fear investing significantly into a new field only to be subject to patent litigation later which destroys that investment. Better to play nicely with you now.
While we are discussing patents, there is a field of landmines you must navigate carefully. Your testing activity might constitute an offer to sell or a public use, which would operate to limit or bar your ability to patent your inventions later. Every country handles this situation differently. In the United States, the law on “experimental uses” continues to evolve, so get competent counsel to advise you on what terms you need to include in your agreement and what procedures you must follow to protect your patent rights. The recent caselaw is going the wrong way for startups, so best practice is always to file first.
You should follow all the best practices for contracts, but here are a few other points to include in these agreements:
You should clearly label the use as a “beta test” or “experimental” or an “MVP” to set the expectations of limited warranties, features, and functionality. Companies will often gladly test something early, but will want to know how much they can rely on a product that is fluid, potentially unstable, and may not be released widely later.
You should have a process to get feedback systematically. This can be data reporting from the product itself as well as qualitative feedback from users and others at the test customer. You should make sure that suggestions given for features, upgrades, and functionality are owned by you, so the customer cannot later claim it is a co-owner of your future patents.
Think carefully about the support you will give and your right to terminate early should the beta test go poorly. Also, identify the important issues for your customer, such as privacy and security. No matter how early your product is, privacy and security are table stakes for most products, even at the MVP stage.
Your early customer may be your future acquirer, largest future customer, largest future investor, or biggest champion to validate your startup in your industry, if not all four. Aside from all the legal and other IP strategies, do not forget the basics: find your champions internally, build a solid personal set of relationships with everyone who matters, and be responsive, kind, and reasonable to work with. Amid all the chaos and pressure of startups, too many entrepreneurs forget to be likeable and human with their customers.