The Quality Inspection Blog did a really good post, entitled Pros and Cons of Crowdfunding (Kickstarter/Indiegogo) for Startups, explaining (yeah, you guessed it, the pros and cons of crowdfunding. Our international IP lawyers are generally not big crowdfunding fans because we have seen far too many companies publicize their innovative product design and brand name to the world before they have put in place the sorts of protections necessary to stop a better funded Chinese manufacturer from copying the product (and sometimes the brand name as well) before the crowdfunder can even get off the ground.
We talked about this way back in 2014 in Kickstarter And China Manufacturing. You Are So Wrong On Your China Risks and of how “failing to protect IP early on is probably the most common mistake made by start-up companies.” Then again earlier this year, in Kickstarter and China Manufacturing: You’ve Got it All Wrong, we wrote in great detail why it is critical to button up your IP before you go on the Internet with your crowdfunded product:
We’ve also had companies come to us after going up in flames due to Kickstarter. In Kickstarter And China Manufacturing. You Are So Wrong On Your China Risks, we talked about the following fairly typical “Kickstarter” China conversation:
Company with product: We just raised money on Kickstarter and we have lined up a China manufacturer for our product and we are thinking it is time to get a China lawyer involved, though we do not have much money for legal yet.
Me: Well, if you are going to spend money on anything, the most important thing is your intellectual property.
Company with product: We figured we would deal with that later. Right now we just want someone to review our NDA and then review the manufacturing contract we will be drafting.
Me: Who drafted your NDA, an attorney with China experience?
Company with product: No, we did it ourselves. It really just needs a quick review.
Me: I have never seen a self-drafted NDA that just needs a quick review for China. To work for China, you need a China NDA, which we actually call an NNN Agreement. NDAs are geared towards preventing disclosures of information but your biggest risk in China is typically not going to be your manufacturer disclosing your information; it’s going to be your manufacturer stealing your product and selling it worldwide and to your own customers. Also, to be effective, the NNN Agreement should be in Chinese and it should contain liquidated damages provisions. There are all sorts of other things that need to go into it as well, but these are the basics. The same holds true for an OEM Agreement. But really, my biggest concern is your IP.
Company with product: Well, to be honest with you, when we listed the risks on our Kickstarter, we said that the risks were manufacturing delays. We didn’t even mention our IP and so I don’t see how we can pay you anything right now to protect that.
Me: Well, if you cannot afford to protect your IP, it is probably not worth your money to pay for contracts. Why spend money for an NNN to protect yourself against a few companies — your potential manufacturers — when you are not able to spend money to protect yourself against the millions of other people out there who could steal your product? And as I hinted, we will need to start over on these contracts, using your draft contracts for nothing more than to determine certain facts regarding what you are doing. I really think that you should at least register your key trademarks.
Company with product: Yeah, well, I’ll talk all of this over with my partners.
If you are going to do just one thing to protect your company and your product before you go on Kickstarter, register your brand name as a China trademark. In China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, I talk about why this is so important:
When it comes to the need to secure the appropriate trademarks in China, I am blunt. Anyone who doesn’t do it is making a big mistake:
I tell them how if they do nothing else, they should immediately register their trademarks in China. This one usually surprises them and they often think I have misunderstood what they are planning for China. They at first do not understand why I am emphasizing the need for their filing a trademark in China when they have no plans to sell their product in China. I then explain how China is a first to file country, which means that, with very few exceptions, whoever files for a particular trademark in a particular category gets it. So if the name of your company is XYZ and you make shoes and you have been manufacturing your shoes in China for the last three years and someone registers the “XYZ” trademark for shoes, that company gets the trademark. And then, armed with the XYZ trademark, that company has every right to stop your XYZ shoes from leaving China because they violate that other company’s trademark.
I had a similar discussion the other day with a company that told me that they will soon be listing on Kickstarter. I very strongly suggested they register their brand name as a trademark before they go on Kickstarter and sent them a blog link as to why. They responded as follows:
Thanks Dan – a good read… so, ok here are my questions/responses.
1) It seems like you keep seeing the same pattern over and over (i.e. ignoring your good and prudent advice) – so what is the common root cause of the theme? Said in another way, why do so many smart/rational folks decide to act less smart/irrational by not doing IP/Trademark in China? I am sure a balanced analysis may show they are, at minimum, acting rationally, but tough choices are being made. My guess is that the cost seems prohibitive or there is no “on ramp” to an effective China IP highway. The feeling is overwhelming and akin to going from 0-65 mph in 3.5 seconds and asking everyone to drive a Ferrari because it has the 0-65 speed you need.
2) I see trademark as something worth reviewing, possibly an “on ramp” strategy – what is the cost?
I am probably not too dissimilar to those other startups. All things considered, if I have a choice between using limited/scarce funds to allocate between textbook perfect China IP vs getting to a revenue state, most will chose allocating towards revenue.
I responded as follows:
They think the world is the United States. The problem is it isn’t. They’ve been trained to go to market and then build the foundation. That works for the United States, but not for China. In the United States, the first to use a brand name gets the trademark and to get a trademark you must use it. This leads American companies not to worry much about trademarks. In China, it’s the first to register who gets it and use is irrelevant (except if you go three years without using your registered trademark, you can lose it). There is no trademark via use.
American companies also ignore that just manufacturing in China requires a trademark because if someone registers your brand name as a trademark they get it and then they can stop your product from leaving China.
And here’s the big thing. As soon as any product goes up on Kickstarter, a ton of people in China will review it and if they like it they will register the product’s brand name as their own China trademark and then start making it. Oftentimes the company that makes it will be the same one you are talking to about having your product made and they will keep talking to you just to stall you. In the meantime they will beat you to market with your product and then be able to block your product from leaving China because it violates their trademark. And all this just keeps getting worse. See China Trademark Theft. It’s Baaaaaack in a Big Way. And it is mostly American companies that pay for this because the EU trademark system is more like China and so they get it. In fact, many Western European countries so get this that their governments will pay for their start-up companies to secure their IP in China early. Because of this we have represented a ton of Swedish and other European start-up product companies.
Also, Americans love patents and underestimate the value of trademarks. See China and Worldwide: Trademarks Good, Patents Bad for more on this. Patents are expensive and difficult to enforce and they rarely help you get something taken down off an online marketplace. Trademarks are cheap and easy and surprisingly powerful.
But as the Quality Inspection Blog points out, crowdfunding has a lot of positives to it, especially when done right and in its post it sets out the following:
1. Confirms a market need. Seeing whether people will actually spend money on your product is usually more valuable than just asking them if they will.
2. It brings you customers. It is a viral distribution channel where backers spread the word on social media and allowing you to both build your brand and see who likes your product and why, and who does not and why.
3. It might get you retailer contracts. Retailers [and I would add, investors as well] can see your product and choose to buy it [or invest in your business].
4. Your customers fund your business, in advance. And without you having to relinquish equity.
5. It brings you credibility in the eyes of Chinese manufacturers. “Let’s say you raised 180,000 USD on Kickstarter. Many Chinese suppliers will be interested in working with you, for obvious reasons. You have cash in the bank, your first order doesn’t need to be tiny, and your market has been proven (meaning increasing sales in the coming years).”
But like the international IP lawyers, the Quality Inspection Blog has its concerns about crowdfunding, especially about your product getting copied:
1. You might get copied before your campaign shows success. Chinese manufacturers will do this using the following methods:
- They will take photos from the campaign page and put it on their own website
- If some of their customers are interested and willing to buy “their” product in sufficient quantity, they will develop it and make it
- Some of those lower-quality products might flood your own market
- It will hurt your image
It happens a lot. It won’t kill your company, but it is VERY frustrating.
2. Companies in your own country might “get inspiration” and move faster than you. A company in your space might see your Kickstarter page, recognize an opportunity, and make its own version of your product/idea and they might get it on the market before you do.
3. If you don’t register your IP someone else might. You have registered your trademark in the US, in Canada, in the EU, in Australia? Great. Someone might see your brand (highly visible on these platforms) and register it in mainland China! What is the harm, you might ask, if you don’t plan to sell in China? Well, the company that purchased it can stop your shipments. It might be (and often is) the manufacturer you have been talking to, in the name of a relative of the owner. They do it as an insurance, for the case where your relationship turns sour and they might need extra leverage.
4. Failing to deliver will be visible. And it can really hurt you.
5. Your Chinese supplier might raise prices. What happens when you go back to your China supplier after a successful crowdfunding campaign? Your supplier sees that you have “raised some good money, they see your selling price, and they see the timelines you committed to. All is transparent. In other words, they know you have no choice but to work with them, and you can afford a price increase.”
Product crowdfunding obviously has its good and its bad points and your job is to maximize the good while minimizing the bad. In other words, crowdfunding can be great but you need to be smart about it.