From the Ashes: Failed Startup IP can Fuel Future Aerospace Innovation

Tradespace analyzed data from 300 defunct aerospace startups to understand the potential for IP to drive new innovation from beyond the grave.

Its been a tough summer for Aerospace startups. On June 28th Masten Space Systems, a rocket company that received $60M+ in NASA development contracts, filed for bankruptcy. A day later Volansi, a sUAS company that raised over $70m entered into assignment for benefit of creditors (ABC). The growth and ultimate collapse of these well-funded startups highlights two key points:

1. A vibrant startup ecosystem has emerged in Aerospace and Defense that is generating innovative, disruptive Intellectual Property (IP)
2. High capital requirements and technical complexity generate risk of significant customer and investor losses

Unlike other industries, the US Government plays a key role in catalyzing aerospace innovation. Programs like AFWERX (the Air Force’s Venture Capital and SBIR organization) have disbursed hundreds of millions of dollars to startups in the form of non-dilutive grants and contracts. NASA continues to make forward-looking bets on technology. Masten and Volansi both benefited from significant non-dilutive government funding. High profile failures like this lead to conversations about government waste and spending.

Those defending government risk-capital argue losses are inevitable and the outsized successes of companies like SpaceX and Palantir outweigh losses from failed bets. While this is true, it completely misses another benefit – the IP created by government-backed investments.

The Valuable, Underutilized Role of IP

Given the significant capital costs associated with aerospace technology development, startups often spend tens of millions of dollars to generate IP. Even after a company has failed, this IP could potentially unlock significant value for other emerging or established companies. However, there is no functioning market for IP, which means the companies that could benefit most from this IP have no visibility or access to these assets.

What Happens to IP When a Company Dies?

Without a functioning marketplace, there are a few possible outcomes for a company’s IP when is winds down operations:

• Nothing: Thousands of companies rely on SBIR grants as their primary source of funding and ultimately end up failing. In these cases, the founders may try to find a company to acquire their IP, but often end up closing up shop and moving on to their next venture, enabling patents to expire and knowledge to grow stale. Unfortunately, this is the most common fate of IP from failed aerospace startups.
• Assignment for Benefit of Creditors: For companies that attract Venture Capital funding, it is common for the IP from defunct companies to be transferred to a trustee, which runs an IP sale process. These private processes target companies looking to build defensive patent portfolios or, increasingly, non-practicing entities who seek out cases of infringement and attempt to enforce the patents in court.
• Acquisition: In rare cases, a company finds a buyer that has a need for their technology and IP. This enables IP generated by defunct companies to continue driving innovation, often exceeding its original potential when combined with the acquirer’s own technology.

To better understand the potential value of startup IP, Tradespace analyzed ~300 aerospace startups that shut down since 2017. We then profiled the nine largest “failed startups.” These companies raised a combined $400M from VC firms and leveraged nearly $200M in non-dilutive government funding.

This funding led to the generation of 220 patents for technologies such as autonomy, UAVs, optical analysis, SATCOM, Energy Efficiency, and Ad Hoc Network Protocols. When Tradespace analyzed Patent Quality – a proprietary metric based on age, citation network, and other data – we found that the quality of patents filed by these nine companies was higher than 75% of all other aerospace technology patents.

The massive investments these companies received may not have resulted in sustainable business models, but they certainly did lead to the generation of high-quality, differentiated IP in critical technology areas.

Potential For IP Impact

Looking at these nine companies, numerous examples emerge of IP driving significant value for acquirers. Lockheed Martin acquired a number of patents and IP from Vector Launch, which included a virtualized sensor interface that supports their modular sensor offerings for UAVs and satellites. When Airware entered into ABC, Skydio acquired much of their unmanned inspection IP, which formed the basis of the UAV OEM’s Energy & Utility solution.

As impactful as these success stories are, they also highlight the missed opportunity to commercialize IP from hundreds of other defunct aerospace start-ups. Of the ~300 defunct startups Tradespace analyzed, only 20 successfully transferred IP to another owner. This translates to over 500 patents that were allowed to expire because there was no efficient way for the IP owners to connect with the right commercialization partners. Not only is this a lost opportunity for IP generators to continue the development of their technology, but it creates a tremendous drag on the US innovation economy.

How To put Aerospace IP Back to Work

Ultimately, solving this problem at scale requires the creation of an efficient, liquid marketplace for IP and technology. As long as IP deals are done through closed processes or ad hoc outreach by founders, inefficiency will rule the day. Conversely, an IP marketplace that connects companies looking for new technology with IP generators and provides tools to analyze, value, and commercialize IP portfolios unlocks a tremendous amount of trapped value. Building a successful marketplace; however, poses a number of challenges:

• Industry Agnostic: Although this article focuses on aerospace, the emergence of cross-cutting technologies means that innovation developed for one industry drives disruption in others. The high-quality energy storage and networking protocols developed by Vector Launch and Airware are prime examples of this. Any effective marketplace must be industry-agnostic and provide tools for IP owners to identify use-cases in new markets.
• Government Support: If government customers want to maximize the returns on their non-dilutive investments, they should develop content and programming to help funding recipients access and benefit from IP commercialization markets. Furthermore, the US Government owns nearly 20,000 patents, only 5% of which have been successfully commercialized. By participating in a single marketplace instead of encouraging each national lab to build their own technology transfer system, the US Government could radically accelerate the development of a liquid IP marketplace.
• Corporate Buy-In: Without transactions, the value of a marketplace is inherently limited. Any functioning IP marketplace will require buy-in from corporate development and research executives at hundreds of companies across multiple industries. Building this network and and helping companies develop the internal processes to effectively bring in IP through licensing acquisition, or collaboration is key.
  

  Conclusion

As the aerospace start-up ecosystem continues to grow, high-profile failures will only proliferate. Far from being a sign of inefficiency, this shows that founders and investors are taking risks on moonshot ideas. However; there is an enormous, missed opportunity to better utilize the IP generated by these failures to catalyze future innovation and economic growth. Creating the requisite visibility and liquidity in IP markets will be key to capturing this value and driving long-term growth in the aerospace industry.

Tradespace has built a global IP marketplace connecting leading innovators across universities, government labs, start-ups, and large companies to commercialize IP. The Tradespace OneIP platform enables both IP generators and buyers to actively manage their IP portfolios, predict IP value, identify partners, and execute meaningful IP transactions. The platform covers every technology area and provides exclusive access to available IP from Fortune 500 Companies, Leading Aerospace & Defense Primes, DoD and DOE labs, Start-Ups, and top research universities.

Interested in buying, selling, or licensing your IP? Click Here to Learn More