Who Owns and Controls What Technology?

In today’s fast-paced business environment, leveraging third-party technologies through APIs and interfaces has become a popular strategy for rapid market entry. This approach is particularly evident in the current AI application boom, allowing businesses to innovate quickly with minimal capital and technical expertise. However, this convenience comes with significant considerations around intellectual property, control, and long-term business viability and value.

IP Ownership: Clear as Mud?

Building services successfully on third-party technologies requires a keen understanding of who owns what intellectual property but this is often complex. Typically, the technology provider retains ownership of the core IP, with specific rights determined by contractual agreements between parties.

The situation becomes particularly complicated with AI-driven services, where ongoing litigation regarding ownership of training data and AI outputs creates additional uncertainty. These legal questions may resolve differently across international jurisdictions, which adds another layer of complexity.

While companies certainly create their own IP when developing new services using third-party technology, the boundaries can be difficult to define, especially when AI systems autonomously generate content. Clarity about ownership rights and licensing terms is essential for business planning and risk management.

Control Dynamics: Independence vs Innovation Speed

Using established technology platforms undoubtedly accelerates innovation, but relying on third-party controlled elements introduces significant business risks. Companies building on proprietary systems like closed-source AI models may face:

• Unpredictable pricing changes

• Functionality modifications

• Performance fluctuations

• Availability issues

These factors can dramatically impact service scalability, operational costs, and your ability to differentiate in the market. It’s often challenging to forecast how API fees will evolve as your business grows, potentially squeezing profit margins in unexpected ways.

This reality highlights the importance of including comprehensive exit clauses in service agreements and developing contingency plans that allow for workload migration if necessary. Unstable dependencies can undermine even the most promising business models.

Investability: Identifying Your True Assets

Investors carefully examine core IP to evaluate competitive advantages, potential legal risks, and fundamental business value. Services built primarily on generic tools often struggle to create defensible differentiation, leading to pricing pressure and valuation challenges. Of course these firms also have fundamental external vulnerabilities and dependencies. 

Many investors consider a lack of proprietary IP a significant barrier to investment. By contrast, businesses leveraging unique datasets or proprietary methodologies can command premium pricing and higher valuations.

When seeking investment, entrepreneurs should honestly address two critical questions:

• What, actually, do we own that creates customer value?

• How could our business continue if third-party services became unavailable?

Exit Strategies in a World of Fragmented IP

Successful business exits depend heavily on the value, defensibility, and uniqueness of the business assets, particularly when external dependencies exist. Companies with limited, fragmented or, worse, uncertain IP typically face reduced valuations due to weaker market positioning and vulnerability to competitor substitution.

IP due diligence is a central component of exit preparations. Businesses lacking clear documentation of their IP ownership—whether code, data, or algorithms—often fail to meet this scrutiny, potentially derailing deals or significantly reducing acquisition values.

Building a Resilient Technology Business

To create a sustainable business that leverages third-party technologies:

1. Clearly identify and document your IP assets: Maintain comprehensive records of every proprietary elements, including code, data, contributors and methodologies. Always secure IP when it’s been developed by internal people or external contractors.

2. Carefully review all technology provider agreements: Understand licensing terms, usage restrictions, and exit provisions before building critical business functions on external platforms.

3. Develop contingency plans for technology migration: Ensure your business can pivot if third-party services change unfavourably or become unavailable. Redundancy is essential.

4. Focus on creating unique value beyond the underlying technology: Build proprietary datasets, specialized algorithms, or unique implementation approaches that differentiate your offering, and make sure that you own them.

5. Consider a hybrid approach: Where core business functions use proprietary technology while leveraging third-party services tactically for non-critical components.

By thoughtfully addressing these considerations, entrepreneurs can build services that not only delight customers but also attract investors and potential acquirers, creating sustainable value in an increasingly interconnected technology landscape.