Are patent demands a significant problem for venture-backed startups? Does the possibility of selling patents influence the likelihood of investment of venture capitalists (VCs) and strategic investors? Would VCs and strategic investors be deterred by patent demands against a startup they are considering? What is the effect of patent demands on the development of venture-backed startups?
To address these questions and establish the impact of patent demands on both startups and venture investors, R. Feldman, a professor of law and director of the Institute for Innovation Law at the University of California-Hastings, conducted a study through the members of the National Venture Capital Association and their portfolio companies.
The results are sticking: 70% of venture investors have portfolio companies that have received patent demands in the information technology sector, while 30% also have experienced patent demands in IPR-intensive industry such as life science. Perhaps even more interestingly, the vast majority of patent demands against the venture-backed startups come from entities that license or litigate patent as their core activities.
The study reports that for the majority of both the venture capitalists and entrepreneurs patent demands had a significant impact on the startup: the economic costs of preparing for and defending against patent demands exceed $50,000 per startup, with a number of startups reporting costs in the millions of dollars.
The effect of patent demands is even more significant if we take into consideration that the absolute majority of investors would not consider the potential selling of patents to patent assertion entities and that more than two-thirds on VCs and strategic investors do not see patent assertion as positive for startups and, more broadly, the startup community. A 100% of venture investors reported in the study that if a company had an existing patent demand against it, it could potentially be a major deterrent in deciding whether to invest
The impact of patent demands on the venture capital and the startup community should not be underestimated. Indeed, as observed by the author: “the cumulative impact of patent assertion in its various forms is staggering. Although difficult to measure with any accuracy, scholars have estimated that patent assertion by monetisers cost US companies $29bn in 2011 alone. These estimates suggest that only 20% of that cost flows back to innovation, either to outside inventors or to any internal research and development by monetisers.” The recent trend of modern patent monetisation, i.e. the drastic increase in the percentage of patent lawsuits filed by “those who do not make products”, is likely to further impact on the dynamics of entrepreneurial innovation. In fact, as a venture investor reported in the study: “When companies spend money trying to protect their intellectual property position, they are not expanding; and when companies spend time thinking about patent demands, they are not inventing.”
Reference
Feldman, R (2013) Patent demands and startup companies: The view from the venture capital community. UC Hastings research paper No 75
Boris Battistini is a senior research fellow at the Swiss Federal Institute of Technology (ETH Zürich) and an associate at Metellus, a venture capital firm based in Zürich, London and San Diego. Email: boris.battistini@metellus.ch.
Martin Haemmig is an adjunct professor at CeTIM at UniBW Munich and Leiden University. Email: martinhaemmig@cetim.org
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