Do Startups Need Patents? Rigorous Study Presents Real Data on Startup Company Patenting Behavior

beautiful dataAs an IP Strategy advisor, I am often asked by the leadership of startup companies what the return on investment is from patenting.  While I can confidently provide recommendations as an expert, my opinions are anecdotal based on my almost 20 years experience as an IP professional.  Certainly, I have advised a number of startup companies over the years for which comprehensive patent coverage was critical to financial and market success.  On the other hand, I have advised a much larger number of startup companies over the years where patenting made little difference to their fortunes.

The subjective nature of IP advice holds for other patent professionals.  Our respective years of experience results in tacit knowledge that becomes “expertise.”   This expertise guides clients to us for advice and allows them to trust in our counsel.   Missing from my knowledge base–as well as that of my IP attorney peers–have been data-driven assessments of whether, when and to what extent patents really matter to start up success.

Similarly, startup companies are typically inundated with the advice of peers, mentors and investors about whether patenting is recommended in a particular business situation.  Such non-specialist expertise is even more fraught with subjectivity because the advice will be based on a smaller number of anecdotes.  I frequently encounter startup company advisors who are absolutely certain in their opinions about the value of patents to startups that do not involve any context or analysis of the company’s business model but are instead grounded in unchangeable beliefs based on the advisor’s personal experience.  Unfortunately, startup companies seeking the counsel of these peers, mentors and investors often do not possess the ability to gauge the subjective nature of the advice and end up incorporating the same erroneous belief systems about patenting to not only the detriment of their companies, but also the rest of the startup community as the errors become embedded in the local ecosystem.

The subjective nature of patenting advice for startups has long bothered me, but without actual data a solution has been elusive. I continue to provide guidance to startups based on my extensive professional experience, albeit also with letting my clients know that their results may vary from those of my previous clients.  While this honesty is appreciated, many have expressed disappointment that given the financial and time investment required to obtain strong patent protection, the return on investment remains uncertain.

I am glad to say that I have now identified a detailed and data-driven study of how patenting influences start up companies in the marketplace, with competitors and in obtaining outside investment.

While a few years old, I recently discovered this article from lead author Stuart Graham, a Georgia Tech Business School professor who from 2010-2013 served as Chief Economist of the US Patent Office.  Entitled “High Technology Entrepreneurs and the Patent System of the 2008 Berkeley Patent Survey” (published in the Berkeley Technology Law Journal and available in this link) this piece is clearly relevant reading for start up company leadership teams seeking to gain understandings of why and how patent protection might be relevant to their success in obtaining investment and in the marketplace.  IP experts and other startup advisors should also be interested in reviewing the data and conclusions in this rigorous study to gain confidence that the advice they give is, in fact, backed up by data from other startup companies.

Admittedly, the data used in this article is a several years old and much transformation in the start up and financial communities has occurred since the article was published in 2009.  Nonetheless, I find this data to provide at least strongly directional data-driven insights into the patenting activities of start ups.  Since the number of patents issued annually continues to increase markedly year over year, we can assume that the number of patents obtained by startups has at least stayed constant in recent years.  I plan on using this data to advise my startup clients on the relevance of patents to their business strategies.

Here are some highlights of the article that I found interesting:

  • Patents were found to be highly relevant to obtaining venture-backed funding at biotechnology and IT hardware-based startup companies.  It may also be surprising that this study also demonstrated that patent protection was also found to be relevant to software-based startups gaining venture-backing.
  • Patents were also found to be more relevant to obtaining Angel and “friends and family” funding than previously thought.
  • A large share of early-stage companies, especially in the software industry,
    avoid the patent system altogether. At the same time, the study found startups
    hold more patents and patent applications than previously
    reported.
  • Usefulness of patents to startup entrepreneurs is driven by industry characteristics. Patents help many startups compete in the market with their technology, but this is much more pronounced among biotechnology and hardware companies (including both medical hardware, such as surgical devices, and IT hardware, such as computers and semiconductors). Conversely, patents are much less important as a means by which most software firms—the majority of which hold no patents –capture competitive advantage from their innovations.
  • When electing to patent, startup executives tend to be most influenced by a desire to prevent knock-offs and than by “reputational” and financial motives, including a successful exit event such as being acquired or going public.
  • Surprisingly (at least to me) startup innovators do not appear to reference the patent literature during the pre-development or development processes.  They do look at the patent literature after launching their products or when considering patenting themselves.
  • Licensing of others’ patents also happens, and while startups are generally receiving information or know-how in the transaction, they are also commonly trying to settle a controversy—and in some cases they take patent licenses solely to avoid a lawsuit.
  • Startups tend to spend considerably more on obtaining each patent than what was previously reported.  Specifically, the 2009-reported patent spending for start ups was $38,000 for each patent, which exceeded the $10,000 to $30,000 range for other patent recipients.  One startup CEO posited that the extra cost could be due to a number of factors including the relative importance of a start up’s patent matters to the business, the likelihood that a startup would use outside counsel vs. internal legal resources and the lesser ability of a startup business team to appropriately manage the work of outside counsel.

There are many more interesting conclusions in this article that will no doubt enhance the knowledge of startup business teams of the value of patents to the success of their companies.  In short, the data set out in this article make it clear that “your mileage may vary” when it comes to patenting, but there are real reasons to patent and to not patent that can be gleaned from the information presented.

2 thoughts on “Do Startups Need Patents? Rigorous Study Presents Real Data on Startup Company Patenting Behavior

  1. Good post Jackie. With the huge increase in SW patents I think it would be really interesting to find a “part 2″ version of this with IT specific updated data. I think for me 75% of the questions I get from startups is “Given the fast pace of software evolution in my market against the slow pace of IP prosecution, why should I patent my software, and how will it practically help my business?”

  2. In my experience, startup innovators do not investigate prior art for two reasons:

    First, there is a widespread perception that it’s not worthwhile, because relevant information is not easily found, or is sufficiently obfuscated by the patent language so as to be technically useless. Moreover, it should be noted that the “bleeding edge” in e.g. software technology may be around 12-18 months, so even a just-published patent application would also be considered “old news” by some.

    (One corollary to that first point is the widespread belief that, should a NPE assert a patent against the startup, that patent would not have not been findable beforehand, and/or would have not obviously read on the technology at issue; thus, why bother looking?)

    Second, it is very likely that any legal advice the startup innovators may have received from counsel probably included prohibiting technical staff from being “tainted” by exposure to patent literature. In particular, the “double penalties from prior knowledge” litigation fear is still quite common.

    I’ve been through multiple startups, have worked on the buy side of large-company M&A, and am now a registered patent agent, so I’ve heard these tales from all sides.

    - milan

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