Patents and the Survival of Internet-related IPOs

We examine the effect of patenting on the survival prospects of 356 internet-related firms that IPO'd at the height of the stock market bubble of the late 1990s. By March 2005, nearly 2/3 of these firms had delisted from the NASDAQ exchange. Although changes in the legal environment in the US in the 1990s made it much easier to obtain patents on software and, ultimately, on business methods, less than half of the firms in this sample obtained, or attempted to obtain, patents. For those that did, we hypothesize that patents conferred competitive advantages that translate into higher probability of survival, though they may also simply be a signal of firm quality. Controlling for age, venture-capital backing, financial characteristics, and stock market conditions, patenting is positively associated with survival. Quite different processes appear to govern exit via acquisition compared to exit via delisting from the exchange due to business failure. Firms that applied for more patents were less likely to be acquired, though obtaining unusually highly cited patents may make them more attractive acquisition target. These findings do not hold for business method patents, which do not appear to confer a survival advantage.

Patenting by Entrepreneurs: An Empirical Study

[T]he Ewing Marion Kauffman Foundation--an organization that studies and promotes entrepreneurship in the United States--funded an effort at the University of California, Berkeley School of Law, to undertake the first comprehensive survey of the relationship between patenting and entrepreneurship in the United States. The authors, along with other investigators, administered the survey in 2008 to approximately 15,000 startup and early-stage companies in the biotechnology, medical device, information technology (IT) hardware, and software and Internet sectors. A portion of the survey examined why entrepreneurs, startups, and early-stage companies do (and do not) seek patents. This Article reports and analyzes results from that survey, showing that several widespread beliefs about startup firm patenting practices are very likely wrong. In brief, like the surveys of large firms, our respondents that hold patents report that the main motivation for patenting is to prevent others from copying their products and services. This result holds--and is statistically valid--across a variety of company characteristics, including firm age, revenues, industry, and patent portfolio size. Because we find that many young technology companies are holding patents, our results offer evidence that is somewhat at odds with frequently cited anecdotal reports that startups, especially in the software and Internet industries, generally do not use patents to protect against the erosion of their profits. We offer one important caveat, however. A substantial fraction of young firms are apparently opting out of the patent system altogether, and this observation is particularly true of companies in the software and Internet sectors. That said, our findings suggest that patent holding, and the strategic use of patents, is more widespread--even among young software and Internet companies--than commentators have previously reported. Additionally, we find--consistent with anecdotal reports--that many startups rely heavily on patents as signals to the market to improve their chances of raising financing, being acquired, and going public. Our results greatly contrast with previous large-firm studies, however, which showed relatively little reliance on patents for these kinds of signaling. Indeed, our results show that as the patent-holding firms in our sample become older and larger, they tend to rely less on patents as signals. This finding is also important because it lends some empirical support--which had been lacking--for the alternative signaling theories of patents, especially for younger startups. Like large firms, our respondents that hold patents report engaging in strategic patenting to help defend against patent infringement suits and to increase negotiating power, possibly for cross-licensing with other firms. Recognizing that startups--and not just those in the biotechnology field--find the strategic use of patents important is a novel finding. Nonetheless, we show that these young technology companies are especially sensitive to the costs of acquiring and enforcing patents, which--at nearly $40,000 per patent--are roughly double the reported average for all patentees. Thus, even though startup firms are well aware of the strategic uses of patents, resource constraints may mean that fewer of them can engage in these strategies as compared with large incumbents. To the extent that strategic patenting is positively related to firm success and survival, we highlight this finding as a policy concern deserving of further study, especially in industries--like electronics--with large numbers of incumbents engaging in similar strategic patenting

Patenting by Entrepreneurs: An Empirical Study

[T]he Ewing Marion Kauffman Foundation--an organization that studies and promotes entrepreneurship in the United States--funded an effort at the University of California, Berkeley School of Law, to undertake the first comprehensive survey of the relationship between patenting and entrepreneurship in the United States. The authors, along with other investigators, administered the survey in 2008 to approximately 15,000 startup and early-stage companies in the biotechnology, medical device, information technology (IT) hardware, and software and Internet sectors. A portion of the survey examined why entrepreneurs, startups, and early-stage companies do (and do not) seek patents. This Article reports and analyzes results from that survey, showing that several widespread beliefs about startup firm patenting practices are very likely wrong. In brief, like the surveys of large firms, our respondents that hold patents report that the main motivation for patenting is to prevent others from copying their products and services. This result holds--and is statistically valid--across a variety of company characteristics, including firm age, revenues, industry, and patent portfolio size. Because we find that many young technology companies are holding patents, our results offer evidence that is somewhat at odds with frequently cited anecdotal reports that startups, especially in the software and Internet industries, generally do not use patents to protect against the erosion of their profits. We offer one important caveat, however. A substantial fraction of young firms are apparently opting out of the patent system altogether, and this observation is particularly true of companies in the software and Internet sectors. That said, our findings suggest that patent holding, and the strategic use of patents, is more widespread--even among young software and Internet companies--than commentators have previously reported. Additionally, we find--consistent with anecdotal reports--that many startups rely heavily on patents as signals to the market to improve their chances of raising financing, being acquired, and going public. Our results greatly contrast with previous large-firm studies, however, which showed relatively little reliance on patents for these kinds of signaling. Indeed, our results show that as the patent-holding firms in our sample become older and larger, they tend to rely less on patents as signals. This finding is also important because it lends some empirical support--which had been lacking--for the alternative signaling theories of patents, especially for younger startups. Like large firms, our respondents that hold patents report engaging in strategic patenting to help defend against patent infringement suits and to increase negotiating power, possibly for cross-licensing with other firms. Recognizing that startups--and not just those in the biotechnology field--find the strategic use of patents important is a novel finding. Nonetheless, we show that these young technology companies are especially sensitive to the costs of acquiring and enforcing patents, which--at nearly $40,000 per patent--are roughly double the reported average for all patentees. Thus, even though startup firms are well aware of the strategic uses of patents, resource constraints may mean that fewer of them can engage in these strategies as compared with large incumbents. To the extent that strategic patenting is positively related to firm success and survival, we highlight this finding as a policy concern deserving of further study, especially in industries--like electronics--with large numbers of incumbents engaging in similar strategic patenting

Patent collateral, investor commitment, and the market for venture lending

This paper investigates the market for lending to technology startups (i.e., venture lending) and examines two mechanisms that may facilitate trade within it: (1) the ‘salability’ of patent collateral; and (2) the credible commitment of existing equity investors. We find that intensified trading in the secondary patent market is strongly related to the annual rate of startup lending, particularly for startups with more redeployable patent assets. Moreover, we show that the credibility of venture capitalist commitments to reinvest in their startups’ next round of financing can be critical for startup debt provision. Utilizing the crash of 2000 as a severe and unexpected capital supply shock for VCs, we show that lenders continue to finance startups with recently funded investors better able to credibly commit to refinance their portfolio companies, but withdraw from otherwise-promising projects that may have needed their funds the most. The findings are consistent with predictions of incomplete contracting and financial intermediation theory.Accepted manuscrip

Physicality in Australian patent law

It is generally understood that the patent system exists to encourage the conception and disclosure of new and useful inventions embodied in machines and other physical devices, along with new methods that physically transform matter from one state to another. What is not well understood is whether, and to what extent, the patent system is to encourage and protect the conception and disclosure of inventions that are non-physical methods – namely those that do not result in a physical transformation of matter. This issue was considered in Grant v Commissioner of Patents. In that case the Full Court of the Federal Court of Australia held that an invention must involve a physical effect or transformation to be patentable subject matter. In doing so, it introduced a physicality requirement into Australian law. What this article seeks to establish is whether the court’s decision is consistent with the case law on point. It does so by examining the key common law cases that followed the High Court’s watershed decision in National Research Development Corporation v Commissioner of Patents, the undisputed authoritative statement of principle in regard to the patentable subject matter standard in Australia. This is done with a view to determining whether there is anything in those cases that supports the view that the Australian patentable subject matter test contains a physicality requirement

Working Paper, Rents and Inefficiency in the Patent and Copyright System: Is There a Better Route?

This paper analyzes the evidence for rents due to the patent and copyright systems for financing innovation and creative work. It notes research suggesting that in both the patent and copyright system, the costs in the form of monopoly pricing and rent-seeking activity outweigh the benefits. It then proposes alternatives to the patent and copyright system.The Kauffman Foundation helped support this work

A study of patent thickets

Report analysing whether entry of UK enterprises into patenting in a technology area is affected by patent thickets in the technology area