“Strong ... to Quite Strong" – The Positive Impact of Patent Grants for Tech Startups

“I’d say strong ... to quite strong.”
-- Greg Focker, on the performance of
his investment portfolio.

If you’re running a tech startup and filing patent applications for your technology, consider the analysis in a recent paper (full cite below) called “The Bright Side of Patents” by Joan Farre-Mensa, et al.:

Our analysis shows that patent approvals have a substantial and long-lasting impact on startups: firms whose first patent application is approved create more jobs, enjoy faster sales growth, innovate more, and are more likely to go public or be acquired.

According to the authors’ analysis, startups that had their first patent approved by the US patent office saw 36% more employment growth and 51% more sales growth over five years, compared to startups whose patent applications were rejected by the US patent office. The authors also report a higher percentage of IPOs and acquisitions among startups whose patent applications were approved.

The conclusions reported by the study come from the authors’ statistical analysis of U.S. patent office data for over 45,000 patent applications and public business records of the companies that filed them.

Do Patents Catalyze Growth?

After a detailed look at the data summarized above, the paper goes on to explore how patent success leads to business success for startups. And the answer, they say, is that patents open the door to funding opportunities. For instance, the authors state that

Successful [patent] applicants tend to raise VC funding quite quickly: the median successful applicant that raises VC funding during the five-year window does so a mere 10 months after [the patent examiner’s first substantive ruling on the application].

Why does a patent improve opportunities for VC funding? The authors don’t suggest that funding is driven by the intrinsic value of the patent, but rather, by patents “alleviating information frictions” in the capital market. For example, they find that

[Patents] alleviate investors’ concerns regarding a startup’s ability to monetize its invention; they reduce information asymmetry by making it easier for entrepreneurs to disclose details of their invention to investors without fear of expropriation; they allow these details to be communicated more credibly; and they help startups signal their quality to investors.

In other words, they found that patents provide information that facilitates investment, which leads to business growth.

Finally, the authors report that patent success has the most pronounced impact on startups working in the fields of electronics, computers and communications (which they call “IT” industries). In these industries, they report, a successful patent increases a startup’s probability of raising VC funds in the next three years by 4.2 percent (p=0.010). The authors explain:

A favorable decision on an IT startup’s first patent application can provide a particularly valuable early signal about the quality of its technology and its founders, ... In addition, recent evidence by Galasso and Schankerman (2015) indicates that patents are particularly effective in blocking downstream innovation and imitation in the IT sector.

To summarize, the study provides lots of data suggesting that getting a patent is a good thing for a tech startup, and some analysis of how a patent approval might lead to business growth, particularly for startups developing electronics, computers and communications technologies.

What’s Missing?

But before you take this to the bank, consider a few caveats.

First, the authors of the paper state that the goal of their study was to investigate the “bright side of patents,” in contrast the supposedly well-documented “dark side of patents.” The paper doesn’t suggest that utilizing the patent system has an overall net-positive effect on startups, nor does the paper weight the benefits of patents against the cost of getting them.

For example, what did the startups spend on their patent approval, and would they have done better to spend that money on other types of assets? The paper doesn’t attempt to answer this question, but it’s definitely a question that startups will need to ask themselves when they’re considering how to allocate their limited funds.

Second, the study compares two groups of startups who both filed patent applications – one group of startups whose patent applications were approved, versus another group of startups whose patent applications were not approved. In other words, the study shows the value of successful patent applications versus unsuccessful ones.

The paper doesn’t look at startups who didn’t file patent applications at all. So the paper’s summary should be read with an emphasis on approvals: “patent approvals help startups create jobs, grow their sales, innovate, and reward their investors.” Therefore, if you’re a tech startup who’s planning to file a patent application, this paper may shed some light on the impact of doing it well versus doing it poorly.

Conclusion

If you’re a tech startup, and you’ve decided to pursue patent protection for your technology, find out what you can do to give yourself the best chance of success. Don’t just file a patent application and think, “mission accomplished.” Putting in the additional time, effort and funding to improve the likelihood of have your patent application approved and issued as a patent could have a significant positive impact on your company.

This article and a link to the paper cited above (“The Bright Side of Patents”) are available on my firm’s website: henrypatentfirm.com.

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Michael Henry is a patent attorney who specializes in creating comprehensive, growth-oriented patent strategies for early-stage companies developing emerging technologies. Michael has drafted hundreds of pending and issued patents covering a broad range of technologies. He routinely works with high-tech startups throughout the U.S. and Canada.

Citation: Farre-Mensa, Joan and Hegde, Deepak and Ljungqvist, Alexander, The Bright Side of Patents (January 26, 2016). USPTO Economic Working Paper No. 2015-5. Available at SSRN: https://ssrn.com/abstract=2704028 or https://dx.doi.org/10.2139/ssrn.2704028