Patent Strategies of Technology Startups: An Empirical Study

For the lazy - Conclusions:

A patent strategy can indeed affect a tech startup company’s growth. The data indicates that companies that have patents in earlier rounds (especially before obtaining funding, or in Rounds 1 and 2) are able to obtain more total funding. This occurs in all markets, but is especially so in Biotechnology/Agriculture, IT/Hardware and Medical devices, in which the largest patenting activity tends to happen in the beginning of the company’s life. This suggests that patenting early may be more important for start-ups than what some views in venture capital may predict.

Surprisingly, most start-ups that patented filed their first application before even receiving any reported funding. A possible explanation is that these companies were aware of the potential signaling value of the patents, and that they strategically filed their patents early, despite the relatively high burden of patenting costs for an early-stage venture.

Also surprisingly, companies located in California patented more than companies located elsewhere. The study supports the idea that California provides unique conditions for start-up growth, and points out to the patenting activity in the state, a factor that is not commonly discussed in the startup environment.

Companies that were venture-backed also filed more patents that those which did not receive venture capital in any stage. This is consistent with previous studies, and reaffirms a strong connection between patents and venture capital.

Moreover, the results indicated that the number of patents (and not merely the fact that the company had patents) was highly correlated with total funding. The effect of each additional patent for companies in the dataset was 530,000 USD more in funding per additional patent application that the company had.

Finally, the analysis also supported the idea that patents account for only for a fraction of start-up success. While the contribution of patents to startup funding seems to be positive, what is the importance of a patent in comparison to other factors? The results back the position that while patents have a positive effect on funding, their contribution to start-up growth is somewhat limited: one factor among many of those that influence investor’s decisions. Patents can only explain increased funding in a limited number of cases, around 10% to 15% of them.

So are we in a position to solve the “patent dilemma”? While the study alone may not solve the dilemma for all companies, it serves to shed an empirical light on it, which is uniquely useful to entrepreneurs, lawyers and the startup ecosystem. Patents may not be a fundamental requirement to receive funding or be acquired, but they prove to be an advantageous tool for early-stage signaling of startup’s value and potential.