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