'Patent Demands & Startup Companies: The View from the Venture Capital Community' (UC Hastings Research Paper No. 75) by Robin Feldman
presents
a study of patent demands against venture-backed startups, conducted through members of the National Venture Capital Association and their portfolio companies. The results of surveying 200 venture capitalists and their portfolio companies provide strong indications of the impact that patent demands are having on the venture-backed community. Both the companies and the venture capitalists overwhelming believe that patent demands have a negative impact on the venture-backed community, with all or most of those assertions coming from entities whose core activity involves licensing or litigating patents. These impacts are described in terms of the specific costs expended by the companies and by the distraction to management, engineers, and other employees. Most important, participants described the human toll that patent demands have had on entrepreneurs. In addition, when making funding decisions, the vast majority of venture capitalists do not consider the potential for selling to assertion entities if the company fails. On the flip side, 100% of venture capitalists indicated that if a company had an existing patent demand against it, it could potentially be a major deterrent in deciding whether to invest.
Finally, one venture capitalist provided an excellent summary of the impact of patent demands on venture-backed companies. When companies spend money trying to protect their intellectual property position, they are not expanding; and when companies spend time thinking about patent demands, they are not inventing.
Feldman reports -
- 70% of the venture capitalists have portfolio companies that have received
patent demands; and roughly one in three startup companies report
receiving patent demands;
- Although 70% of the venture capitalists have experienced demands in the
information technology sector, 30% also have experienced demands in the
life science sector;
- The vast majority of patent demands against the startup companies come
from entities that license or litigate patents as their core activity. (59% of the venture capitalists and 66% of the startup companies reported that all or most came demands come from such entities);
- 74% of the venture capitalists and 58% of the startup companies report that patent demands had a significant impact on a company;
- According to the vast majority of both the venture capitalists and the startup companies, the costs of preparing for and defending against patent demands exceed $50,000 per company, with a number of companies reporting costs in the millions of dollars.
- 64% of venture capitalists disagree with the statement, “as a venture capitalist, I consider the potential for selling patents to patent assertion entities if the companies fail.”
- When asked whether they see patent assertion as positive for startups and the startup community, 72% of venture capitalists disagree.
- 100% of venture capitalists indicate that if a company had an existing patent demand against it, it could potentially be a major deterrent in deciding whether to invest. Roughly half indicate that it would simply be a major deterrent on its face, and the other half indicate
