Patent Demands & Startup Companies: The View from the Venture Capital Community

Abstract

With the high level of interest in patent monetization and its effects on US companies, data on the topic is increasingly important. This study examines one aspect of the topic, focusing on the effects of the rising patent monetization market on startup companies. The study provides one of the rare glimpses of monetization activity outside of lawsuits. It provides both quantitative and qualitative information on the startup community’s experience with and perspectives on patent demands. Among other issues, the study tests a narrative that has circulated suggesting that patent monetization creates for venture capital investment. According to the theory, venture capitalists will be attracted to the possibility of monetizing a startup company’s patents if the company fails, and this attraction spurs investment. The study tests that narrative through the eyes of the venture-backed community itself. Results include the following: When making funding decisions, the vast majority of venture capitalists do not consider the potential for selling to assertion entities if the company fails. Thus, patent monetization does not appear to provide investment incentives. In addition, both the companies and the venture capitalists overwhelming believe that patent demands are having a negative impact on the startup community, and all or most of the demands they experience are coming from those whose core activity involves licensing or litigating patents. The effects of these demands are described in terms including the specific costs expended by the companies and the distraction to management, engineers, and other employees. Most important, participants detail the human toll that patent demands have had on entrepreneurs.