Author(s)
Ronald J. Mann and Thomas W. Sager
Source
University of Texas Law, Law and Econ Research Paper No. 57, 2007; Research Policy, Vol. 36, No. 2, pp. 193-208, 2007
Summary
The authors argue that patents are a relevant consideration to determine software start-up success in venture capital.
Policy Relevance
A quantitative analysis of the data reveals that having a patent at the time of initial investment is practically irrelevant to success. However, acquiring patents is correlated to other success factors in venture capital, and yet the rates of patenting vary substantially from sector to sector in software.
Main Points
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Having a patent at the initial stage of investment has little value in predicting the success of a start-up going through the venture capital cycle.
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There is not a lot of data regarding the patenting practices of software start-ups as it relates to their success in obtaining venture capital financing.
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The data indicate that patents are more useful to software firms that sell to designers and developers of software than they are to firms that sell software to individuals or businesses to use for providing service functions.
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The data indicate that there is a greater correlation for success in differentiating firms by whether they had no patent or at least one patent than by differentiating firms with multiple patents from firms with one patent.
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It is possible that firms tend to get patents not so much to increase the value of their firm for investors, but rather to protect the contributions the firm has made from being appropriated and used by the investors.
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The patenting data is difficult to separate from other data factors that are also indicative of start-up success such as: the number of rounds of investment by venture capitalists, the total investment amount, the longevity of the start-up, the receipt of late-stage financing, and the exit status of the firm.
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Patenting in the software start-up industry is at the least an important component of a well-run organization and is consequently not a random occurrence in the industry. It may or may not provide an overall welfare benefit, but it is a factor in determining success.