My old law school friend Jason Mendelson, the Managing Director of the VC fund the Foundry Group, takes issue with a recent claim that “76 percent of startup managers report that venture capital investors consider patents when making funding decisions.”
In his blog Mendelson’sMusings, Jason refutes this stat and discusses how it has been misreported as indicating that VC’s care about patents. Jason explains that the real report is only about what entrepreneurs think that VC’s think about patents — as if entrepreneurs really know what VCs think. Apparently, the report doesn’t have any stats about what VC’s actually think about patents.
From his perspective as a VC, what Jason thinks about software patents is that “the vast majority of the time, they are a deadweight loss on innovation and our economy.”
From my perspective from defending companies against trolls with amazingly absurd patents, I agree that they can be terrible for innovation and defensive litigation costs can be a drag on a company’s finances. I think there was a decade when the PTO really blew it and allowed some unsubstantiated, ridiculous software patents.
In my career as an IP attorney, I’ve also seen where software patents have helped a startup negotiate better deals and gain leverage with a mega-company. I’ve also had clients who successfully licensed their patents to the wider industry and sold their patents to a mega-company for millions. Some patents can add tremendous value and some aren’t worth the cost of drafting and filing them.
I look forward to Jason’s future discussion about when he thinks software patents can add value to a company. Jason’s insight is very valuable to startups who wish to eventually seek VC funding.
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The key judgement for both the start-up team and their investor or potential investor, is whether the Company is able to create any competitive advantage that could be maintained as a barrier to market entry for competitors. Each case should be examined on a unique basis. Many of the best ideas are relatively simple, and appear obvious to everyone only after someone finds a way to describe the idea. Occasionally software patents have created substantial value. It may be that rather than having to ‘defend’ the invention against competitors in the market space, that a patent draws in partners who see the value in co-operating rather than fighting.
For a start-up, the key value in describing the invention and filing patent may not be in the straight protection value (as viewed by the VC). More likely is that the start-up will benefit from the patent infringement analysis that helps the team to understand their competitive landscape better. It also helps to define for the start-up what it is about their capability and invention that makes them unique.
I think there are multiple ways that a patent can add value to a startup. Gavin has described a few. I agree that the process of drafting a patent can give a company clarity but it’s an expensive way to focus. A good business coach would be much cheaper.
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