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— Judgment Call —
Two Boston University professors completed an economic study that analyzed the relationship between ventures holding patents in 27 different software markets and the financing of the ventures in those markets. The study concluded that "firms that have higher numbers of patents and patent applications pending are more likely to receive funding from outside investors, and more likely to subsequently 'exit' from the entrepreneurial phase through IPO or acquisition." This positive correlation between the number of pending patent applications and receipt of funding provides foundation for the study's view that "outside investors appear to be focused on these firms' 'pipeline' of IP assets under development."
Consequently, startup software firms should weigh carefully this immediate benefit in determining whether to seek patent protection. Often the costs of seeking patents to protect proprietary technologies are perceived as outweighing the benefits. Particularly for startups, time and money may be limited resources viewed as better spent on more immediate needs, such as product development, marketing, rent and payroll. Further, some may perceive filing patent applications as providing only tenuous or distant benefits. As a result, startups may delay deploying an intellectual property protection strategy. Delaying may be a mistake, however, because immediate and significant benefits may accrue to startup software companies as an effect of filing patent applications. While the study identifies a correlation between filing patent applications and receiving funding, there indeed may be a causal connection between the two, namely, that such companies were more likely to receive funding because they filed patent applications. Several possible reasons support this theory. First, investors often view the number of issued patents a company owns as an indicator of long-term, sustainable earnings growth potential. Mihir Jobalia, managing director and head of software at research and investment bank ThinkPanmure LLC, has observed that companies that obtain patents tend to display other indicators of growth potential, such as increased gross margins and increased research and development expenditures. One theory for this connection is that by procuring patents, a company creates barriers to entry for future competitors, thus allowing the company to maintain its market share while providing goods or services at a price that creates higher gross margins. A company with higher gross margins has more money to invest in research and development, which may be used to develop new products. The company may then file patent applications on the inventions embodied in those new products, thereby providing additional competitive advantage and continuing the positive cycle. In addition, a startup that has filed patent applications may indicate to investors that the company is "serious." Properly drafted patent applications are highly detailed technical descriptions of inventions, requiring time, money and human effort to prepare. Therefore, the existence of patent applications shows investors that the company is willing and able to make such investments to protect and monetize its assets. Also, by filing a patent application, a company has created an asset independent from the protected product or technology. Patent applications, along with issued patents, may be sold or used as collateral to secure a loan. Moreover, a patent application may have a potential value much greater than the cost of drafting and filing the patent application. Therefore, the benefits of an effective intellectual property protection strategy may begin to accrue when patent applications are filed in early financing and formation stages of a high-technology company and may further develop as patents are issued and the company matures. As software startups are pressed to decide whether to file patent applications during their infancy, their cost-benefit analyses should account for this potential immediate and significant benefit of filing. Frank A. Bruno and Blake Reese are registered patent attorneys in the intellectual property practice of Milbank, Tweed, Hadley & McCloy LLP. Comments |
While long-term benefits of patent protection are well known, a recent study has revealed that filing patent applications, particularly by startup software companies, may yield a significant immediate benefit: an increased likelihood of receiving funding from outside sources. 
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"Outside inventors" is mentioned. Do you mean outside INVESTORS?
I am CEO of a diagnostic device startup and would like to know if outside inventors use existing patent pipeline for some purpose.