This is a series of four articles on AI and IP protection:
So, if you are an AI entrepreneur, you might now question the utility of a patent and above all interrogating yourself with the big question: should I even try to get a patent in the first place or invest my money in more meaningful activities?
Quick answer: it depends.
In addition to common sense reasoning (which is more or less what I mentioned above), there is empirical evidence that a patent may be beneficial to your business.
In fact, Mann and Sager (2007) proved that having patents is positively correlated to startup performance indicators, such as the number of financing rounds, total investment received, exit status, longevity and late-stage financing. This is not an isolated example since Conti et al. (2013) for instance also showed that having a patent increases the likelihood of getting VC funding (but no angel funding, because angels apparently value other things more than IP protection). Haeussler et al. (2014) interpreted patents as a quality signals for VC financing, finding that one patent application reduces time to venture funding by 76% (and VCs are apparently very good at understanding the quality of a patent) and therefore increases the likelihood of getting funding (an interesting side evidence is that also patent oppositions are well seen and increase likelihood of funding, maybe because they are signs of market potential and validation). This probability is even higher when you complement patents with trademarks (Zhou et al., 2016).
Furthermore, Baum and Silverman (2004) also found a positive association between patent applications and pre-IPO financing, while Farre-Mensa et al. (2017) instead pushed this analysis one step forward. They did not simply show that the first patent you obtain increases your likelihood of raising venture capital funding in the following three years by 2.3 percentage points (a 53% increase relative to the 4.3% unconditional probability of raising VC funding, although the effect is smaller during the first year and ramps up later) as well as the likelihood of securing a loan by pledging the patent as collateral, but also showed the impact of them on the daily operations.
In fact, startups that file a patent have, on average, 55% higher employment growth and 80% higher sales growth five years later. They also pursue more follow-on quality innovation and have a higher probability of getting subsequent patents (up by 49%) of a higher quality (with the average number of citations per subsequent patent increasing by 26%).
Eventually, have a portfolio of patents will have a strong positive effect also in case of an IPO.
Hence, let’s quickly recap what we learned: a patent may bring you more funding, more quick funding, attract talents and increase sales, put you on the right road to keep building great things and increase your exit value.
Well, truth be told, it sounds like a great benefits package to me. So why is not everyone rushing to patent every single invention developed? Here comes the catch.
First of all, the results that we mentioned above do not apply to everyone (Farre-Mensa et al., 2017). Generally speaking, they apply only to startups that have raised little or no money before patenting (very early-stage), lead by inexperienced entrepreneurs (serial entrepreneurs do not need patent to prove the company potential and tech feasibility), mostly operating in IT, and located in hot technology hubs (where getting investors’ attention is otherwise difficult). Moreover, additional patenting through funding rounds do not increase the investment amounts.
Block et al. (2013) indeed show that an inverted U-shaped relationshipexists between the number of trademarks and the company’s financial valuations (i.e., it is positively related up to a certain threshold and then becomes negative), and only for early-stage startups. The same type of relationship also exists between the breadth of start-ups’ trademark portfolios and the financial valuations, and it is also valid for the relationship between diversified patenting activity and performance (Fernhaber and Patel, 2012; Li et al., 2012; Qian, 2002).
So, if you are an early-stage startup trying to find your place in the world and equipped with a brilliant technical innovation in your hand, I would at least encourage you to have this conversation with a patent lawyer. The first patent you filed is definitely worth its value.
I am always interested in speaking to, learning from or simply connecting with interesting founders working in highly impactful fields like life sciences, energy, and others. If you are one of them, feel free to reach out here!
Baum, J. A., Silverman, B. S. (2004). “Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology start-ups”. Journal of Business Venturing 19: 411–436.
Block, J. H., De Vries, G., Schumann, J. H., Sandner, P. (2013). “Trademarks and venture capital valuation”. Journal of Business Venturing 29 (4): 525–542.
Carley, M., Hegde, D., Marco, A. (2014). “What is the Probability of Receiving a U.S. Patent?”. Yale Journal of Law and Technology 17 (1): 204–224.
Conti, A., Thursby, M., Rothaermel, F.T. (2013). “Show me the right stuff: Signals for high‐tech startups”. Journal of Economics & Management Strategy 22 (2): 341–364.
Farre-Mensa, J., Hedge, D., Ljungqvist, A. (2017). “What is a Patent Worth? Evidence from the US Patent “Lottery”. NBER Working Paper, 23268: 1–57.
Fernhaber, S.A., Patel, P. (2012). “How do young firms manage product portfolio complexity? The role of absorptive capacity and ambidexterity”. Strategic Management Journal 33 (13): 1516–1539.
Haeussler C., Harhoff D., Mueller E., (2014). “How Patenting informs VC investors — The Case of Biotechnology”. Research Policy 43 (8): 1286–1298.
Li, L., Qian, G., Qian, Z. (2012). “The performance of small and medium-sized technology-based enterprises: do product diversity and international diversity matter?”. International Business Review 21 (5): 941–956.
Mann, R. J., Sager, T. W. (2007). “Patents, venture capital, and software start-ups”. Research Policy 36: 193–208.
Qian, G., (2002). “Multinationality, product diversification, and profitability of emerging US small- and medium-sized enterprises”. Journal of Business Venturing 17 (6): 611–633.
Zhou, H., Sandner, P. G., Martinelli, S. L., Block, J. H. (2016). “Patents, Trademarks, and Their Complementarity in Venture Capital Funding”. Technovation 47: 14–22.