Do Patents Really Matter To Startups? New Data Reveals Shifting Habits

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Editor’s note: Leonid Kravets is a patent attorney specializing in developing IP strategy for young technology companies. He blogs on the topic at startupsip.comRobert J. Moore is the CEO and co-founder of RJMetrics, which helps online businesses make smarter decisions by making their data more understandable and actionable. For more information, visit RJMetrics.com. To be notified of any new findings regarding this study, register for updates.

Arguments about the value of patents have heated up over the past few years. Software patents in particular have come under increasing scrutiny from thought leaders in the start-up ecosystem, yet later-stage companies like Facebook continue to pay huge sums to acquire patent portfolios.

Just how much attention are start-ups paying to patents? Rather than speculate, we decided to go straight to the data. We pulled information from CrunchBase and the USPTO to build a patent activity database of over 12,000 funded technology companies. Then we plugged it into RJMetrics, a tool that makes data more understandable and actionable for online businesses. Here’s what we found:

  • One third of all funded companies have filed a patent application.
  • 19% of all funded companies filed at least one patent application prior to receiving any funding.
  • Since 2005, the average start-up has become less likely to apply for patents than companies founded in the previous year.
  • Companies in the semiconductor industry are most likely to apply for patents (65.2%) and companies in ecommerce are the least likely (10.5%).
  • Among firms that have invested in at least 100 companies, those with the most patent pursuers in their portfolios are DAG Ventures (59%), Menlo Ventures (57%), and Kleiner Perkins (56%).
  • Outspoken anti-software-patent investors Brad Feld (Foundry Group, 26.2%) and Fred Wilson (Union Square Ventures, 18%) practice what they preach — they have fewer than average patent pursuers in their portfolios.

How We Did It

We used the CrunchBase API to identify the industries and backers of 12,404 technology companies. We then matched the names of these companies to records in the historical patent application database published by the United States Patent and Trademark Office (“USPTO”). Once we had the data, we were able to upload it to RJMetrics and pull the insights shown here with just a few clicks.

In order to provide the most recent data possible, we limited our study to only published patent applications (not issued patents, which are typically not published until several years after application). The USPTO typically publishes non-provisional patent applications 18 months after filing. Thus, some of the recent company results may be skewed low because recent patent applications may not yet have had time to be published by the USPTO.

Patent Rates by Industry

Our findings show that 33% of all funded companies (4,050 of 12,404) have at least one published patent application, but patent rates vary greatly by industry.

Companies in the semiconductor and biotech industries have the highest patent application rates (65% and 62% respectively). Companies in these “hard tech” industries require significant investments at very early stages and their patents are more commonly used to defend intellectual property. Conversely, “soft tech” industries like ecommerce, web, and video games have patent rates below 20%.

The percent of funded companies with patent applications on file by industry is shown below. Only industries with at least 200 funded companies were included:

Patents Table

Company industries were pulled from CrunchBase.

Investor Influence

The differing patent philosophies of top investors are illuminated by our findings. First, it is worth noting that 18.9% of all funded companies filed patent applications prior to even receiving their first funding round. This compares to 33% of all funded companies having filed patent applications at any point during their existence.

Among investors with at least 20 portfolio companies, both the mean and median of companies with patent applications is 43%. In other words, 43% of the companies that a typical VC invests in will apply for a patent at some point. Based on the fund, however, this number can vary substantially.

There is a clear trend for the funding arms of large companies to place a significant emphasis on patents. For example, 88% of companies invested in by Samsung Ventures, 86% of companies invested in by Johnson Johnson Development Corporation, and 81% of companies invested in by Motorola Ventures have at least one published patent application.

Similarly, healthcare investors appear to place a strong emphasis on patents, with the highest patent application rates belonging to De Novo Ventures (96%) and Delphi Ventures (91%).

Some major Silicon Valley investors, such as Khosla Ventures (66%), DAG Ventures (59%), Menlo Ventures (57%) and Kleiner Perkins (56%) have patent application rates that are substantially higher than average.

However, other prolific investors such as Accel Partners (34%) and Sequoia Capital (39%) are comfortable in the middle of the pack, having patent application rates that are not notably different from the average investor.

Seed-stage investors have the fewest patent applicants in their portfolios, with 500 Startups (6.5%), SV Angel (17.7%), and German VC High-Tech Gruenderfonds (15.7%) rounding out the bottom of the list.

Some investors are outspoken against software patents. For example, Fred Wilson of Union Square Ventures and Brad Feld of the Foundry Group believe software patents should be abolished. Indeed, the investment philosophies of both funds appear to reflect these views. Union Square Ventures (18%) and Foundry Group (26.2%) both have patent application rates that are well below the average of 43%.

Patent Cohort Analysis

We wanted to see if startups have become more or less likely to apply for patents in recent years. To compare companies from different vintages on an apples-to-apples basis, we turned to our weapon of choice: cohort analysis in RJMetrics.

We grouped companies into cohorts by their founding year (as indicated in CrunchBase) and looked at the average number of patent applicants submitted per company in that cohort over time.  The results were quite telling.

Each line is the “cohort” of companies that were founded in that year  (i.e., the light blue line represents all companies founded in 2005). Any given data point is the number of patent applications that the average company in that cohort had submitted by that point in their lifecycle.

What is remarkable about this chart is the perfect chronological stacking of cohort lines by year. Lower lines mean the average company is less likely to apply for patents. Because each year’s line is lower than the previous year’s, the average company has been decreasingly likely to apply for a patent in each year of their existence.

Also noteworthy is what happens to the slope of these lines over time. In the 2005 and 2006 cohorts, the slope of the line increases in later years. This makes sense if you assume that companies become more likely to start applying for patents as they age and achieve more scale. The 2007 line, however, has a near-constant slope between years 2 and 4. Then, in the 2008 cohort, we see the slope of that line is actually declining. In other words, companies founded in 2008 became less likely to apply for a patent with each year that went by. This trend continues in the data we have about the 2009 and 2010 cohorts.

So, the average company is less likely to pursue a patent. But what if we exclude companies who never apply for any patents? How do the patent pursuers behave as a group? We re-ran the cohort analysis and only included companies that applied for at least one patent. The results are below.

The lines have almost exactly flipped! In recent years, companies that have applied for at least one patent have been increasingly likely to apply for more patents over time.

It appears that, while the average company is less likely to apply for patents, those companies that do apply for patents are now applying for a greater number on a more rapid timeframe. Indeed, this is confirmed by the “probability of repeat application” chart below.

As you can see, the chances that a given company submits an additional patent application increases with each patent application they submit. Among companies that submitted 5 applications, 85% of them went on to submit a 6th.

Conclusion

Over the past several years, the average popularity of patents has steadily declined among funded technology startups.

The reasons an individual company may choose to apply for patents can be complex, but key characteristics can have a major influence. A company’s industry and investors, for example, appear to be meaningful indicators of their likelihood to apply for patents.

Despite the overall decline in application activity, those companies that have chosen to pursue patents have done so more aggressively than ever. This is indicative of the increasing dichotomy in the marketplace, in which some thought leaders are actively speaking out against certain types of patents while patent portfolios are being bought and sold for lucrative amounts.

Article source: http://techcrunch.com/2012/06/21/do-patents-really-matter-to-startups-new-data-reveals-shifting-habits/

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