High technology entrepreneurs and the patent system. 2008 Berkeley

Electronic copy available at: http://ssrn.com/abstract=1429049
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HIGH TECHNOLOGY ENTREPRENEURS AND THE
PATENT SYSTEM: RESULTS OF THE 2008
BERKELEY PATENT SURVEY
Stuart J.H. Graham,†
Robert P. Merges,††
Pam Samuelson,†††
& Ted Sichelman††††
ABSTRACT
We offer description and analysis of the 2008 Berkeley Patent Survey—
the first comprehensive survey of patenting and entrepreneurship in the
United States—summarizing the responses of 1,332 early-stage technology
companies founded since 1998. Our results show that entrepreneurs have
varied and subtle reasons for using the patent system, many of which diverge
from the traditional theory that patents provide an “incentive to invent.”
Somewhat surprisingly, startup executives report that patents generally
provide relatively weak incentives to conduct innovative activities. But while
a substantial share of early-stage companies hold no patents, we also find that
holding patents is more widespread than previously reported, with patenting
patterns and motives being highly industry, technology, and context specific.
When early-stage companies patent, they are often seeking competitive
advantage, and the associated goals of preventing technology copying,
securing financing, and enhancing reputation. We find substantial differences
between the health-related sectors (biotechnology and medical devices), in
which patents are more commonly used and considered important, and the
software and Internet fields, in which patents are reported to be less useful.
Startups with venture funding hold more patents regardless of industry,
although unlike software companies, venture-backed IT hardware firms show
a patenting pattern more similar to that of health-related firms. When
choosing not to patent major innovations, early-stage companies often cite to
cost considerations, and report substantially higher patenting costs than the
© 2009 Stuart J.H. Graham, Robert P. Merges, Pam Samuelson, and Ted
Sichelman.
† Assistant Professor, Georgia Institute of Technology, College of Management &
Affiliated Scholar, Berkeley Center for Law and Technology, University of California,
Berkeley, School of Law.
†† Wilson Sonsini Goodrich & Rosati Professor of Law and Technology, University
of California, Berkeley, School of Law.
††† Richard M. Sherman Distinguished Professor of Law, University of California,
Berkeley, School of Law.
†††† Assistant Professor, University of San Diego, School of Law & Affiliated Scholar,
Berkeley Center for Law and Technology, University of California, Berkeley, School of Law.

1256 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 24:4
prior literature has estimated. Our unique findings help inform the ongoing
debate about the role and usefulness of the patent system.
TABLE OF CONTENTS
I. INTRODUCTION: WHY INVESTIGATE HOW
ENTREPRENEURS USE (AND ARE AFFECTED BY) THE
PATENT SYSTEM? ....................................................................................... 1258
II. APPROACH TO SURVEYING HIGH TECHNOLOGY
ENTREPRENEURS ABOUT THEIR USE OF IP ............................ 1264
A. OUR FOCUS IS ON TECHNOLOGY STARTUPS .................................... 1266
1. Targeting “Entrepreneurial Companies” and Their Top
Executives........................................................................................ 1266
2. Selecting High Technology Sectors..................................................... 1268
3. Choosing Companies to Survey......................................................... 1269
B. PROFILING OUR RESPONDENT COMPANIES .................................... 1271
III. PATENT (AND APPLICATION) HOLDING IN
TECHNOLOGY STARTUPS...................................................................... 1274
A. PATENT HOLDING AMONG STARTUPS IS WIDESPREAD BUT
NOT UBIQUITOUS................................................................................... 1274
1. Startups’ Patents Come from Several Different Sources..................... 1274
2. Startups Hold Numerous Patents, but Explanations Are
Nuanced .......................................................................................... 1275
3. Technology Entrepreneurs Suggest the Patenting Story Is
Complex.......................................................................................... 1277
B. IN PATENTING, NOT ALL STARTUPS ARE CREATED EQUAL ........ 1278
1. Industry Influences the Incidence of Startups Holding Patents............ 1278
2. Venture-Backed Companies Are More Likely to Hold Patents ....... 1279
C. PATENTS MAY OFFER ONLY MIXED TO WEAK INCENTIVES
TO ENGAGE IN INNOVATION .............................................................. 1283
1. The Reported Relatively Weak Incentive Value of Patents................ 1285
2. The Multiple Meanings of Startup Patenting.................................... 1287
IV. FIRST FINDING: PATENTS HELP STARTUPS IN
TECHNOLOGICAL COMPETITION................................................... 1288
A. PATENTS CAN SERVE TO PROMOTE STARTUPS’
COMPETITIVE ADVANTAGE ................................................................. 1288
1. Industry Influences Patents’ Role in Competitive Advantage ............. 1290
2. Patents’ Role in Technology Competition Differs by Innovation
Focus ............................................................................................... 1293
3. Startups Use Multiple Methods to Compete with Technology
Innovations ...................................................................................... 1294

2009] ENTREPRENEURS AND THE PATENT SYSTEM 1257
V. SECOND FINDING: STARTUPS HAVE DIFFERING
MOTIVES FOR PATENTING .................................................................. 1296
A. STARTUPS FILE PATENTS TO PREVENT COPYING, SECURE
FINANCIAL GOALS, AND ENHANCE REPUTATION.......................... 1297
B. STARTUPS’ MOTIVATIONS TO SEEK PATENTS DIFFER BY
INDUSTRY................................................................................................. 1302
C. PATENTS SERVE AN IMPORTANT FUNCTION IN THE
FINANCING OF STARTUPS ..................................................................... 1303
1. Investors and Entrepreneurs Highlight the Role of Patents in
Startup Financing............................................................................ 1304
2. The Role of Patents in Attracting Entrepreneurial Capital............... 1306
a) Startups Report That Patents Are Important to
Their Investors................................................................. 1306
b) Patents’ Reported Importance to Investors
Differs by Industry.......................................................... 1308
VI. THIRD FINDING: TECHNOLOGY ENTREPRENEURS
VARY IN THEIR REASONS FOR NOT SEEKING
PATENTS .......................................................................................................... 1309
A. COST CONSIDERATIONS LOOM LARGE FOR STARTUPS IN
DECIDING TO FORGO PATENTING .................................................... 1310
B. STARTUPS’ REASONS TO FORGO PATENTING DIFFER BY
INDUSTRY................................................................................................. 1312
1. Biotechnology Startups Most Commonly Cite Reluctance to
Disclose Information as a Reason Not to Patent............................... 1312
2. Software and Internet Startups Most Commonly Cite Cost
Considerations as a Reason Not to Patent........................................ 1313
3. The Most Important Reason Not to Patent Also Differs by
Industry ........................................................................................... 1314
C. STARTUPS’ MOTIVES TO FORGO PATENTING DIFFER BY
INNOVATION TYPE ................................................................................ 1314
VII. TECHNOLOGY ENTREPRENEURS MUST RECKON
WITH PATENTS HELD BY OTHERS ................................................. 1315
A. LICENSING-IN PATENTS: (SOME) STARTUPS LICENSE FROM
OTHER PATENT-HOLDERS................................................................... 1316
1. Startups License Both to Gain Knowledge and to Settle Disputes...... 1317
2. Venture-Backed IT Startups Take More Patent Licenses................ 1318
B. CHECKING THE PATENT LITERATURE BY STARTUPS: MIXED
FINDINGS ................................................................................................. 1320
VIII. IS THE PATENT SYSTEM WORKING FOR U.S.
TECHNOLOGY STARTUPS?.................................................................... 1323
IX. CONCLUSION ................................................................................................ 1325

I. INTRODUCTION: WHY INVESTIGATE HOW
ENTREPRENEURS USE (AND ARE AFFECTED BY) THE
PATENT SYSTEM?
Entrepreneurs contribute significantly to economic growth in the U.S.
and global economy.1
They create new organizations, products, services, jobs,
and opportunities for complementary economic activities.2
Intellectual
property (IP) law is an important policy lever that affects not only the
opportunities for engaging in entrepreneurship, but also the success or failure
of many entrepreneurial efforts.3
Classical economic theory holds that investments in technology
development—of which entrepreneurial activities are an integral part—will
be suboptimal if too little intellectual property protection exists.4
However,
1. See JOSEPH A. SCHUMPETER, THE THEORY OF ECONOMIC DEVELOPMENT: AN
INQUIRY INTO PROFITS, CAPITAL, CREDIT, INTEREST, AND THE BUSINESS CYCLE 74–94
(1934) (examining the role that entrepreneurship plays in the dynamism of capitalist
economies); ZOLTAN ACS & DAVID AUDRETSCH, INNOVATION AND SMALL FIRMS 19–24
(1990) (discussing innovation rates among large and small firms); DAVID B. AUDRETSCH,
MAX C. KEILBACH & ERIK E. LEHMANN, ENTREPRENEURSHIP AND ECONOMIC GROWTH
(2006) (examining the relationship between entrepreneurship and economic growth); ANDRÉ
VAN STEL, EMPIRICAL ANALYSIS OF ENTREPRENEURSHIP AND ECONOMIC GROWTH (2006)
(same as above); John C. Bound et al., Who Does R&D and Who Patents?, in R&D, PATENTS
AND PRODUCTIVITY 21 (Zvi Griliches ed., 1984); Martin A. Carree & A. Roy Thurik, The
Impact of Entrepreneurship on Economic Growth, in HANDBOOK OF ENTREPRENEURSHIP
RESEARCH 437 (Zoltan J. Acs & David B. Audretsch eds., 2003) (examining the relationship
between entrepreneurship and economic growth); Samuel Kortum & Josh Lerner, Assessing
the Contribution of Venture Capital to Innovation, 31 RAND J. ECON. 674, 682 (2000) (examining
the systematic measurement of the relationship between venture capital and innovation).
2. See supra note 1. See generally Ingrid Verheul et al., An Eclectic Theory of
Entrepreneurship: Policies, Institutions and Culture, in ENTREPRENEURSHIP: DETERMINANTS AND
POLICY IN A EUROPEAN-US COMPARISON 11, 18 (2002) (describing the supply and demand
for entrepreneurial activity, including culture; industry structure; individual attributes; and
technological, market, and financing opportunities).
3. See David H. Hsu & Rosemarie Ziedonis, Patents as Quality Signals for
Entrepreneurial Ventures 2 (Apr. 2007) (unpublished manuscript, on file with the Mack Ctr.
for Technological Innovation) (finding that a doubling in the patent stock of venture-backed
semiconductor companies leads to a 24% premium in market valuation); see also Andreas
Panagopoulos & In-Uck Park, Patent Protection, Takeovers, and Startup Innovation: A Dynamic
Approach 19 (Ctr. for Mkt. & Pub. Org., Working Paper No. 08/201, 2008), available at
http://www.epip.eu/conferences/epip03/papers/Panagopoulos_ip-aug08v2-sw.pdf
(providing an economic model wherein “positive but not excessive IP protection” leads to
increased acquisitions of startup firms by incumbents, thereby increasing overall innovation);
Ted Sichelman, Commercializing Patents, 62 STAN. L. REV. 341 (2010) (exploring the
relationship between patent protection and the successful commercialization of invention).
4. See generally WILLIAM D. NORDHAUS, INVENTION, GROWTH, AND WELFARE: A
THEORETICAL TREATMENT OF TECHNOLOGICAL CHANGE (1969) (discussing the standard
economic theory of IP); Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for

because entrepreneurial activity may be redirected or halted by intellectual
property rights claimed by others, an equally serious impediment to
investment for entrepreneurs may arise if IP protection is too strong or
uncertain.5
Although a considerable body of previous work has explored the
relationship between IP rights and innovation, far less scholarship has
focused on the more particular relationship between IP rights and
entrepreneurship.6
The basic economic principle underlying IP rights is that
the process of developing innovative products and practices is an expensive,
time-consuming, labor-intensive, and risky endeavor.7
Once these
innovations exist, however, they can be cheap and easy to copy.8
IP rights
protect innovators from copying by free riders and allow them to recoup the
investment incurred during the creation, development, and
commercialization processes, either directly by manufacturing and
distributing products and services embodying the innovation, or indirectly
through licensing to other firms that incorporate the innovation in their
products and services.9
Although this basic economic principle applies to all
companies, because early-stage firms tend to lack the kinds of
complementary assets (such as well-defined marketing channels,
manufacturing capabilities, and access to cheap credit) that ease entry into
the market, they are arguably even more sensitive to IP rights than their more
mature counterparts.10
Nevertheless, research and policy analysis has not
Innovation, in THE RATE AND DIRECTION OF INVENTIVE ACTIVITY: ECONOMIC AND SOCIAL
FACTORS 609 (William D. Nordhaus ed., 1962) (same as above).
5. See Stuart J.H. Graham & Ted Sichelman, Why Do Start-Ups Patent?, 23 BERKELEY
TECH. L.J. 1063, 1080–81 (2008) (exploring how incumbents may use patent portfolios to
restrain startups from entering markets); Colleen V. Chien, Of Trolls, Davids, Goliaths, and
Kings: Narratives and Evidence in the Litigation of High-Tech Patents, 87 N.C. L. REV. 1571, 1573–
74 (2009).
6. See, e.g., NORDHAUS, supra note 4; Arrow, supra note 4; Lee G. Branstetter,
Raymond Fisman & C. Fritz Foley, Do Stronger Intellectual Property Rights Increase International
Technology Transfer? Empirical Evidence from U.S. Firm-Level Panel Data, 121 Q.J. ECON. 321
(2006); Nancy Gallini & Suzanne Scotchmer, Intellectual Property: When Is It the Best Incentive
System?, 2 INNOVATION POL’Y & ECON. 51 (2002); Elhanan Helpman, Innovation, Imitation,
and Intellectual Property Rights, 61 ECONOMETRICA 1247 (1993).
7. Arrow, supra note 4, at 619.
8. Id. at 614
9. Concerning these latter transactions in the markets for technology, see ASHISH
ARORA, ANDREA FOSFURI & ALFONSO GAMBARDELLA, MARKETS FOR TECHNOLOGY: THE
ECONOMICS OF INNOVATION AND CORPORATE STRATEGY 171–96 (2004).
10. See Scott Shane, Technological Opportunities and New Firm Creation, 47 MGMT. SCI. 205,
209 (2001) (“Although established firms might also be more likely to commercialize broad
patents, they are disproportionately important to independent entrepreneurs who lack
complementary assets.”). See generally David J. Teece, Profiting from Technological Innovation:

adequately addressed how particular IP laws differentially affect
entrepreneurial firms relative to more established ones.11
In response to this noticeable gap in knowledge, the Berkeley Center for
Law and Technology (BCLT) conducted a wide-scale survey in 2008 of high-
technology startup firms in the United States to determine how these
companies use and are affected by the patent system. Part of our aim in
conducting the survey was to identify those aspects of the patent system that
substantially encourage or hinder entrepreneurial activity, particularly in high-
growth technology industries such as the Internet, computer software and
hardware, medical device, and biotechnology fields.
We were also concerned with the paucity of data regarding the potential
effects of pending patent reform measures on entrepreneurs and on the
entrepreneurial process more generally. Patent reform is currently the subject
of a vigorous national debate.12
Recent studies by the Federal Trade
Commission13
and the National Academy of Sciences14
made specific policy
recommendations that inspired this debate. This led to the drafting and
discussion of various legislative proposals in Congress, starting in 2005 and
continuing through the current session.15
There has also been a renewed
interest in patent law in the Supreme Court, with the Court deciding several
high-profile cases over the last several years.16
Recently, the Court granted
certiorari in the highly controversial case of Bilski v. Doll, which will address
Implications for Integration, Collaboration, Licensing and Public Policy, 15 RES. POL’Y 285 (1986)
(discussing the benefits of “complementary assets”).
11. See Ted Sichelman & Stuart Graham, Patenting by Entrepreneurs: An Empirical Study,
16 MICH. TELECOMM. & TECH. L. REV. (forthcoming 2010) (reviewing most of the existing
literature on patenting and entrepreneurship).
12. See, e.g., Dan L. Burk & Mark Lemley, Don’t Tailor Make Patent Act: The Key to
Accommodating Competing Interests Lies in the Courts, 31 NAT’L L.J. 18 (2009).
13. FEDERAL TRADE COMMISSION, TO PROMOTE INNOVATION: THE PROPER
BALANCE OF COMPETITION AND PATENT LAW AND POLICY 4–17 (2003), available at
http://www.ftc.gov/opa/2003/10/cpreport.htm.
14. COMM. ON INTELLECTUAL PROP. RIGHTS IN THE KNOWLEDGE-BASED ECON.,
NAT’L RESEARCH COUNCIL OF THE NAT’L ACADS., A PATENT SYSTEM FOR THE 21ST
CENTURY 81–130 (Stephen A. Merrill, Richard C. Levin & Mark B. Myers eds., 2004),
available at http://www.nap.edu/catalog.php?record_id=10976.
15. See generally Kevin R. Davidson, Retooling Patents: Current Problems, Proposed Solutions,
and Economic Implications for Patent Reform, 8 HOUS. BUS. & TAX L.J. 425 (2008) (describing
various congressional bills); Carl E. Gulbrandsen et al., Patent Reform Should Not Leave
Innovation Behind, 8 J. MARSHALL REV. INTELL. PROP. L. 328 (2009) (same as above).
16. See, e.g., MedImmune, Inc., v. Genentech, Inc., 549 U.S. 118 (2007); KSR Int’l Co.
v. Teleflex Inc., 550 U.S. 398 (2007); eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388
(2006).

the scope of patentable subject matter for business methods.17
Bilski may also
have implications for the patentability of software, a subject matter, along
with business methods, of critical concern to many technology startups. Also
of note, the U.S. Patent and Trademark Office (USPTO) has recently
considered dramatic changes in the way patent applications are handled.18
The opinions of large corporations and the organized patent bar have been
expressed very clearly in the judicial, legislative, and Patent Office reform
debates,19
but input on how the proposed changes to patent law and policy
will specifically affect entrepreneurship has been lacking.20
In the detailed results presented below, we do not offer simple answers
to the difficult unanswered questions about the patent-entrepreneurship
relationship. As one important example illustrates: although we find that
holding patents is more widespread among technology startups than
previously believed, company executives report that patents provide relatively
weak incentives for core activities in the innovation process, such as
invention and commercialization. These results raise the question: why would
startups incur the substantial costs of patenting if they find patents are not
17. In re Bilski, 545 F.3d 943 (Fed. Cir. 2008), cert. granted sub nom. Bilski v. Doll, 129 S.
Ct. 2735 (2009).
18. See, e.g., Tafas v. Doll, 559 F.3d 1345 (Fed. Cir.), reh’g en banc granted, 328 Fed. App’x
658 (2009) (finding that the proposed continuation rules were inconsistent with the Patent
Act); James W. Beard, Weeds in the Docket: Patent Continuation Reforms and Their Impact on Patent
Applications in the Biotechnology Industry, 90 J. PAT. & TRADEMARK OFF. SOC’Y 423 (2008)
(describing the PTO’s proposed changes to the continuation rules). The USPTO recently
withdrew its proposed changes, essentially mooting the case. See Susan Decker, U.S. Patent
Office Drops Rules That Led to Glaxo Suit, BLOOMBERG, Oct. 8, 2009,
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aIKiD9D4dOgc.
19. See, e.g., Brief Amicus Curiae of the Federal Circuit Bar Ass’n in Support of
Respondents, Teleflex, Inc., KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007) (No. 04-
1350), 2006 WL 2983161; Amicus Brief for Pharmaceutical Research & Manufacturers of
America, MedImmune, Inc., v. Genentech, Inc., 459 U.S. 118 (2007) (No. 05-608), 2006 WL
2091231; Brief for Amicus Curiae Computer & Communications Industry Ass’n in Support
of Petitioners, eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) (No. 05-130), 2005
WL 2381066; Kevin Bogardus, Stakeholders Inch Toward Final Deal on Patent Reform, but Rifts
Remain, THE HILL, Feb. 13, 2008, available at http://thehill.com/business-a-lobbying/3467-
stakeholders-inch-toward-final-deal-on-patent-reform-but-rifts-remain.
20. See, e.g., Joe Mullin, Small Companies Suffering in Surge of Infringement Suits, THE
RECORDER, June 4, 2009, at 3 (“When the Senate began debating patent reform in March,
there was plenty of testimony from patent experts, but nothing from small entrepreneurs.”).
Although independent inventors have been active in the patent reform debates, not all
independent inventors are entrepreneurs. See, e.g., Rick Merritt, Inventors’ Group to Address
Patent Reform, EE TIMES, June 4, 2009, available at http://www.eetimes.com/news/
latest/showArticle.jhtml?articleID=217701966. As such, a unique “entrepreneurship voice”
has likely been missing from the reform debates.

offering particularly strong incentives to engage in invention and
commercialization?
Our response to this question is nuanced and multi-faceted. Specifically,
a large share of early-stage companies, especially in the software industry,
avoid the patent system altogether. At the same time, we find that startups
hold more patents and patent applications than prior commentators have
reported.21
These differences appear to be primarily attributable to our survey
method, which captured many patents and applications—including those
acquired from founders and from other sources—that previous studies had
missed.
A dominant theme in our findings is that the usefulness of patents to
technology entrepreneurs is driven by industry characteristics. So while we
find that patents help many startups compete in the market with their
technology, this role tends to be much more pronounced among
biotechnology and hardware companies (including both medical hardware,
such as surgical devices, and IT hardware, such as computers and
semiconductors). Conversely, patents are much less important as a means by
which most software firms—the majority of which hold no patents—capture
competitive advantage from their innovations.22
Our results also shed light upon startups’ motivations for filing for
patents and for choosing not to patent major innovations. When electing to
patent, startup executives tend to be most influenced by a desire to prevent
copying and, to a lesser extent, by reputational and financial motives,
including successful exit (such as being acquired or going public). In an
important showing, we demonstrate that patenting may play a previously
underappreciated role in helping startups to secure investment from various
sources of entrepreneurial capital, including not only angel and venture
investors, but also “friends and family” and commercial banks. Also notable
is our finding that the costs of prosecuting and enforcing patents are a
substantial barrier to technology entrepreneurs attempting to access the
patent system. But the explanation for startups choosing not to patent is also
context-specific: biotechnology company executives are much more likely to
cite concerns about information disclosure than those in other industries.
Our results also show subtlety in the ways that startups contend with
patents in their operating environment and their executives’ attitudes toward
the patent system. While respondents told us that checking the patent
literature is reasonably common while innovating, startups at times do so
21. See infra Section III.B.2.
22. See id.

only after launching their products or when considering patenting
themselves. Licensing of others’ patents is also not infrequent, and while
startups are generally receiving information or know-how in the transaction,
they are also commonly trying to settle a controversy—and in some cases
they take patent licenses solely to avoid a lawsuit. On the whole, technology
entrepreneurs tell us that the patent system is neither working particularly
poorly nor well for their companies and industries.
Because many of these reasons for—and attitudes toward—patenting
have little to do with the classical incentives and free rider stories, they are
exemplary of many of the results we present in this Article. We find varied
and subtle explanations for why technology entrepreneurs use the patent
system: from the reasons they decide (or not) to file for patents on their
innovations, to whether and when they examine the patent literature, to their
views about the patent system as a whole. With this context in mind, Part I
describes the specific research questions that motivated the survey, how the
samples were selected, and some key profile characteristics of our
respondents. Part II discusses the patent holding characteristics of
technology startups, and the reportedly weak incentives patents provide to
startups to engage in innovative activity. Part III offers our first set of
findings that help explain why startups file for patents when they appear to
offer relatively weak incentives to innovate. Part IV assesses the varied roles
played by patents in helping the startup to compete, especially compared with
other means available to the firm for capturing value from innovation. Part V
provides another set of key findings—those uncovering the motivations that
entrepreneurs report for filing patents on their innovations. Part VI
complements that discussion by exploring the reasons why technology
entrepreneurs forgo patenting. Part VII completes the analysis by examining
how technology entrepreneurs respond when they face patents held by
others in their competitive environment. Part VIII explores our key
attitudinal question in the survey, and reports on the general opinion among
high-technology executives that the patent system is neither working
particularly well nor particularly poorly for their companies and industries.
Part IX offers some concluding observations about the scope of the study,
the implications of our findings, and continuing our research in this area.

II. APPROACH TO SURVEYING HIGH TECHNOLOGY
ENTREPRENEURS ABOUT THEIR USE OF IP
We began our project with a set of research questions addressing a
variety of topics concerning patenting and technology entrepreneurship,
including the following:23
• Do startups apply for patents to protect their innovations and is this
a successful strategy?
Do they apply for patents for other reasons, e.g., to attract
investors or for cross-licensing to obtain the right to use
another company’s patents?
• What role do actual or potential patent rights play in decisions to
invest in startups?
In what circumstances is strong patent protection a
prerequisite to investment?
In what circumstances are patent rights less important than
other factors?
• How do investors and entrepreneurs assess the scope and value of
their own and other firms’ patent rights in the course of deciding
which business opportunities to pursue or to fund?
• Once entrepreneurs have initial funding, are patent rights more
important to the entrepreneur than to more established companies,
which can rely on manufacturing, distribution and marketing
capacities, brands and other reputation qualities, and their existing
customer base to protect their market position?
• What steps do startups take to avoid infringing other parties’ patent
rights? Are they able to acquire licenses to such rights when
necessary? Is inadvertent infringement a problem?
• How often do startups receive allegations of infringement and what
do they do in response?
Are entrepreneurs affected by “patent trolls” (that is, owners
of patents who pursue patent litigation as a business model)?
23. We were aided in formulating our research design by insights and helpful
comments during discussions with Hank Barry, John Barton, James Bessen, Tom Ciotti, Wes
Cohen, John Duffy, Rebecca Eisenberg, Brad Feld, Richard Gilbert, Michael Goldberg, Josh
Green, Bob Gunderson, Bronwyn Hall, Mitchell Kapor, Peter Menell, James Pooley, Walter
Powell, Arti Rai, AnnaLee Saxenian, Carl Shapiro, Robert Strom, Lee Van Pelt, and David
Yoffie, whom we thank.

• How would patent reform proposals affect entrepreneurial
companies?
Given the breadth of these research questions, we chose a research
design that would allow us to provide meaningful empirical data on these
issues. While some useful data is available in archival sources, much of the
most useful information about how well or poorly the patent system is
working for entrepreneurs resides with those who are starting and managing
startup and early-stage companies. We therefore designed a survey
questionnaire targeted to these issues and administered it to a large sample of
technology entrepreneurs in companies across the United States.
In order to transform our research questions into a survey, we undertook
extensive research and conducted numerous interviews with experts in the
field and with active entrepreneurs. During this process we examined the
theoretical and empirical literature in law, economics, management, and other
social sciences to develop a series of hypotheses.24
We also drew heavily from
prior innovation surveys.25
Furthermore, our research team held discussions
with scholars, university technology-transfer officers, independent inventors,
startup founders and executives of early-stage companies, Silicon Valley
lawyers, managers of venture capital (VC) firms, and angel investors in order
to better understand the entrepreneurial environment and to craft questions
24. Some of the ideas covered by our questions were drawn from a number of sources.
See Janice J. Jackson, The Usefulness of the General Social Surveys Database in Entrepreneurship and
Small Business Research, in 4 ADVANCES IN ENTREPRENEURSHIP, FIRM EMERGENCE, AND
GROWTH: DATABASES FOR THE STUDY OF ENTREPRENEURSHIP 393 (Jerome A. Katz ed.,
2000); Jerome A. Katz, The Logic and Opportunities of Secondary Analysis in Entrepreneurship
Research, in 4 ADVANCES IN ENTREPRENEURSHIP, FIRM EMERGENCE, AND GROWTH:
DATABASES FOR THE STUDY OF ENTREPRENEURSHIP 5 (Jerome A. Katz ed., 2000); Richard
C. Levin et al., Appropriating the Returns from Industrial Research and Development, 18 BROOKINGS
PAPERS ON ECON. ACTIVITY (SPECIAL ISSUE) 783 (1987); Edwin Mansfield, Patents and
Innovation: An Empirical Study, 32 MGMT. SCI. 173 (1986); Edwin Mansfield, Mark Schwartz &
Samuel Wagner, Imitation Costs and Patents: An Empirical Study, 91 ECON. J. 907 (1981); Jerry
G. Thursby & Marie C. Thursby, Who Is Selling the Ivory Tower? Sources of Growth in University
Licensing, 48 MGMT. SCI. 90 (2002); Wesley M. Cohen, Richard R. Nelson & John P. Walsh,
Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms
Patent (Or Not) (Nat’l Bureau of Econ. Research, Working Paper No. 7552, 2000), available at
http://ssrn.com/abstract=214952.
25. Multiple surveys were examined. See AM. INTELLECTUAL PROP. LAW ASS’N, AIPLA
2005 ECONOMIC SURVEY (2005); CARNEGIE MELLON UNIV. & ALFRED P. SLOAN FOUND.,
RESEARCH AND DEVELOPMENT IN THE UNITED STATES (1994); GA. INST. OF TECH.,
INVENTORS AND THEIR INVENTIONS: UNDERSTANDING THE INNOVATION PROCESS
(2007), available at http://www.prism.gatech.edu/~jwalsh6/inventors/Inventor
Questionnaire.pdf; NAT’L SCI. FOUND., THE MANUFACTURERS’ INNOVATION SURVEY
(1993); PURDUE UNIV., PURDUE LICENSING SURVEY (1998).

that would shed light upon topics that were not well understood, or for
which there were conflicting explanations.26
A. OUR FOCUS IS ON TECHNOLOGY STARTUPS
1. Targeting “Entrepreneurial Companies” and Their Top Executives
The economist Daniel Spulber has critiqued the relative
underrepresentation of the entrepreneur in neoclassical economic theory.27
In
his view, entrepreneurship does not begin until the individual forms a startup
firm, after which the individual and the enterprise are inexorably
intertwined.28
Spulber writes:
Entrepreneurs play a central role in the economy because they
are the prime movers—the makers of firms. . . .
. . . [Spulber’s definition of t]he general theory of the firm
places the entrepreneur at the center of microeconomic analysis.
The entrepreneur engages in transactions that are needed to
establish firms. In turn, firms create and operate markets and
organizations.29
According to this theory, the period of entrepreneurship does not end until a
true separation of ownership and control occurs.30
We approached the problem of surveying entrepreneurship in a manner
consistent with that suggested by Spulber. While there are many pathways to
better understanding the roles played by patenting in entrepreneurship, we
26. We had fruitful discussions concerning our questionnaire design with Hank Barry
(Hummer Winblad Venture Partners), James Bessen (Boston University School of Law),
Tom Ciotti (Morrison & Foerster LLP), Wes Cohen (Fuqua School of Business, Duke
University), John Duffy (The George Washington University Law School), Brad Feld
(Foundry Group), Rich Gilbert (UC Berkeley Department of Economics), Bob Glushko
(UC Berkeley School of Information), Christoph Grimpe (Centre for European Economic
Research), Dominique Guellec (Organisation for Economic Co-operation and
Development), Bob Gunderson (Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP), Bronwyn Hall (UC Berkeley Department of Economics), Dietmar Harhoff
(Ludwig-Maximilians University School of Business), Bob Lee (UC Berkeley Survey
Research Center), Mark Myers (The Wharton School, University of Pennsylvania), Sean
O’Connor (University of Washington School of Law), Lee Van Pelt (Van Pelt, Yi & James,
LLP), and John Walsh (Georgia Institute of Technology School of Public Policy), whom we
thank for their insights.
27. See DANIEL F. SPULBER, THE THEORY OF THE FIRM: MICROECONOMICS WITH
ENDOGENOUS ENTREPRENEURS, FIRMS, MARKETS, AND ORGANIZATIONS 156–57 (2009).
28. Id. at 151.
29. Id.
30. Id. at 152. The separation of ownership and control has been a cornerstone of the
economic theory of the firm for decades. See also ADOLF A. BERLE, JR. & GARDINER C.
MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 69 (1933).

elected to survey “entrepreneurial companies”—defined by us as companies
founded in the United States during the last ten years.31
Given our research
questions stated above, we were particularly keen to uncover the realities of
patenting and entrepreneurship, rather than the intentions or attitudes of
entrepreneurs. Noting the almost complete lack of empirical data on what
entrepreneurs actually do when faced with decisions about intellectual
property, we focused not on the intentions of would-be entrepreneurs, but
rather on the choices that entrepreneurs in firms actually made while
innovating.
Such a research design fosters the ability to provide meaningful insights
about the role that IP rights play in a wide class of entrepreneurial activities.
For instance, focusing on the company allowed us to inquire into the entity’s
age, employment, and share of scientists and engineers, and then relate these
aspects to the company’s patenting choices. Moreover, this research design
permitted us to ask about the sources and success in garnering external
funding, and relate these responses to the usefulness and utility of seeking
patents. Critically, unlike the few European studies of small firm patenting,32
we avoided focusing solely on existing patent holders and, instead surveyed
the broad class of entrepreneurial companies in order to offer insights into
how the patent system is working for patentees and non-patentees alike.
Entrepreneurs generally become high-level executives of the firms they
found and tend to be generalists who handle numerous aspects of their
business.33
Aware that many firms have more than one founder,34
and driven
31. Entrepreneurs can run the panoply from “idea havers” to inventors to company
founders. See generally David G. Blanchflower & Andrew J. Oswald, What Makes an
Entrepreneur?, 16 J. LAB. ECON. 26 (1998) (outlining characteristics of individual
entrepreneurs); James W. Carland et al., Who Is an Entrepreneur? Is a Question Worth Asking, in
2 ENTREPRENEURSHIP: CRITICAL PERSPECTIVES ON BUSINESS AND MANAGEMENT 178
(Norris F. Krueger ed., 2002) (same as above); William B. Gartner, “Who Is an Entrepreneur?”
Is the Wrong Question, 12 AM. J. SMALL BUS. 11 (1988) (same as above).
32. See Sichelman & Graham, supra note 11, at 25–31 (reviewing these studies).
33. See Edward P. Lazear, Balanced Skills and Entrepreneurship, 94 AM. ECON. REV.
(PAPERS & PROC.) 208, 210 (2004) (noting that entrepreneurs are generalists who put
together teams of people and assemble resources and capital, and to be effective, they must
have a general set of skills).
34. See Chan Chaiyochlarb, If You Are Going to Launch a Startup, How Many Friends Would
You Need?, TESTING TESTING 1,2,3, Feb. 23, 2007, http://blogs.msdn.com/testing123/
archive/2007/02/23/if-you-are-going-to-build-a-startup-how-many-friends-should-you-
start-up-with.aspx (electing a non-scientific sample and arriving at a figure of 2.09 founders
for successful firms); Brad Feld, How Many Founders Does a Startup Need?, FELD THOUGHTS,
Feb. 25, 2007, http://www.feld.com/wp/archives/2007/02/how-many-founders-does-a-
startup-need.html (observing that startups tend to have two or three founders).

by our interest in the innovation functions of the firm,35
we targeted our
survey questionnaire to chief executive officers (CEOs), presidents, and chief
technology officers (CTOs). Over three-quarters of our respondents
identified themselves as being one of these three officers.36
2. Selecting High Technology Sectors
Because we were principally interested in knowing how patenting affects
the technology entrepreneurship process, we limited our field of study to
certain high technology sectors. Given the extensive writing, opinion, and
theory about the differences in innovation and patenting characteristics
between the life sciences and information technologies firms, we focused
primarily on companies in the biotechnology and software industries. As
such, much of our analysis below compares and contrasts the results of our
survey in these two sectors. At the same time, we understood that other
high-technology industries are important drivers of dynamism and growth.
Accordingly, we also surveyed companies in the medical device and IT
hardware sectors (the latter defined as semiconductor, communications, and
computer hardware), and when meaningful and relevant, we report briefly
here on their responses. While we are mindful that patenting may play an
important role for startups in other industries,37
much of the patenting and
venture-funding activity among small firms takes place in our chosen high
technology sectors.38
35. We chose not to specifically target lawyers in the firm, on the theory that lawyers
would tend to be comparatively more risk averse about divulging company information to
outsiders.
36. This figure is actually an undercount, since some respondents who were presidents
instead called themselves “Owner,” and other officers neglected to identify themselves as
“Chief Technology Officer” but instead as “VP of Engineering,” “Chief Scientist,” or the
like. As such, our yield in these three categories was closer to 85%. Among the “other”
executives responding, they serve in many different functions, including those from
operations (about 15% of all others), finance (about 10% of all others), and in-house lawyers
(about 7% of the others), as well as marketing/sales and development (each about 5% of all
others).
37. While the vast majority of our respondents fell into these four industry
classifications, about 12% came from other sectors. Approximately 7% fell into medical
technologies that did not include either “biotechnology” or “medical devices,” and another
5% fell completely outside our technology definitions. For more information, see Stuart
Graham & Ted Sichelman, Patents and Innovating Startups: Analysis of the 2008 Berkeley Patent
Survey (Nov. 24, 2009) (unpublished manuscript, on file with Social Science Research
Network), available at http://ssrn.com/abstract=1512726.
38. See Robert E. Hall & Susan E. Woodward, The Incentives to Start New Companies:
Evidence from Venture Capital 3 (Nat’l Bureau of Econ. Research, Working Paper No. 13056,
2007), available at http://imio.haas.berkeley.edu/WilliamsonSeminar/hall021408.pdf.

3. Choosing Companies to Survey
Because our research questions deal with how the patent system broadly
affects technology entrepreneurship, we adapted our research design to two
different types of entrepreneurial companies. First, we were interested in
studying how patenting relates to the “average” entrepreneurial company.
Second, we were keen to understand how the highest “quality” companies—
namely, those most likely to generate innovations, succeed, and grow—were
using the patent system. We therefore chose two groups to survey: those
representing the population of firms, and those that had been successful in
securing VC funding. Unfortunately, there is no single association to which
all high-technology entrepreneurial firms belong.
After examining the available data sources, we selected Dun & Bradstreet
(D&B) as a proximate window into the overall population of companies in
the United States. D&B is a leading business credit-reporting and
information source in the United States and holds over 140 million business
records worldwide.39
D&B conducts entrance interviews to assign a credit
rating to the companies in its database during which it determines technology
class and founding date. We used D&B’s data on technology class40
and
founding date to construct a sample of 10,500 D&B-listed companies
founded in our target industries after December 31, 1997.41
However, we also understand that venture-backed firms, though an
important segment, make up only a small portion of the overall population of
39. The company reports that “77 percent of D&B’s U.S. active file contains
businesses with 10 or fewer employees.” Dun & Bradstreet, Facts & Figures,
http://www.dnb.com/us/about/db_database/dnbstatistics.html (last visited May 24, 2009).
Based on a rough comparison with aggregate U.S. Census data, we estimated that D&B
contains about 60% of all companies founded in our target industries. See U.S. Census
Bureau, Statistics of U.S. Businesses, http://www.census.gov/csd/susb/susbdyn.htm (last
visited Sept. 23, 2009).
40. Using the entrance interviews, D&B assigns companies to Standard Industry
Classifications (SICs), which we relied upon to select which companies fell into each industry
sector. SIC numbers are not sufficiently differentiated to identify “biotechnology”
companies—in the SIC codes, these companies are lumped together with other commercial
researchers in SIC code 8731 “Commercial Physical and Biological Research” companies.
We therefore relied upon D&B’s more fine-grained North American Industry Classification
System (NAICS) coding to identify “biotechnology research” companies. The corresponding
NAICS code is 541711. See U.S. Census Bureau, North American Industry Classification
System, http://www.census.gov/eos/www/naics/ (last visited Sept. 23, 2009).
41. Our list included all D&B’s biotechnology companies (642) assigned to NAICS
541711, all medical device companies (1,048) assigned to SIC 3841, and a random sample of
its listed software companies (8,810) assigned to SIC codes 7371, 7372, 7373, and 7379.

companies.42
Prior research shows that this small share of firms is
disproportionately responsible for innovative output in the economy,43
and
that venture capital funding is related to patenting activity.44
Because of our
interest in understanding the role of patenting in startup investment, we
chose to focus on this important class of companies by turning to the
Thomson’s VentureXpert data, which covers a substantial share of venture-
backed companies in the United States.45
Using Thomson’s rich data on
company characteristics, we selected 5,600 companies primarily in our target
sectors founded in 1998 or later that received venture or similar institutional
42. See Kortum & Lerner, supra note 1, at 674 (noting that from 1983–1992, venture-
backed firms’ R&D spending accounted for 3% of the U.S. total).
43. Id. at 675 (noting that while venture-backed firms account for just 3% of all R&D
spending, they account for 8% of the innovative output and a disproportionate amount of
patenting).
44. See David B. Audretsch, Werner Bönte & Prashanth Mahagaonkar, Financial
Signalling by Innovative Nascent Entrepreneurs (Ctr. for Econ. Policy Research, Discussion Paper
No. DP7165, 2009), available at http://ssrn.com/abstract=1345692; Iain M. Cockburn &
Megan MacGarvie, Patents, Thickets, and the Financing of Early-Stage Firms: Evidence from the
Software Industry (Nat’l Bureau of Econ. Research, Working Paper No. W13644, 2007),
available at http://ssrn.com/abstract=1037168; Carolin Haeussler, Dietmar Harhoff &
Elisabeth Müller, To Be Financed or Not . . . – The Role of Patents for Venture Capital Financing 2
(Munich Sch. of Mgmt., Discussion Paper No. 2009-02, 2009), available at
http://www.ip.mpg.de/shared/data/pdf/haeussler_et_al_vcpat_jan2009lmu_wp_reihe.pdf;
Paul H. Jensen, Elizabeth Webster & Hielke Buddelmeyer, Innovation, Technological Conditions
and New Firm Survival 5–6 (Melbourne Inst., Working Paper No. 26/06, 2006), available at
http://ssrn.com/abstract=946827.
45. VentureXpert draws its data from portfolio companies funded by over 1,000 private
equity partnerships, of which 700 are venture funds, and holds information on the funding
transactions of over 4,350 VC firms derived from industry surveys as well as quarterly and
annual fund reports. VentureXpert, About Us, http://vx.thomsonib.com/NASApp/
VxComponent/VXMain.jsp (last visited Oct. 1, 2009). But cf. Steven N. Kaplan, Berk A.
Sensoy & Per Strömberg, How Well Do Venture Capital Databases Reflect Actual
Investments? 1 (Sept. 2002) (unpublished manuscript, on file with the Chicago Graduate
School of Business), available at http://ssrn.com/abstract=939073 (suggesting that
VentureXpert tends to be biased toward California companies, and that most of the data
come from the investors, not from the companies themselves).

funding.46
Combining our D&B and VentureXpert samples, our final list of
target firms contained over 15,000 unique entities.47
B. PROFILING OUR RESPONDENT COMPANIES
In trying to profile the respondents in our survey, we are met with a
difficult task. Since we purposefully set about to target entrepreneurial
companies across a variety of characteristics (such as industry and age), there
is no meaningful “average” respondent company. However, it is important to
disclose the numerical breakdown of the responding companies’
characteristics. We therefore offer descriptive statistics on the characteristics
of the companies that answered our questionnaire, followed by statistics on
the response rates to our survey.
Our median respondent (at the 50th percentile per category) is a self-
described “startup” company founded in April 2002. It has nine employees,
half of whom are scientists or engineers, and has neither had an initial public
offering (IPO) nor been acquired.48
The company’s 2007 revenues were
$300,000, and its founders had prior experience running another company.
Geographically, the company’s offices are located somewhere west of the
Mississippi River. In terms of funding its operations, the median respondent
from our D&B sample has received funding from “friends and family,” at
46. Selection was made primarily on technology attributes. Thomson uses a proprietary
industry classification that includes “Information Technology,” “Medical/Health/Life
Science,” and “Non-High Technology.” As of May 2008, of the over 11,000 U.S. companies
founded after 1997 in their database, about 65% were classed “Information Technology”
and about 20% were assigned to “Medical/Health/Life Science.” All companies with at least
one email address for a company executive were included in our sample (3,359 companies),
supplemented with a random sample of all remaining companies meeting our technology
definitions.
47. We also administered our questionnaire to a group of companies in the “cleantech”
(i.e., environmental technologies) market in conjunction with GreenTech Media, an online
cleantech industry clearinghouse. Because we have a strong reason to believe that this sample
was not representative of the population of cleantech startup firms, we do not report these
results here. However, we plan to make these effectively anecdotal reports available.
48. In this regard, over 10% our respondents had been acquired or had undergone an
IPO. So while our sample may have excluded some firms that effectively dissolved upon a
successful exit, presumably D&B and VentureXpert data did not exclude many of these firms.
Furthermore, our sample also included many firms that had unsuccessfully dissolved, although
we did not pursue extra efforts to locate former executives and founders of those firms.
While in many, if not most of the circumstances, these executives were not reachable, there
are responses in our data from companies that were winding down when the surveys were
completed. Nevertheless, our respondent set generally excludes non-surviving firms.
However, our bias testing of respondent versus non-respondent firm-level characteristics,
described further infra, included both survivors and non-survivors in the latter category.

least one “angel” investor, and a commercial bank, but not from venture
capital firms, investment banks, or other companies.
Excluding our pre-test responses, 1,332 unique companies responded to
our survey. Overall, this figure produces an 8.7% response rate. This
uncorrected response rate does not account for companies that could not be
reached, either because the contact information we had was inaccurate, or
because the firm had gone out of business or fundamentally reorganized. We
revised this base response rate by first correcting for returned mail (evidence
of inaccurate physical address),49
and second by reference to the results of
random sample telephone calls we conducted during the fall of 2008.50
For the D&B sample, we achieved a 7.0% response rate, and after
correcting for bad addresses that figure becomes 8.4%. Correcting further for
telephone failures, the rate rises to 10.6%. In the VentureXpert sample, we
achieved a 12.4% response rate among companies for which we had emails.51
After accounting for mailing and telephone failures, the corrected response
rate is 17.9%.
In addition to higher response rates from VentureXpert companies,
responses from medical firms were substantially more likely than from IT
companies.52
In the D&B sample, the (telephone and mail-corrected)
response rate for biotechnology and medical device firms is 23.7% and
13.4%, respectively. For software and Internet companies, that same figure is
8.9%. Among the VentureXpert sample, the (fully corrected) response rates
for medical (biotechnology and medical device) and IT (hardware and
software) companies are 24.2% and 15.6%, respectively.53
Overall, we find that our respondents are not statistically different from
the non-respondents on key company characteristics. Within industries, we
49. The U.S. Postal Service (USPS) returned approximately 17% of our mailings with
“return to sender,” “unable to forward,” and “no longer at address” stamps. It is likely that
this figure is low since the USPS returns less than 100% of non-deliverable mail, particularly
when that mail, like ours, is not a first-class mailing.
50. We found on average that 23% of the companies could not be reached at the
telephone numbers provided by our data sources, though this figure was substantially higher
in some sectors (e.g., 41% for venture-backed biotechnology firms).
51. We had an email address for at least one officer in 68% of the VentureXpert
companies. Our testing shows that there are generally no significant differences in the way
that the emailed and non-emailed (mail only) VentureXpert companies answered our survey.
See Graham & Sichelman, supra note 37.
52. In this regard, because of the reported importance of patenting to biotechnology
companies, we took extra efforts to contact this group, telephoning every non-respondent,
typically multiple times.
53. Based on our telephone calls, we found that approximately 23% of IT companies
and 35% of biotechnology companies were not reachable at the telephone number provided
by our data sources.

find generally no statistically significant differences in the age, sales volume,
or employee counts between respondents and non-respondents.54
We also
recognized the possibility that more active patentees may have chosen to
disproportionately respond to our “patent” survey, so we matched our
respondent and non-respondent companies to the USPTO patent record.
Again, we find no statistically significant differences between the two groups
in terms of the number of patents held by the companies, nor the number of
applications filed since 2001.55
We have built statistical models based on firm
characteristics to predict responses from non-respondents, and have also
compared responses from our original pool of respondents to those garnered
from a random telephone sample of initial non-respondents. While we do see
a western bias in the companies responding to our survey, our testing
generally shows that our respondents are not dissimilar in other important
respects from our non-respondents.56
In sum, by and large, we can detect no
statistical differences in the answers from the companies we were able to
reach and the companies that declined to answer our survey.57
One of the main findings of our survey is that venture-backed companies
are significantly different in the way they view the innovation, technology
competition, and patenting processes. As such, we often report their
responses separately in this Article. When these differences are not
important, we combine the results.
54. D&B software respondents are approximately one-half year younger than non-
respondents when we measure on the year (not date) of founding (significant at the 95%
confidence level). Responding D&B medical device companies have more employees than
non-respondents (38 versus 14, a result which is weakly significant at the 90% confidence
level). When we report confidence levels herein, we describe differences as either at 90%,
95%, or 99% level, but an actual confidence level may be higher than the reported value.
55. We can only see published applications after 2001 in the United States. We also
tested for the number of patents (and applications) per year of age of the company, and
again found no significant differences. See Graham & Sichelman, supra note 37.
56. See id. The one exception is in the medical device sectors, in which respondents do
appear to be different from the non-respondents in some respects. For instance, D&B non-
respondents tend to have significantly more employees at the mean than the D&B
respondents in this sector, although this difference is largely driven by a few relatively large
outliers (i.e., larger firms, represented in this sector did not choose to respond to our survey).
This finding may account for the large (yet insignificant) differences in non-respondents’
patents and applications we found when matching to the USPTO data. Venture-backed
companies in medical devices also show differences, with the non-respondents being
significantly more likely to be founded earlier than respondents, which may again explain
differences we see (albeit non-significant ones) in the larger number of patents granted to
non-respondents in our USPTO name matching. See id. As such, we tend to downplay the
reporting on these respondents in this Article.
57. For interested readers, we describe this bias testing in a separate article. See id.

III. PATENT (AND APPLICATION) HOLDING IN
TECHNOLOGY STARTUPS
A. PATENT HOLDING AMONG STARTUPS IS WIDESPREAD BUT NOT
UBIQUITOUS
1. Startups’ Patents Come from Several Different Sources
Because we asked respondents to report the numbers and origins of the
patents and applications they held, our survey results offer a uniquely
accurate window into the patenting behavior of early-stage technology
companies. In the past, scholars have tried to match granted patents listed in
the USPTO database to company names by using data in the assignee field.58
This method tends to produce an undercount because it misses patents that
were assigned to the company from the founders post-grant or otherwise
acquired from outside the firm.59
While scholars have generally not used the
USPTO reassignment data to supplement the original assignments, even in
this regard the USPTO records on patents reassigned to different entities
after grant are notoriously incomplete.60
Further compounding the difficulty
58. See, e.g., Bronwyn H. Hall, Adam Jaffe & Manuel Trajtenberg, Market Value and
Patent Citations, 36 RAND J. ECON. 16, 20 (2005).
59. Although published patent applications have recently become available in the
United States, they too cannot be relied upon to give accurate results. First, they have only
been published since 2001. Second, they are only published after eighteen months, which
means that the most recent applications cannot be counted. Third, there is a class of patent
applications that do not require publication. Applicants can disclose to the Patent Office that
they do not intend to seek patent protection in any other jurisdiction with an eighteen month
publication rule and opt out of the requirement. See 35 U.S.C. § 122(b)(2)(B) (2006).
Estimates vary, but it is believed that between 5–15% of applications take advantage of this
statute. See Stuart J. Graham, Continuation, Complementarity, and Capturing Value: Three
Studies Exploring Firms’ Complementary Uses of Appropriability Mechanisms in
Technological Innovation 36 (Spring 2004) (unpublished Ph.D. dissertation, UC Berkeley)
(on file with the UC Berkeley Library). Additionally, small firms are among the most likely to
elect non-publication, since they are comparatively less likely to market their products
outside the United States. See Mark D. Janis, Patent Abolitionism, 17 BERKELEY TECH. L.J.
899, 919 (2002).
60. Although the Patent Office offers a recording system, it is merely optional, and the
recording of assignments appears to be routinely ignored. See 35 U.S.C. § 261 (2006). In
essence, the law establishes a registration system with a notice statute protecting subsequent
purchasers for value. See id.; U.S. PATENT & TRADEMARK OFFICE, MANUAL OF PATENT
EXAMINING PROCEDURE § 301 (8th ed., rev. 7, 2008). The registration system is organized
in a fashion analogous to a “land deed” registry, in which the person or entity that purchases
later without notice of an earlier transfer prevails over the earlier transferee, if it did not
record within a grace period. See 35 U.S.C. § 261 (2006); U.S. PATENT & TRADEMARK
OFFICE, MANUAL OF PATENT EXAMINING PROCEDURE § 301 (8th ed., rev. 7, 2008).
Because the market for buying and selling patents is presumably subject to extensive due
diligence and other forms of contracting that prevent fraudulent assignments of patents,

of knowing “what patents companies have” is the problem of name-
matching, which stems from the multiple forms of company names,
corporate name changes, and typographical errors in the patent records
themselves.61
Moreover, arriving at accurate counts may be particularly
difficult for early-stage companies since—as our survey results show—it is
common for startups’ patents to originate with founders prior to the
company’s founding date. Such patents may first issue to founders (as
individuals, with no initial corporate assignee) and only later be assigned to
the company. Because startups are resource constrained (in money and time),
it may be less likely that these companies update their assignment records at
the Patent Office.62
Effectively tracking these patents would require knowing
the names of the founders and matching them to the USPTO patent
inventor records. And with common names, that second task can be a
herculean labor.63
Our survey results are not prone to these difficulties, and thus offer
superior information about the patent holdings of early-stage technology
companies. Instead of relying on matching, we asked our respondents to
report to us the number of U.S. patents or filed applications held by the
company from three unique sources: (1) those coming from founders that
were applied for prior to the company founding date; (2) those acquired by
the company from sources other than its founders; and (3) those filed by the
company itself after its founding date.
2. Startups Hold Numerous Patents, but Explanations Are Nuanced
Because studies relying on the USPTO database had reported average
patent holdings for venture-backed startup companies in the range of 0.5–6.0
patents,64
we were surprised to find that, on average, the companies in the
population of high-tech firms (as proxied by D&B) hold well over four (4.7)
arguably there is not as great a need to pay attorneys’ and filing fees to record reassignments
as with real property.
61. For instance, the assignee “Minnesota Mining and Manufacturing Company” also
appears as assignee “3-M” in U.S. Patent No. 4,000,444 (filed Mar. 12, 1973).
62. See Dennis Crouch, Another University Patent Ownership Dispute: Stanford Loses Rights
Based on Researcher’s Side Agreement, PATENTLY-O, Oct. 1, 2009, http://www.patentlyo.com/
patent/2009/10/another-university-patent-ownership-dispute-stanford-loses-rights-based-
on-researchers-side-agreement.html (“Patent ownership regularly transfers without the new
owner recording the assignment with the USPTO.”).
63. See Manuel Trajtenberg et al., The “Names Game”: Harnessing Inventors’ Patent Data for
Economic Research (Nat’l Bureau of Econ. Research, Working Paper No. W12479, 2006),
available at http://ssrn.com/abstract=926058 (discussing the difficulty of the inventor name-
matching problem).
64. See Ronald J. Mann & Thomas W. Sager, Patents, Venture Capital, and Software Start-
ups, 36 RES. POL’Y 193, 197 (2007).

patents and applications (Table 1). Among the venture-backed firms in our
survey—a more comparable sample to previous studies—the average firm
holds just under nineteen patents and applications (18.7). These figures are
somewhat misleading, though: among the D&B respondents, over six in ten
companies (61%) hold no patents at all. Moreover, these average statistics are
influenced by a few patent holders with very large portfolios. For instance,
one of the respondents in our D&B sample reports holding 260 patents and
applications from all sources. Similarly, one venture-backed company holds
570 total patents and applications.
We observed earlier that there are important differences between the very
select venture-backed startups and companies drawn from the larger
population of companies (most of this latter set having no venture
investment)—and this observation also applies to patent ownership. For
instance, among those startups drawn from the D&B sample (approximately
85% of which have no venture backing), the median company (the firm at
the 50th percentile) holds no patents or applications. Venture-backed
companies are substantially different from the D&B respondents: the median
venture-backed firm holds six patents or applications. Among venture-
backed firms, a comparatively small 18% hold no patents or applications,
about one-third the share exhibited by the D&B companies.
These findings suggest that the holding of patents by technology startups
is more widespread than previously believed, especially among venture-
backed companies, but that holding patents is by no means ubiquitous
among entrepreneurial firms. Substantial numbers of early-stage technology
companies appear to be opting out of the patent system altogether, and these
firms are not merely clustered among the younger companies. In fact, the
likelihood of not holding any patents is virtually the same among the
youngest and oldest companies in our study. For example, among the older
D&B companies in our sample (those founded prior to 2003), 64% of firms
report holding no patents.65
Therefore, the likelihood of holding (or not
holding) patents by technology startups does not appear to be driven by age
effects, but instead by the company’s business model, strategy, technology, or
other factors, such as the cost of patenting and subsequent enforcement.66
65. We note that there is not a hidden “technology” effect to these findings: the share
of companies that are identified as biotechnology, medical devices, or software are virtually
identical among the older and younger companies.
66. Among those firms that chose to hold patents, however, there is a positive
influence of age on the number of patents held. See Graham & Sichelman, supra note 37.

Table 1: Patents and Applications Held by Startup Companies67
Source
Industry
Allrespondents
Biotechnology
MedicalDevices
Software/Internet
ITHardware╫
Population of companies (D&B)
Companies holding patents/applications (share) 39% 75% 76% 24% —
Average # patents/applications held (all companies) 4.7 9.7 15.0 1.7 —
Average # filed by company (patent holders only) 8.1 8.5 13.0 5.0 —
Average # from founders (patent holders only) 1.9 2.0 3.0 1.2 —
Average # acquired (patent holders only) 2.1 2.4 3.7 0.9 —
Venture-backed companies
Companies holding patents/applications (share) 82% 97% 94% 67% 91%
Average # patents/applications held (all companies) 18.7 34.6 25.2 5.9 27.4
Average # filed by company (patent holders only) 15.8 22.9 16.1 7.1 23.6
Average # from founders (patent holders only) 2.5 3.8 3.8 0.7 3.1
Average # acquired (patent holders only) 4.2 9.0 6.5 0.7 3.5
╫ Available only for VentureXpert listed companies.
3. Technology Entrepreneurs Suggest the Patenting Story Is Complex
To better understand the underlying rationale of our respondents’
answers, we conducted several hour-long, follow-up interviews by telephone
in the early months of 2009.68
The comments of one such executive, call him
Neil, are illustrative of what is often a tension for the entrepreneur in
deciding whether to seek patent protection. Neil is the inventor of an
innovative biometrics information technology and CEO of a startup he
founded in 2003 to commercialize the technology. While his company has
67. Results are based upon two questions from the survey. (1) “Does your company
own U.S. patents or has it applied for U.S. patents (including any patents or applications
acquired through any purchase or transfer)?” and (2) “How many, if any, U.S. patents or
pending applications does your company have from the following sources: Patents or
pending applications applied for by Founders prior to the company’s founding date? Patents
or pending applications purchased, transferred, or assigned to company? Patents or pending
applications filed by your company since founding?”
68. Our interviews were conducted on a convenience sample of our respondents. We
began with a random sample of respondents who had provided email addresses to us
(approximately 80% of the total), and disproportionately contacted respondents in Northern
California. We did, however, speak with all respondents who were willing to speak with us.

filed one patent application that has not yet been granted, he has generally
tried to avoid patents even though his investors, which include VC firms, are
interested in him having them. He stated:
Our business is a consumer services business; it was never my
intention to be a monopoly and to protect [this technology] . . . .
Instead, our strategy is to grow as the number one supplier of [our
new product] while simultaneously allowing other, smaller
companies to spread [the underlying technology] around the
nation. In doing so, [the technology] will have a huge consumer
base and our company will be viewed as the prominent player,
much like “Kleenex” is in the tissue industry.69
Neil’s comments help expose several themes that run through our survey
responses. First, patenting is common among our respondents, but by no
means ubiquitous. Second, patenting for the entrepreneurs choosing to hold
patents is often motivated by reasons that have not commonly been well-
understood or studied in the literature. And third, the incidence and
usefulness of patents to technology entrepreneurs is very much determined
by the industry and technology in which the company is operating.
B. IN PATENTING, NOT ALL STARTUPS ARE CREATED EQUAL
1. Industry Influences the Incidence of Startups Holding Patents
Similar to the patenting differences associated with the presence of
venture funding, we find profound disparities in the likelihood, number, and
original source of patents by the technology focus and industry of the
company. Among the D&B sample, biotechnology and medical device
companies are much more likely to hold patents and applications than are
software and Internet firms (Table 1). In fact, three out of four of these
medical companies report holding patents and applications compared with
only one in four among software startups.
There are also substantial differences across industries in the number of
patents held on average, with the total patents of medical and life science
companies once again substantially greater than those of the software and
Internet firms in the D&B sample. Medical device companies report holding
fifteen patents and applications on average, compared with just under ten for
biotechnology research companies. These figures are significantly higher than
for software companies, which hold on average less than two patents and
applications. Much of this difference is driven by the relatively high
likelihood of software firms holding no patents. If we compare the average
69. Interview with anonymous executive, March 2009 (emphasis in original).

count of patents and applications held by firms that have chosen to hold
patents, D&B software and Internet firms compare more closely with D&B
biotechnology research companies (7.1 patents to 12.9 patents, respectively).
Additionally, large patent-portfolio companies influence the result: among
those D&B companies that hold patents, the median software startup (at the
50th percentile) holds two patents and applications and the median
biotechnology firm possesses six. In the IT sector, hardware companies hold
significantly more patents than their software counterparts: venture-backed
IT hardware firms hold on average more than twenty-seven patents and
applications, about five times more than similarly-funded software and
Internet companies.
While there are substantial inter-industry differences at the level of the
average D&B company, focusing instead on those companies choosing to
hold patents demonstrates smaller or insignificant differences as to the origin
of the patents held by the firm. Across the D&B patent holders, about two
patents and applications come into the firm from its founders, and while this
number falls to nearly one for the (fewer) software and Internet companies
holding patents, the difference is not statistically meaningful. For every ten
employees at a patent-holding D&B company, the firm files seven patents on
average, and it acquires two patents or applications from sources other than
its founders. These figures change little based on the technology of the
company, and the differences are not statistically meaningful. In sum, for
startup companies that hold patents, the likely origin of those patents
remains virtually the same regardless of the technology focus of the firm.
What is significantly different, though, is the likelihood of holding any
patents—software and Internet companies in the population (as proxied by
D&B) are much less likely to hold patents than similar companies involved in
the health-related technologies.
2. Venture-Backed Companies Are More Likely to Hold Patents
These inter-industry differences also persist among the venture-backed
firms, where the incidence of holding patents is much higher and the origins
of those patents are more varied. Table 1 shows that virtually all (97%)
companies in the biotechnology and medical device sectors hold patents—
and while holding patents is less likely for venture-backed IT firms (hardware
and software alike), the rates are still relatively high (about 90% and 70%,

respectively). Venture-backed firms are much more likely to hold patents,
regardless of technology focus.70
In order to better understand the motivations for venture-backed
companies to patent, we interviewed several partners at VC firms. One such
partner holds an engineering degree, invests primarily in biotechnology
companies, and has extensive experience in the technology, business, and
investment environments in which his portfolio companies operate. He
stated:
When you go into life sciences—and in reality, with any [bio-
related technology] that you’re creating or acquiring—if it doesn’t
have a reasonably strong patent, and if you don’t have the
capability to expand the patent estate covering your technology and
products, you are going to have complicating issues. [As a young
company], you need to secure patents, and with the broadest claims
and specifications that you can get.71
These comments support two clear messages that spring from our responses.
First, early-stage biotechnology companies are much more likely to use, and
to see utility in using, the patent system. Second, venture investors are
interested in patents, and venture-capital backed companies are much more
likely to hold and file for patents. Whether this second observation is
primarily driven by investors demanding a more active patent “footprint” of
the companies they fund or by companies that VCs fund simply being more
likely to supply patents to investors, we are unable to say with certainty. Our
evidence points, however, to a relationship that runs both ways. Firms that
seek venture-funding appear to be patenting more actively prior to the
funding event (and for the purpose of securing funding), and venture-capital
investors appear much less willing to fund companies that hold no patents.
In this sense, the results of our survey differ substantially from several
prior studies of startup patenting. In particular, we show that among venture-
backed companies, patent-holding is more widespread and—in conjunction
with additional data we present below72
—more important to securing venture
investment than previously reported. The best prior evidence on the topic
comes from Ronald Mann and Tom Sager, who matched venture-backed
companies to the Delphion patent database.73
Their article reports that
70. The finding that venture-backed firms are substantially more likely to hold patents
is consistent with an earlier study finding that venture-backing has a positive influence on
patenting. See Kortum & Lerner, supra note 1.
71. Interview with anonymous venture capital firm partner (May 2009).
72. See infra Parts IV, V.
73. Mann & Sager, supra note 64, at 196.

venture-backed software firms hold on average just under three patents,
while venture-backed biotechnology companies possess just under 5.5
patents.74
Moreover, they state: “[O]nly 2% of software firms had more than
4 patents, and less than 1% of software firms had more than 10 patents; 19%
of biotechnology firms had more than 4 patents and 6% had more than 10
patents.”75
Our responses from startup company executives show that patents are
more widely held, and held in greater numbers, than Mann and Sager
estimate. Our respondent venture-backed software and Internet firms hold
on average just under six patents and applications,76
double the estimate of
Mann and Sager, while venture-backed biotechnology companies hold just
under thirty-five patents, more than six times what Mann and Sager estimate.
If we restrict ourselves only to patents and applications filed by these firms
(thus more closely approximating Mann and Sager’s patent-matching-and-
counting method), our venture-backed software respondents report filing 4.9
patents on average, while venture-backed biotechnology companies file 22.2
at the mean—still substantially higher than the figures estimated by Mann
and Sager.
In contrast to Mann and Sager’s suggestion that patent holding is
reasonably uncommon,77
our respondents tell us that 63% of venture-backed
software and Internet startups hold more than four patents and applications,
while more than 47% of these firms reported holding more than ten.
Extending this analysis to venture-backed biotechnology startups, we find
that 86% of these companies report having more than four patents and
applications while 60% hold more than ten. These discrepancies with the
figures cited in Mann and Sager may be partly accounted for by the earlier
time period of their study78
and the fact that not all applications result in an
74. Id. at 197.
75. Id. at 198.
76. We also find that venture-backed IT hardware firms hold on average more than
twenty-seven patents and applications, about five times more than similarly-funded software
and Internet companies.
77. Mann & Sager, supra note 64, at 197–98.
78. Mann and Sager examined companies that received their first rounds of funding in
1996–1998, measuring patent grant rates as of the end of 2004. As such, the higher patenting
numbers we see among firms in our data could reflect an increasing patenting trend over
time in startups—though such a trend is arguably unlikely to account for a substantial share
of the large differences reported here. Additionally, although it may appear that Mann and
Sager’s time window is shorter than ours, it is not. In particular, because most startups do
not receive venture capital financing until more than one year after founding, Mann and
Sager’s effective time horizon appears to be about seven to ten years. An analysis by the
authors shows that firms listed in VentureXpert that have issued patents (matched to the
USPTO data) have, on average, initial VC funding arriving about 2.5 years after company

issued patent.79
This latter possible explanation may be undercut, however,
insofar as the grant rate of startups’ patent applications is higher than usual
because (a) the quality of the invention may be higher than average80
and (b)
the patent applicants themselves may care more about winning a granted
patent, and thus expend more time, effort, and money in the application
process.81
Another noteworthy finding of our study is that founders bring
substantial numbers of patents and applications with them into their startups.
Another possible source for our differences with Mann and Sager’s estimates
is their failure to account for founder-added patents that go unrecorded at
the USPTO.82
When a D&B-listed biotechnology startup holds patents, its
founders tend to bring on average two patents and applications into the firm,
a figure that nearly doubles to 3.8 when the firm has venture backing.83
Venture-backed medical device and IT/hardware firms that hold patents
tend to acquire more than three patents and applications on average from
their founders. However, for patent-holding software companies with
founding. Although our study focused on firms founded after 1997, because many of those
firms were not founded until much later (the median founding date for all firms was 2002),
the effective windows appear roughly equal, if not shorter in our study.
79. There is conflicting evidence about the USPTO’s application grant rate. See Robert
A. Clarke, U.S. Continuity Law and Its Impact on the Comparative Patenting Rates of the US, Japan
and the European Patent Office, 85 J. PAT. & TRADEMARK OFF. SOC’Y 335 (2003) (responding to
an earlier study by Quillen and Webster); Ron D. Katznelson, Bad Science in Search of “Bad”
Patents, 17 FED. CIR. B.J. 1 (2008) (discussing problems involved in grant rate calculation);
Cecil D. Quillen, Ogden H. Webster & Richard Eichmann, Continuing Patent Applications and
Performance of the U.S. Patent and Trademark Office - Extended, 12 FED. CIR. B.J. 35 (2002)
(evaluating prior date to revisit determination of the USPTO grant rate); Mark A. Lemley &
Bhaven Sampat, Is the Patent Office a Rubber Stamp?, 58 EMORY L.J. 181, 184–89 (2008)
(pointing to data controversies in calculating patent grant rates).
80. See Kortum & Lerner, supra note 1, at 690 (finding that venture-backed firms’
patents have significantly more forward citations than the population of patents). But cf. Jean
O. Lanjouw & Mark Schankerman, Protecting Intellectual Property Rights: Are Small Firms
Handicapped?, 47 J. L. & ECON. 45 (2004) (finding that patent portfolio size is positively
related to forward citations).
81. See infra notes 188–89 and accompanying text (finding that startups expend twice or
more on out-of-pocket costs on patenting than previously-reported averages). See generally
Stuart J.H. Graham & Dietmar Harhoff, Separating Patent Wheat from Chaff: Would the U.S.
Benefit from Adopting a Patent Post-Grant Review? (Oct. 14, 2009) (unpublished manuscript, on
file with Social Science Research Network), available at http://papers.ssrn.com/
abstract_id=1489579 (suggesting higher grant rates among triadic patents demonstrate that
extra effort pays off in winning patents).
82. See Mann & Sager, supra note 64, at 196–97.
83. These differences are significant at the 95% confidence interval.

venture funding, founders are likely to bring fewer than one patent or
application with them into the startup.84
After founding, venture-backed biotechnology and medical device
companies are also more likely than software and Internet firms to file patent
applications and to acquire patents (or applications) from sources other than
their founders. For these biotechnology and medical device firms that hold
patents or applications, they report that on average eight originate from
acquisitions (other than from founders), and that they directly file twenty
applications. These figures are substantially higher than the just over 0.5
patents or applications acquired on average by venture-backed software and
Internet firms, and the seven directly filed by these startups. Interestingly, IT
hardware firms are the outlier: these companies are more like the health-
related firms in terms of their number of founder-originating patents and
patent filings, but are also similar to their software counterparts in that they
tend to acquire comparatively few patents from sources other than founders.
C. PATENTS MAY OFFER ONLY MIXED TO WEAK INCENTIVES TO
ENGAGE IN INNOVATION
Given that the patent monopoly is most commonly justified on the
ground of providing incentives to innovate, we were surprised to find that, in
general, the technology startup executives responding to our survey report
that patents offer relatively mixed to weak incentives to engage in innovation.
In this context, we refer to the term “innovation” in its Schumpeterian
sense—the series of steps taken from idea to invention to development to
commercialization.85
To uncover patents’ incentive value, our questionnaire
asked all respondents how strong or weak an incentive (1=not at all, 2=weak,
3=moderate, and 4=strong incentive) patents served for undertaking four
innovation-related activities: (a) inventing new products, processes, or
services; (b) conducting initial research and development; (c) creating internal
tools or processes to build or implement final products, processes, or
services; and (d) undertaking the risks and costs of making, selling, and
marketing a commercial product. In general, the executives we surveyed
reported that patents serve as only slight to moderate incentives for each of
these stages in the innovation process.
84. It is noteworthy that among software firms, the average number of founder-
originating patents is lower for venture-backed companies (0.7 patents) than for those in the
D&B population sample (1.2 patents), although this difference is not statistically significant
at conventional levels.
85. See SCHUMPETER, supra note 1, at 66 (contending that innovation consists of novel
goods, production methods, markets, production inputs, and forms of organization).

We recognized during the design stage of our survey instrument that the
meaning of the term “incentive” could be interpreted in several ways by our
respondents. While we cannot dismiss the possibility that our respondents
may not have understood the term incentive in the way that neoclassical
theory generally presents it,86
our preliminary testing and interviews suggested
to us that the business-savvy technology entrepreneurs we surveyed do
interpret that term in the way that theory presents it. Moreover, there is
ample evidence that the patents-as-incentives rationale is a well-known
concept in the mainstream business literature and media.87
Of course, while
the respondents may have understood our questions, they may not fully
comprehend the role patenting actually plays in their innovation process,
which is often subtle.88
So while we are reasonably confident that our
responses capture at least a proximate window into the incentive role that
86. See JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION 390 (1988)
(inducing innovation through an award of a temporary monopoly ultimately benefits the
public good).
87. See, e.g., Robert J. Barro, Drugs Via Canada? The Side Effects Could Hurt, BUS. WK.,
Aug. 30, 2004, at 34 (“Pursuing these policies would be a mistake because the current setup
strikes a reasonable balance between incentives for invention and the prices of existing
drugs.”); Hiawatha Bray, Ethernet Pioneer: Patent System Is Flawed, but Still the Best We’ve Got,
BOSTON GLOBE, May 13, 2007, at D3 (“When you grant private property, you create an
incentive to invest and protect and make the best use of that property. A patent, which is a
form of private property, is itself a form of technology for encouraging innovation.”
(quoting Bob Metcalfe, partner, Polaris Venture Partners)); Michael Fitzgerald, A Patent Is
Worth Having, Right? Well, Maybe Not, N.Y. TIMES, July 15, 2007, at BU3 (“Patents are
supposed to give inventors an incentive to create things that spur economic growth.”);
Gloria Lau, U.S. Policy on Prescription Drugs Keeps Raising Eyebrows, INVESTOR’S BUS. DAILY,
July 25, 2005, at A7 (“There’s got to be a worldwide push to honor intellectual property.
Otherwise there’s no incentive to do drug research.”); Gary L. Reback, Patently Absurd,
FORBES, July 21, 2002, at 44 (“But as an incentive to innovate, a patent holder gets a free
pass from the rigors and challenges of competition. The right amount of such incentive may
well spur invention.”).
88. For instance, it may be that people think of “an incentive” as somehow the
proximate cause or reason for conducting R&D and other innovation-related activities, in
which case a respondent may not have connected the term “incentive” with more
“secondary” incentive effects that patents may play in spurring the activity. In other words,
people may well think: “I would have conducted this innovation anyway, even without a
patent.” Indeed, because one rarely knows the outcome of an R&D project, and never
knows the complete shape of the prior art, very few inventions would be created if the
certainty of patenting was required to begin R&D. What people may not realize, however, is
that the “secondary” effects of patents—such as attracting capital and enabling arm’s-length
transactions—may in the aggregate contribute enough of a “plus factor” to make certain
projects viable, even if people do not think of patents in those terms. Thus, respondents may
not have appreciated the idea of a “marginal incentive effect,” thinking of incentives as more
of an “all or nothing” concept.

patents play for technology entrepreneurs, we nevertheless recognize that
further investigation of our findings is warranted.
1. The Reported Relatively Weak Incentive Value of Patents
Among the D&B companies, respondents told us that on average,
patents offer just above a “slight incentive” to engage in invention, R&D,
and commercialization, and between “slight” and “no incentive at all” to
create internal tools and processes. While venture-backed startup executives
rate the incentive value more highly than do those at D&B companies, in no
category are patents reported to provide even a “moderate” incentive for any
of the four entrepreneurial activities about which we queried.
An interview we conducted with the sole proprietor of a medical device
company assisted us in understanding some of the low-powered incentives
that patents offer. This physician-turned-entrepreneur—whom we will call
Jeremy—has chosen largely to opt out of the patent system. As is the case
with many innovations in medical devices, Jeremy was a “user-innovator,”
seeing a practical problem in his medical practice that needed a practical
response.89
He founded his company to offer a product to meet that need,
and quickly secured a patent. This lone patent, however, has not allowed him
to compete effectively, and he perceives very little incentive to seeking patent
protection today:
Fifteen years ago, patents were probably very useful and
offered a lot of protection. But not today. In fact, today they are
not very valuable at all, and, even if I were to get a patent on my
[updated technology], odds are that I would still find a copy for sale
on the side of the road in China.90
Jeremy’s comments highlight two aspects associated with the incentive
value of patents expressed in our survey responses. First, respondents tell us
in general that the incentive value provided by patents is typically low for a
range of innovative activities. Second, the pattern of reporting relatively weak
incentives generally holds not just for those companies that do not patent,
but also among those companies that do.
To verify that those companies holding patents were also reporting
relatively low incentives, we divided our respondents into two categories:
companies that told us they held at least one patent or application and
companies holding none. We show that, as we expected, companies
89. See generally ERIC VON HIPPEL, DEMOCRATIZING INNOVATION (2005) (describing
“user innovation” as technology supplied by technology users who experience a need and
innovate to fill that need).
90. Interview with anonymous company founder (Feb. 2009).

expending resources to acquire patents rate their incentive value higher in all
categories than do those companies holding none. However, the incentive
value that these active patent holders ascribe to patents still does not, for any
of the four innovative activities, reach on average even the “moderate
incentive” level. And for those companies that report holding zero patents or
applications, the incentive value of patents is ranked by respondents on
average between “slight incentive” and “no incentive at all” for each of the
four innovation activities.
An important caveat to these findings, however, is a marked inter-
industry difference in the incentive values that patents offer for innovation.
For example, biotechnology companies report that patents generally provide
“moderate” incentives in the innovation process, whereas software firms
report that they generally provide at best “slight” incentives. This finding is
consistent with inter-industry differences in the incidence and numbers of
companies holding patents discussed above.91
While these incentive results
are also consistent with anecdotes about software firms,92
we were somewhat
surprised to find that, in the biotechnology sector, companies did not report
a stronger connection between the incentives offered by patents and
innovation. Interestingly, these incentive results do not substantially change
when limiting the sample only to those firms that are actually holding
patents.
Our findings on the incentive value of patents are noteworthy given the
legal and theoretical bases for the “patents as incentives” view. The U.S.
Constitution, the foundation for the intellectual property laws in the United
States, provides for patents primarily upon the incentive view.93
And at least
since Nobel Laureate Kenneth Arrow’s 1962 work on the value of
intellectual property in spurring research and development, economists have
examined the value that society gains from offering patents (in the form of
limited monopolies) to “idea havers” as an incentive to convert those ideas
into inventions.94
Noting that patent rights generally live well beyond the
creative spark of invention,95
other scholars have suggested that patents serve
as incentives throughout the innovation process, across a range of
91. See supra Section III.A.
92. See Ronald J. Mann, Do Patents Facilitate Financing in the Software Industry?, 83 TEX. L.
REV. 961, 1001 (2005).
93. See U.S. CONST. art. I, § 8, cl. 8.
94. See Mansfield et al., supra note 24, at 915; Roberto Mazzoleni & Richard R. Nelson,
The Benefits and Costs of Strong Patent Protection: A Contribution to the Current Debate, 27 RES.
POL’Y 273, 274 (1998); Brian D. Wright, The Economics of Invention Incentives: Patents, Prizes, and
Research Contracts, 73 AM. ECON. REV. 691, 696 (1983).
95. See, e.g., SUZZANNE SCOTCHMER, INNOVATION AND INCENTIVES 138–43 (2004).

entrepreneurial activities.96
So, if as our findings suggest, patents provide
relatively weak incentives to undertake the risks of innovation, what purposes
do they serve?
2. The Multiple Meanings of Startup Patenting
The overall picture of startup patenting suggested by these two chief
findings is surprising. On the one hand, startup companies in all high
technology sectors are patenting much more widely, and in greater numbers
than we had reason to believe from the prior literature. However, when we
ask top executives at these early-stage firms whether the patents that they are
seeking (and for which they are devoting scarce resources) offer incentives to
create, develop, and commercialize the technology that is at the core of the
venture, they answer that, in general, patents are not serving that purpose
particularly well.
Our questionnaire design enabled us to shed light on this important
conundrum. We find, and detail below, that patents are playing significant
roles in technology entrepreneurship, even if the executives of startups assess
their incentive value to be relatively weak. Some of these functions do
concern patents’ traditional role in diminishing competition from third
parties in the technological marketplace and the related concern of securing
profits from innovation—especially for biotechnology, medical device, and
hardware firms (but notably less so for software and Internet companies). At
the same time, patents appear to be supporting other activities crucial to
technology startups: securing the necessary investment to develop and grow;
increasing the odds and quality of a liquidity event, such as an acquisition or
IPO; and serving strategic roles in negotiation and defending against patent
infringement suits.
What clearly springs from our data is a recognition that patents serve as
important institutional support for activities that are important to the success
of technology entrepreneurs. But as some theorists have recently suggested,97
for many of these companies, patents do not provide the sorts of incentives
to innovate that we long expected, though our findings indicate that they
often serve other important roles in the entrepreneurship process. We now
turn to a fuller examination of these roles.
96. See generally Sichelman, supra note 3 (examining incentives to commercialize
significant patented inventions).
97. See Clarisa Long, Patent Signals, 69 U. CHI. L. REV. 625 (2002); Mann, supra note 92.

IV. FIRST FINDING: PATENTS HELP STARTUPS IN
TECHNOLOGICAL COMPETITION
A. PATENTS CAN SERVE TO PROMOTE STARTUPS’ COMPETITIVE
ADVANTAGE
A major finding of our survey, and a partial explanation for the
widespread use of patents by technology entrepreneurs, concerns the
function that patents serve in helping the startup compete in the marketplace
with its innovative technology. Theory has long suggested that formal IP
rights are critical in protecting the lead-time or first-mover advantages that
fast innovators possess.98
Moreover, earlier surveys of managers at large U.S.
companies indicated that IP rights are an important means of gaining a
competitive edge but found mixed results when specifically considering
patents.99
Our results demonstrate that patenting plays a substantial role for many
high-technology startups in securing competitive advantage from their
technology innovations, but that this finding is also context-specific. In
asking our sample companies about how meaningful patents were in the
quest for profits and success, we attempted to disaggregate some of the
answers from previous surveys, and also focused on startups. Specifically,
previous studies tended to examine how mainly large and publicly traded U.S.
companies profit from their innovation in fairly broad terms,100
generally
failing to distinguish among important legal mechanisms, such as copyrights
and trademarks.101
While making these distinctions, our questionnaire also
reproduced several elements from these previous surveys, such as
“patenting” and “secrecy,” for the sake of consistency and comparison.102
In
the end, our questionnaire asked the respondent to indicate how important
(or unimportant) the following seven items were to the company in securing
98. See Teece, supra note 10, at 286–87 (suggesting that both technological complexity
and the strength of IP rights are critical to protect the innovator’s advantage).
99. See Cohen et al., supra note 24; Levin et al., supra note 24.
100. See supra note 99.
101. For example, the study by Levin and others included both patenting and secrecy,
but not copyrights and trademarks as appropriability means. See Levin et al., supra note 24, at
794. The study by Cohen included patenting, secrecy, and “other legal” means. Cohen et al.,
supra note 24, at 5–6.
102. The use in prior surveys of the term “secrecy” instead of “trade secret” presented
us with a conundrum: we believed that the term “secrecy” could be interpreted by
respondents to mean both more, and less, than “trade secret.” At the same time, we saw
value in being as consistent as possible with prior surveys. Preliminary testing with
respondents convinced us that the subjective understanding of the terms “secrecy” and
“trade secret” did not differ substantially among respondents. As such, we decided to use the
term “secrecy.”

competitive advantage from its technology innovations: first-mover
advantage over competitors; secrecy; patents; copyrights; trademarks;
difficulty of reverse engineering; and other production, implementation, or
marketing capabilities. Hereafter, we call these seven methods
“appropriability strategies.”103
Our results show that these early-stage firms use multiple appropriability
strategies. Among our aggregated respondents,104
first-mover advantage is
clearly ranked the most important: in fact, it is the only appropriability
strategy ranked between “moderately important” and “very important” on
average by all companies.105
Three methods are grouped together in the next
ranked position—secrecy, complementary assets, and patenting—which
respondents rate on average between “slightly important” and “moderately
important,” although closer to the latter.106
Following these are the remaining
three appropriability strategies—difficulty of reverse engineering, trademarks,
and copyright—which fall between “slightly important” and “moderately
important.”107
Such an aggregation of our responses108
offers a basic descriptive picture
into our results: first-mover advantage tends to dominate the other
appropriability strategies. This view of our data also suggests that other
methods—including patents—are generally rated as having some importance.
In fact, the difference between the average scores assigned to the other six
methods is relatively small (even though some of these differences are
statistically significant). However, this aggregation of our responses hides a
highly nuanced story. In fact, when we examine companies’ responses by
their differing characteristics, such as their technological focus or the type of
funding they have secured, the importance of these appropriability strategies,
and pointedly patenting, tends to shift radically.
103. In so doing, we follow the nomenclature of the Cohen study. See Cohen et al., supra
note 24, at 5.
104. 1,236 companies responded to this set of questions.
105. Scoring at the mean 3.3 on a 1–4 scale; significantly different from the next-ranked
method at the 99% confidence interval.
106. These methods score at the mean 2.8, 2.8, and 2.7, respectively, on a 1–4 scale;
these three are not significantly different from each other, but are significantly different from
the next ranked method at the 99% confidence interval.
107. These methods score at the mean 2.6, 2.5, and 2.5, respectively, on a 1–4 scale;
these three are not significantly different from each other in rank order, but the mean score
for reverse engineering is significantly different from the mean score for copyright at the
99% confidence interval.
108. See supra note 104.

Figure 1: Capturing Competitive Advantage from Technology, by Industry109
1. Industry Influences Patents’ Role in Competitive Advantage
One cut of our data that allows us to see profound differences in the
reported importance of patents, as well as other appropriability strategies, is
segmenting by industry: for biotechnology, medical devices, and even IT
hardware firms in our sample,110
patenting is ranked among the most
important appropriability means (Figure 1). Among biotechnology
110. We note that IT hardware companies are found only in our VentureXpert sample,
and thus their responses presented here must be viewed through the overall lens of the
increased likelihood of venture-funded firms to use the patent system.
How important or unimportant is each of the following in your company’s
ability to capture competitive advantage from its technology inventions?
1 2 3 4
Complementary assets
Reverse engineering
Trademark
Copyright
Patents
Secrecy
First mover advantage
Importance
(1=Not important at all; 2=Slightly important; 3=Moderately important; 4=Very important)
Biotechnology Medical Devices Software

companies, patenting is ranked the most important appropriability strategy.111
For medical device startups and venture-backed IT hardware companies,
respondents rank patenting second, behind first-mover advantage.112
Our results, for all biotechnology companies combined, underscore that
a firm’s technological focus strongly influences startup executives’ view of
the importance of different appropriability strategies. For this group of firms,
patenting is ranked as the most important means of capturing competitive
advantage.113
Even when we exclude the VentureXpert firms and focus only
on the D&B firms, patenting is still rated the most important appropriability
method.114
This finding is noteworthy given that, among the sample of both
large and small pharmaceutical firms reported by Cohen, Nelson, and Walsh
(“Cohen et al.”), patenting was considered less effective than secrecy in
protecting competitive advantage from innovation.115
We were also surprised to find that the importance of patenting by
(venture-backed) IT hardware companies is much more similar to that
expressed by healthcare startups than by software and Internet companies.116
This is a noteworthy finding because in the 1994 Carnegie-Mellon Survey, IT
111. The difference over the second most important, “first-mover advantage,” is
statistically significant at the 90% confidence interval.
112. In both cases, the differences between patenting and first-mover advantage were
significant at the 95% confidence interval. The results for all medical device firms show that
patenting is more important than the next most important method cited, secrecy, with a
difference significant at the 99% level. Among the VentureXpert IT hardware firms, patenting
was indistinguishable in importance from secrecy and reverse engineering, with all three
essentially “tied” for the second most important means—although each was significantly
different from the next most important method, complementary assets, at the 95%
confidence interval.
113. Among these 171 respondents, “patents” is ranked first, and is significantly
different from the second ranked “first-mover advantage” at the 90% confidence level.
114. However, among the 101 D&B companies responding to this question, we cannot
statistically differentiate between first-mover advantage, secrecy, and patenting.
115. See Cohen et al., supra note 24. The study by Cohen et al. asked respondents to
report on the “effectiveness” of appropriability means, while we chose to follow the study of
Levin et al., supra note 24, and ask about their “importance.” While comparison is made
more difficult by these semantic differences, Cohen et al. nevertheless report that patenting
is a less effective appropriability strategy for product innovation, and particularly for process
innovation, than secrecy. See Cohen et al., supra note 24, at 9–11. Although not discussed in
the Cohen et al. working paper, the original Carnegie-Mellon survey reportedly contained
responses from some biotechnology firms indicating that in 1994, secrecy was substantially
more effective than patenting—more so in fact than among larger pharmaceutical firms.
Communication from Wesley M. Cohen, Professor, Duke Univ., to Stuart Graham, Assistant
Professor, Ga. Inst. Tech. Coll. Mgmt. (Aug. 12, 2009) (on file with authors).
116. We note that IT hardware firm responses exist only in the VentureXpert data, and
that no D&B “hardware” respondents exist in our sample, so the reported averages
represent only venture-backed companies.

hardware firms (such as semiconductors and communications equipment)
reported that patenting was only effective at protecting about one-quarter of
their product innovations, compared with secrecy, which was effective at
protecting about one-half.117
In our results, venture-backed IT hardware
firms rank patenting at least as important as secrecy.118
Clearly, for this select
sample of IT hardware companies, patenting plays a much more significant
role in capturing competitive advantage from innovation than for a sample of
generally larger firms surveyed by Cohen et al. over a decade ago.119
Like the
biotechnology companies, part of this difference may reflect our
respondents’ small size and lack of reliance upon complementary assets.
Another explanation could lie in industry shifts, such as an increasing trend
in intra-industry cross-licensing, as well as the rise of “fabless”
semiconductor firms, which appear to be more dependent on patents than
secrecy since they are more likely to license, rather than commercialize, their
inventions.120
The value of patenting among startups in biotechnology and medical
devices (and venture-backed IT hardware) stands in stark contrast to the
(un)importance ascribed to patents by software and Internet firms. The
limited function served by patenting in technology competition for early-
stage software firms is underscored in Figure 1. In software, patenting is
rated the least important among all the appropriability strategies.121
When we
focus only on software companies in the D&B sample, patenting is still the
least important method,122
ranked on average barely above “slightly
important.” Likewise, patenting is the lowest-rated method by venture-
117. But, interestingly, undifferentiated “computer” companies in the Cohen et al.
survey reported that both patenting and secrecy were about equally effective. Cohen et al.,
supra note 24, at tbls.1 & 2.
118. While the average importance given to patents is greater than that of secrecy, the
difference is not statistically significant at conventional levels.
119. See Cohen et al., supra note 24, at tbls.1 & 2. Interestingly, in our findings,
preventing reverse engineering—presumably through technical design—is more important
to competitive advantage for IT hardware startups than to companies in other sectors.
120. See Ashish Arora & Marco Ceccagnoli, Patent Protection, Complementary Assets, and
Firms’ Incentives for Technology Licensing, 52 MGMT. SCI. 293, 293 (2006); Bronwyn H. Hall &
Rosemarie Ham Ziedonis, The Patent Paradox Revisited: An Empirical Study of Patenting in the
U.S. Semiconductor Industry, 1979–1995, 32 RAND J. ECON. 101, 107–08 (2001).
121. Patents are ranked last, with the difference between patenting and the next lowest
ranked method, reverse engineering, significant at the 99% confidence interval.
122. For both the overall and D&B sample of software firms, patenting is rated the
lowest by statistically significant margins (at the 99% confidence interval).

backed software companies, although for these companies it is not
statistically different from other low-ranked methods.123
2. Patents’ Role in Technology Competition Differs by Innovation Focus
We find that “product innovators” are substantially more likely than
“process innovators” to report that patenting is important in capturing
competitive advantage.124
To relate the aforementioned appropriability
strategies with the innovation focus of early-stage companies, we asked our
respondents to disclose the importance (or unimportance) of various sources
of innovation to their overall business strategy.125
For two of these categories,
product and process innovation, we were able to identify companies considering
one or the other as their primary innovation focus.
Our analysis demonstrates that, in general, patenting is almost twice as
important for product innovators than for process innovators. In fact,
patenting is rated as second only to first-mover advantage by product
innovators, but is rated last by process innovators. First-mover advantage,
secrecy, copyright, trademark, and the difficulty of reverse-engineering are
also rated as more important by product than by process innovators,126
but
not to the same extent as the differential reported in the importance of
patenting between the two types of innovators. Among all the methods, only
complementary assets are ranked (in absolute terms) as a more important
appropriability strategy by process innovators when compared with product
innovators.127
Noting that biotechnology companies rated patenting as more important
overall than did software and Internet firms, we also examined product
innovators within each of these two technologies. A strong technology effect
on the ranking of the importance of patents is once again evident:
biotechnology product innovators are much more likely to rate patents as
123. Venture-backed software firms rank “patents” on average the lowest in importance,
but their average ranking is not statistically different from “copyright” and “trademark.”
Patenting is statistically different from the next most lowly ranked method, “secrecy,” at the
95% confidence interval.
124. We define “product innovators” here as those that rated product innovation as
“very important” but all other types of innovation as less important. Similarly, we define
“process innovators” as those that rated process innovation as “very important” but all other
types of innovation as less important.
125. These included: (1) product innovation; (2) process or internal tools innovation; (3)
business-model innovation; and (4) design innovation (including product shape and
packaging).
126. The differences associated with copyright and trademark are not statistically
significant at conventional levels.
127. This difference is not statistically significant at conventional levels.

important when compared with software product innovators. Among these
product-focused biotechnology companies, patenting was rated the most
important appropriability strategy. Among product-focused software
companies, however, patenting remains rated the least important means of
successfully competing. Therefore, we believe that our main findings are
driven more by technology differences than the type (i.e., process vs.
product) of innovation.
3. Startups Use Multiple Methods to Compete with Technology Innovations
As was clear in the aggregated statistics presented earlier, startups across
the high-technology landscape use different methods to compete in the
marketplace. While patenting is playing a substantial role in all but the
software and Internet sector, startups in all sectors use other appropriability
strategies—possibly in complementary ways. It is noteworthy, however, that
software and Internet startups, compared with companies in other sectors,
tend to rate all methods about which we queried as less important. Software
and Internet companies rate on average only one method, first-mover
advantage, as at least “moderately important.” Conversely, companies in
other industry sectors rate at least three methods on average as more than
“moderately important” (Figure 1).
Our in-depth interviews with respondents support these observations.
One executive at a biotechnology startup—we will call him Glen—reported
that the company held over 150 patents, many of which his company filed,
but a substantial number of which were acquired from other entities. In
describing his company’s competitive strategy, he reported:
We have three tiers when thinking about how to protect our
technology with intellectual property. Tier one comprises [our basic
technologies]; tier two involves the “clumping” of our [basic
technologies]; tier three is a combination [of our technologies] to
very specific uses. Beyond these, we adopt different strategies for
different products and for different reasons. For one, we file
[fewer] manufacturing patents in hopes of keeping these as trade
secrets.128
Glen also related that, while first-mover advantage is a key component of his
company’s strategy, “[first-mover advantage] plays more of a role in the drug
industry than it does in biotech . . . . It is also important [for us] to establish
relationships within the network of similar companies and investors. Finding
key partners is critical for a platform company like us.”129
128. Interview with anonymous company founder (Mar. 2009).
129. Id.

These comments reflect several findings that arise from our survey
results. While biotechnology firms are active patent-holders and are more
likely to say that patents are important to their competitive position, they also
tend to rank several, if not all, of the various means of capturing competitive
advantage from technological innovation more highly relative to software
companies. Moreover, to effectively compete, startups tend to report that
multiple methods of appropriability are useful, even though the clustering of
and relative importance ascribed to these methods do not follow a common
pattern.
For instance, in terms of startups’ use of intellectual property, it is
noteworthy that both copyrights and trademarks play varied appropriability
roles. These forms of protection are particularly salient for software firms,
although even in this sector there is divergence. Among the population of
software companies (as proxied by D&B), executives rate copyright as
second, not statistically different from complementary assets (but both
methods ranked behind first-mover advantage, which is clearly rated as the
most important method).130
For these same software-firm respondents,
trademarks rank just behind copyrights and complementary assets, and are
considered just as important as secrecy in capturing competitive advantage.
Among venture-backed software firms, however, trademarks, copyrights, and
patents are ranked behind all others, statistically undifferentiated among each
other as the least important methods of capturing competitive advantage.
The responses of D&B software companies differ markedly not only from
venture-backed software firms, but also from all companies in other sectors.
Among non-software startups, copyright protection is rated the least
important of the several methods, while trademarks tend to be among the
lower-ranked items.
In sum, while we find that various appropriability strategies are important
to technology startups, our chief finding is that, outside of the software and
Internet sector, patenting plays a substantial role in helping early-stage
technology companies compete. But having learned that patenting is
important in securing competitive advantage does not answer a key question:
What are the specific mechanisms by which this competitive advantage is
achieved? Is competitive advantage attained through added financing that
patents help facilitate for the company, thus enabling it to develop a better
technology and get it to market faster and more effectively than its
competitors? Or is this competitive advantage won when a patent signals to
suppliers and would-be customers that a company has a valuable and
130. These differences are significant at the 99% confidence interval.

important technology? Or do patents permit the company to secure its
innovations, and keep competitors at bay while it develops a monopoly
position that patents then serve to protect and solidify? We could answer
these questions only by inquiring into the specific factors motivating
companies seeking patent protection on their innovations. As such, we asked
our respondents whose companies had actually filed at least one U.S. patent
application about the reasons they pursued a patenting strategy.
V. SECOND FINDING: STARTUPS HAVE DIFFERING
MOTIVES FOR PATENTING
We find that when technology entrepreneurs seek patent protection, they
often do so for varying and, sometimes, complementary reasons. Comments
made by Glen, the CEO of a biotechnology firm holding over 150 patents,
are illustrative:
We have a patent committee that decides, within a complex
framework of factors, whether it is important to patent, whether
competitors will copy the technology regardless of IP protection,
and whether the patent will have foreseeable future value . . . .
Patents also tend to legitimate [our product]. A patent can also
provide a source of supplementary income and can be a badge, a
branding, of a successful innovative high-tech company.131
Glen also told us that patents are important to his company when making
deals and seeking investment:
When doing deals, sometimes we only show our stack [of
patents], and sometimes the other party wants to do a lot of due
diligence on our individual patents. But we never fail to give a
presentation of about one hour on them—patents play a huge role
in securing investment.132
He also indicated how the issues of investment, copying, and competition
were interrelated in the ways his company approached patenting:
I have fidelity in my investors, and have raised over $100
million in capital. In securing my investors’ support, I see our
patent portfolio as an integral piece of the puzzle. Our competitors
are concerned about our patents, or otherwise they’d do it
themselves. Our customers don’t really care—they just want the
best product at the cheapest price. But if startups like ours are not
diligent about securing patents, they will be crushed by larger
131. Interview with anonymous company founder, supra note 128.
132. Id.

corporations, who will steal your technology and make it cheaper—
and obliterate you.133
This chief executive’s comments touch upon several of the factors that
our study of the literature and our pre-survey conversations with
entrepreneurs and investors suggested were motivators for startups to seek
patent protection. During this process, we identified those factors that were
most prominent, including the following: preventing others from copying
products or services; improving the chances of securing investment;
obtaining licensing revenues; improving the chances/quality of liquidity (e.g.,
acquisition/IPO); preventing patent infringement actions against the
company; improving the company’s negotiating position with other
companies (e.g., cross-licensing); and enhancing the company’s
reputation/product image. In the survey, we asked whether the company had
filed at least one patent, and among those answering in the affirmative, we
inquired into the importance of these several motivations for patenting.134
A. STARTUPS FILE PATENTS TO PREVENT COPYING, SECURE FINANCIAL
GOALS, AND ENHANCE REPUTATION
Across all respondents who report filing for patents,135
the most
important reason for patenting is to prevent others from copying the
startup’s products and services (Figure 2).136
This result is notable because it
contradicts some prior anecdotal reports indicating that the high costs of
patenting and enforcing patents generally precluded startups from using
patents to prevent copying and competition.137
We approach this finding with
a certain amount of caution, however, since we are mindful that the premier
position given by our respondents to “preventing copying” may be at least in
part the result of socially desirable response bias (in that respondents
generally know patents are supposed to prevent copying and so tell us that
they do just that).138
Our qualitative interviews with respondents, however,
133. Id.
134. See also Sichelman & Graham, supra note 11 (providing a more detailed account of
the survey findings on the motivations to patent).
135. 610 companies responded to this set of questions.
136. The mean for this response was statistically different from the next most important
(securing investment) at a 99% confidence level.
137. See Mann, supra note 92, at 981 (finding that the benefits of patenting to earning
supernormal profits are weak for startup software firms, especially for ones at very early
stages).
138. Communication from Wesley M. Cohen, Professor, Duke Univ., to Stuart Graham,
Assistant Professor, Ga. Tech. Coll. Mgmt. & Ted Sichelman, Assistant Professor, Univ. San
Diego, Sch. Law (July 22, 2009) (on file with authors). See generally Catherine E. Ross & John
Mirowsky, Socially-Desirable Response and Acquiescence in a Cross-Cultural Survey of Mental Health,

offer us confidence that preventing copying is an important consideration
when startups choose to patent.
Next in importance is a cluster of several motives: improving chances of
securing investment; improving chances and quality of a liquidity event
(another species of securing capital);139
and, of somewhat lesser importance,
enhancing company reputation and product image.140
This latter result, in
which financial motives dominate reputation, is driven entirely by the
VentureXpert companies in our survey. When we consider only D&B
respondents, enhancing reputation is indistinguishable from securing funding
and improving liquidity, although among the D&B startups, preventing
copying is still the most important reason reported for filing patents.
25 J. HEALTH & SOC. BEHAV. 189 (1984) (noting the incidence of socially-desirable response
bias). Further support for such a view is lent by our positioning the “preventing copying”
choice as the first among our set of options presenting in the questionnaire.
139. We consider the “liquidity event” here as a means of securing capital for growth.
We recognize, of course, that successful exit can also provide a return on investment for
financiers and personal wealth for founders and employees.
140. There were no statistically significant differences between the rankings of securing
investment and improving the liquidity event, but enhancing company reputation ranks as
significantly different from both of these former reasons at a 95% confidence level.

Figure 2: Motivations for Patenting – All Startups Filing Patents
The above question was asked of those reporting that their company had filed for at least
one U.S. patent (averages reported).
These results contrast with earlier large-firm surveys in which
respondents ranked patenting for securing capital as relatively unimportant.141
Our results are consistent, however, with a finding in the Carnegie Mellon
survey showing that relatively smaller firms in that study tended to rank the
importance of patenting to enhance firm reputation as significantly higher
than did larger firms.142
Our findings are also consistent with studies showing
that patenting plays a positive role in valuation during fundraising and upon
exit for venture-backed firms.143
The qualitative interviews we conducted with respondents following the
administration of our survey add flavor to these findings. Patenting to
prevent copying was an important motivator for the CEO of a software firm,
141. There is a slightly stronger tendency by the venture-backed firms to rate improving
the chances of securing investment and liquidity events as more important than the D&B
firms. However, the order of the reasons listed is the same for each sample set as the
aggregate presented above.
142. See Cohen et al., supra note 24, at 18 n.41.
143. See Cockburn & MacGarvie, supra note 44, at 42; Hsu & Ziedonis, supra note 3, at 2.
How important or unimportant have the following been to your
company in seeking patent protection in the United States?
1 2 3 4
Importance
(1=Not at all important; 2=Slightly important; 3=Moderately important; 4=Very important)
Prevent others from copying our
products or services
Improve chances of securing investment
Improve chances / quality of liquidity
(e.g., IPO / acquisition)
Enhance company reputation /
product image
Improve negotiating position with other
companies (e.g., cross-licenses)
Prevent patent infringement actions
against us
Obtain licensing revenues

whom we call Anna. She created a piece of software and filed a patent prior
to founding a startup to market the software in 2003. That patent became
important to her company’s survival and success. Anna relates:
A large public company copied the code of our product and
tried to sell it on the market . . . . Without my patent, I wouldn’t
have been able to stop it . . . . [Ultimately], our company settled on
the courthouse steps—literally—and we got our expenses covered,
picked up a bit of money, and also established a license agreement
[with the large company] to license it and pay us royalties.144
Regarding the relationship of patenting to entrepreneurial capital, she
remarked: “Venture capital investors place a high value on companies with
patents. From 2003 through 2007, I sat in on many startup and venture
capital boards and, generally speaking, I found that patents were key to
funding—in fact, they were the differentiator between companies.”145
These
comments mirror our general findings that motivations to patent are varied,
but that “preventing copying” and “financing and reputation” motives loom
large for startups.
The next most important reasons for technology startups to file patents
deal with defensive and strategic motives146
—namely, to prevent
infringement lawsuits and to improve negotiating position, for example in
cross-licensing deals (Figure 2).147
That startup and early-stage firms rate
these motives for patenting as “moderately important” is a novel finding,
insofar as previous work had implicitly assumed—at least outside of the
biotechnology industry—that these firms were not targeted in enforcement
(litigation and licensing) activity at sufficiently high rates to justify using
patents defensively.148
Although it appears that our early-stage technology
firms state that these motives for patenting are less important than reported
in earlier surveys of larger firms,149
our result that startup companies may be
144. Interview with anonymous company executive (Apr. 2009).
145. Id.
146. While the means of both of these motivations are significantly different at the 99%
confidence level from that of “enhancing reputation,” there are no statistically significant
differences between the two reasons. Taking the lesser important reason of this group—
preventing patent actions against us—there was a statistically significant difference at the
99% confidence level when compared with the next most important reason—licensing.
147. We are unable to differentiate, however, whether the “negotiation” value of patents
is related to strategic motives or reflects the “deal-making” aspects of financing and the exit
event mentioned earlier.
148. See Graham & Sichelman, supra note 5, at 1096 (“We would be somewhat surprised
if many start-ups are filing for patents to improve their position in cross-licensing
negotiations . . . .”).
149. See Cohen et al., supra note 24, at tbls.8, 9, 10 & 11.

engaging in sophisticated uses of patents for strategic and defensive purposes
is nonetheless noteworthy and deserves further study.
Figure 3: Motivations for Seeking Patent Protection, by D&B Industry
Question asked of those reporting that their company had filed for at least one
U.S. patent (averages reported).
Finally, all startups rated the importance of securing licensing revenue
significantly lower than other reasons, with the mean of all respondents
falling between “slightly important” and “moderately important.” This
How important or unimportant have the following been to your
company in seeking patent protection in the United States?
1 2 3 4
Obtain licensing revenues
Prevent patent infringement actions
against us
Improve negotiating position with
other companies (e.g., cross-licenses)
Enhance company reputation /
product image
Improve chances / quality of liquidity
(e.g., IPO / acquisition)
Improve chances of securing
investment
Prevent others from copying our
products or services
Importance
Biotechnology Medical Devices Software
(1=Not at all important; 2=Slightly important;
3=Moderately important; 4=Very important)

finding might seem to conflict with the markets-for-technology view that
small firms are more likely to license their patents because vertical
specialization allows these firms to operate in upstream technology markets
and provide technology inputs to (generally large) firms operating in
downstream product markets.150
Indeed, a recent survey of European
patentees showed that small firms are much more likely to patent to secure
licensing revenue than larger ones.151
While our main findings show that
licensing revenue is generally a comparatively unimportant consideration in
startup patenting, some evidence from our study supports the view that the
smallest of startup firms rely more on patenting for licensing than larger
firms.152
And as we detail in the next Section, firms in the biotechnology
industry—which is often used as an exemplar of vertical specialization—are
more likely to rate licensing income as an important reason to patent than are
firms in other sectors we surveyed.
B. STARTUPS’ MOTIVATIONS TO SEEK PATENTS DIFFER BY INDUSTRY
Consistent with the anecdotes we collected during our qualitative
interviews, our results also show significant inter-industry differences in the
motives for filing patents (Figure 3). We find that the health and life science
companies (biotechnology and medical devices) tend to cluster in the
importance they ascribe to the different motives. From a statistical
standpoint, the averages presented in Figure 3 for biotechnology and medical
device respondents are indistinguishable, with the exception of “obtaining
licensing revenues” and “improving negotiating position,” which
biotechnology firms rate as significantly more important motivations to file
patents.153
Highlighting the industry distinctions, software and Internet firms’
answers are all significantly different from the biotechnology and medical
device firms, with the exception of “preventing patent infringement
actions.”154
In particular, biotechnology and medical device firms list preventing
copying as nearly “very important” overall, while software firms place less
emphasis on this motive (though still rating it between “moderately” and
150. See, e.g., Arora & Ceccagnoli, supra note 120, at 304–05.
151. See ALFONSO GAMBARDELLA ET AL., THE VALUE OF EUROPEAN PATENTS:
EVIDENCE FROM A SURVEY OF EUROPEAN INVENTORS 41 (2005), available at
http://www.alfonsogambardella.it/PATVALFinalReport.pdf.
152. When we segment our respondent firms by total revenue, high-revenue
entrepreneurial firms report that licensing is significantly less important to patenting than for
low-revenue firms. See Sichelman & Graham, supra note 11.
153. These differences are significant at the 99% and 95% level of confidence,
respectively.
154. These differences are significant at the 95% confidence interval or above.

“very” important).155
The biotechnology and medical device companies also
cite patenting to secure investment and to improve the chances and quality of
a liquidity event as much more important motivations than do software
firms.156
Finally, biotechnology firms place much greater emphasis on
patenting to obtain licensing revenue than all other firms, including medical
device firms.157
C. PATENTS SERVE AN IMPORTANT FUNCTION IN THE FINANCING OF
STARTUPS
Another noteworthy finding of our study is that patents play an
important role in the financing of many startup companies, both during the
initial stages and subsequent development of the firm, and also at the
liquidity or exit event. Entrepreneurs and startup firms can face substantial
barriers when seeking to secure the financial resources necessary to grow and
to survive, largely due to their small size and limited experience.158
Compounding these problems, startups often lack observable measures of
success since they generally have few assets and little to no operating
history.159
The uncertainty created by this limited information makes it
difficult for potential investors to appraise the quality and profit potential of
the enterprise, and as a result, these investors must assess the value of
startups through other readily available measures.160
Several commentators have suggested that patents can serve as quality
signals for startup investors.161
For instance, David Hsu and Rosemarie
Ziedonis have recognized that while many characteristics of the firm can be
used as quality signals associated with future profits, patents have been
155. Biotechnology and medical device firms showed statistically significant differences
in their mean responses for the importance of preventing copying from hardware and
software firms at a 99% confidence level.
156. Biotechnology and medical device firms showed statistically significant differences
from hardware and software firms at a 99% confidence level.
157. Biotechnology firms showed statistically significant differences from medical
device, hardware, and software firms at a 99% confidence level.
158. See A.L. Stinchcombe, Social Structure and Organizations, in HANDBOOK OF
ORGANIZATIONS 142–93 (James G. March ed., 1965).
159. See Tyzoon T. Tyebjee & Albert V. Bruno, A Model of Venture Capitalist Investment
Activity, 30 MGMT. SCI. 1051, 1053 (1984).
160. See Toby E. Stuart, Ha Hoang & Ralph C. Hybels, Interorganizational Endorsements and
the Performance of Entrepreneurial Ventures, 44 ADMIN. SCI. Q. 315 (1999).
161. See Hsu & Ziedonis, supra note 3, at 1–2 (suggesting that entrepreneurial lineage,
founder backgrounds, and affiliations with reputable third parties such as corporate partners,
venture capitalists, and investment bankers, can serve as important quality signals); Long,
supra note 97, at 655–59 (setting forth a “signaling” theory of patents).

underappreciated in that role.162
Moreover, patents are costly assets, and
therefore fit the cost criteria for a quality signal laid out by Michael Spence,
who suggested that a credible signal ought to be costly, both in terms of
direct pecuniary costs and effort.163
While these theories can be read to apply to many types of investments,
existing empirical tests of the value of patents tend to examine only venture
capital, a species of investment that comprises a relatively small slice of the
overall entrepreneurial finance pie.164
In contrast to relatively difficult-to-
secure VC financing, startups are more often funded by angel investors and
commercial banks, and most often by friends and family.165
The Kauffman
Foundation Firm Survey, which tracks a cohort of companies founded in
2004, shows that while 1% and 5% of companies started in their founding
year by exchanging ownership in the company for VC and angel funding,
respectively, 7% took personal loans from friends and family, 13% supported
the founding with personal loans, and 39% used personal credit cards to
finance at least some part of the startup.166
1. Investors and Entrepreneurs Highlight the Role of Patents in Startup
Financing
Unlike previous studies, our survey examined various sources of startup
investment, and the results show that patenting plays a more substantial role
in supporting many different species of entrepreneurial capital investment
than has been commonly believed. Several of the qualitative interviews we
conducted illuminate this finding. For instance, the partner we call Stan, who
works with a VC firm and invests primarily in life-science companies, told us,
When thinking about the life-cycle of a company, in many
respects the value of the IP is really generally assessed at the early
stage by the first stages of “professional” money. These early-stage
162. See Hsu & Ziedonis, supra note 3, at 10–12.
163. Michael Spence, Job Market Signaling, 87 Q.J. ECON. 355, 358 (1973).
164. See, e.g., Dirk Engel & Max Keilbach, Firm-Level Implications of Early Stage Venture
Capital Investment - An Empirical Investigation, 14 J. EMPIRICAL FIN. 150 (2007); Paul Gompers
& Josh Lerner, The Venture Capital Revolution, 15 J. ECON. PERSP. 145 (2001); Steven N.
Kaplan & Per Strömberg, Financial Contracting Theory Meets the Real World: An Empirical
Analysis of Venture Capital Contracts, 70 REV. ECON. STUD. 281 (2003). But see Bernard S. Black
& Ronald J. Gilson, Venture Capital and the Structure of Capital Markets: Banks Versus Stock
Markets, 47 J. FIN. ECON. 243 (1998).
165. Alicia Robb & David T. Robinson, The Capital Structure Decisions of New Firms
(Feb. 11, 2009) (unpublished manuscript, on file with Social Science Research Network),
available at http://ssrn.com/abstract=1345895.
166. Alicia Robb & David DesRoches, Kauffman Firm Survey – Baseline/First/Second/Third
Follow-Up 446–48, 459–63 (Apr. 27, 2009) (unpublished manuscript, on file with Social
Science Research Network), available at http://ssrn.com/abstract=1024312.

[professional investors] will do a great deal of scrutiny of IP of all
types, but especially of trade secrets and patents. If you think about
a patent estate as having a life, most of its validity is presumably
established when the first guys do their investment. Later investors
experience less need to invest as much effort into due diligence as
the early-stage investors did—there’s generally no need to go back
and repeat what’s already been done. What will happen is that later
investors will look at marginal change in the patents of a company
since the last investigation. . . . A reason why patents are so
important in the biotechnology industry in particular is that, when
one makes a biotech investment, fundamentally one is making an
IP investment. Consequentially, the early-stage venture investors
dig very deeply into the validity of that IP.167
These comments resonate with our empirical findings: investors of many
types value patents as an input into their investment decision, particularly
venture capital investors in the life sciences.
Startup executives whom we interviewed also remarked about the
importance that patents play in convincing investors to fund the startup.
Neil, the CEO of a biometrics information company, suggested to us that
“investors were interested in patents, and it was a key question that came up
during negotiations. But our company does not hold patents as their [sic]
core investment—instead we focus on our services to earn revenues.”168
This
latter statement by Neil shows that there remains some ambiguity about the
role played by patents in securing funding. Even among those companies
that hold patents, we found similar ambiguity. For instance, our interview
with Jeremy, the sole proprietor of a medical device company who filed one
patent application, yielded this comment: “I applied for a patent to make it
clear to investors what exactly it was that I owned. But seeing [the device]
live is better than reading a patent, and I think that a live demonstration of
[my device] is better in securing their investment.”169
These comments from technology entrepreneurs are instructive, and help
to highlight two important findings of our survey. First, patents appear to
play a significant role in the funding decisions of many different types of
startup investors. But, second, patenting may not be a necessary condition
for access to entrepreneurial capital.
167. Interview with anonymous venture capital firm partner (May 2009).
168. Interview with anonymous executive (Mar. 2009).
169. Interview with anonymous founder (Feb. 2009).

2. The Role of Patents in Attracting Entrepreneurial Capital
Our survey specifically asked respondents about the role that patents play
in securing investment from six different sources: friends and family; angel
investors; venture capital investors; other companies as investors (corporate
venture capital); investment banks; and commercial banks (such as credit or
loans). We inquired whether the company had engaged in negotiations with
any of these six sources of startup capital and whether the company had been
funded by that source. Moreover, we asked respondents to report whether
each of the funding sources had indicated that the startup having patents was
an “important factor” in that source’s funding decision.170
a) Startups Report That Patents Are Important to Their Investors
Our respondents report that patenting plays a more significant role in
attracting funding than had been previously believed. It is widely held that
VC investors rely on patents in their investment decisions, although the
reasons for this reliance are unclear. Some suggest that a patent is an
important signal of quality in an uncertain investment environment, and that
by relying on the independent expertise of the Patent Office, the investor can
dispel some of the information asymmetries between the investor and the
startup.171
A variant signaling theory maintains that while the Patent Office’s
pronouncements are not very meaningful, the fact that startup managers had
the cognizance and wherewithal to file for patents is an important sign of
their managerial sophistication, particularly in codifying inchoate
knowledge.172
An alternative explanation is that patents tend to provide
sufficient freedom to operate, allowing a company to develop and
commercialize its embryonic products.173
Another theory suggests that
170. We understood that, like the problem of “hearsay,” relying on one person’s
interpretation of the beliefs of another can be a problematic approach. In an attempt to
mitigate against this problem, we asked the respondent whether the source had “indicated”
that patents were an important factor.
171. See Hsu & Ziedonis, supra note 3, at 5; Long, supra note 97, at 649.
172. See Graham & Sichelman, supra note 5, at 1078–79.
173. See Gideon Parchomovsky, Publish or Perish, 98 MICH. L. REV. 926, 930 (2000).
Technically, patents are only rights to exclude others from making, using, or selling the
patented invention. 35 U.S.C. § 271 (2006). However, patents can also serve as “prior art”
that can be used to prevent others from patenting. Thus, holding patents in a relevant field
will tend to exclude others from patenting in that field, thereby providing the patent holder
greater freedom to operate. Additionally, patents can enhance freedom to operate by
preventing lawsuits from other patent holders, who might be wary of being countersued in
litigation. See Graham & Sichelman, supra note 5, at 1065.

investors require the companies to have patents so as to enjoy these IP rights
as residual claimants should the venture fail.174
While our data do not shed light on these different explanations per se, we
are able to report some results on the perceived importance of patents in
startup funding.175
Our figures reflect the share of those respondents who
reported that a potential funding source (e.g., friends and family) with whom
the respondent negotiated had indicated that having patents was important to
their funding decision. For D&B companies that negotiated with VC firms,
just over two-thirds (67%) had indicated to the respondent that patents were
an important factor. This share is higher among our venture-backed sample,
with just above three-quarters (76%) indicating as much. There are also
notable technology differences. Among the D&B companies, 60% of
software firms reported that VC investors considered patents important,
while that figure rose to 73% for D&B biotechnology firms and 85% for
D&B medical device companies.
Surprisingly, respondents reported that patents are also important to
many commercial banks and “friends and family” investors. In our D&B
sample, companies negotiating with friends and family declare that 31%
consider patenting important to making a funding decision. For those D&B
companies negotiating with commercial banks—presumably, mainly for
loans or credit—the figure is just over one-fifth (21%). The shares reported
by the venture-backed sample are similar for friends and family (35%), but
increase markedly (49%) for commercial banks.176
Our respondents also indicated that patents are important to other
sources of entrepreneurial capital. D&B companies report that 57% of angel
investors, 54% of “other companies” as investors, and 50% of investment
banks indicated that patents were important to their investment decision.
Among our venture-backed sample, the figure for angel investors is similar to
that for D&B firms (59%), but patents were reported to be significantly more
important to investment banks (61%) and other companies as investors
(70%).177
174. See id. at 1078.
175. The importance associated with “enhancing reputation” among the startups that
filed at least one patent may reflect, at least in part, a desire by the company to become more
attractive to investors.
176. The importance of patents to commercial banks among venture-backed firms may
be indicative of recent trends in “venture debt.” Darian M. Ibrahim, Debt as Venture Capital,
2010 U. ILL. L. REV. (forthcoming 2010), available at http://ssrn.com/abstract=1418148.
177. These differences are significant at the 90% and 99% confidence interval,
respectively.

b) Patents’ Reported Importance to Investors Differs by Industry
As with other aspects of patenting by startups, the industry differences in
the reported importance of patents to investors is noteworthy. Among D&B
biotechnology firms for instance, respondents were much more likely to
reveal that commercial banks considered patenting by the target firm
important (43%) than were D&B software firm respondents (13%). This
difference is also notable among friends and family, who considered patents
to be important for more than half (55%) of D&B biotechnology firms, but
less than one-quarter (23%) of D&B software companies. There are also
significant differences for angel investors (71% for biotechnology and 53%
for software), venture capital (73% and 60%, respectively), other companies
as investors (64% and 42%, respectively), and investment banks (62% and
36%, respectively). Clearly, across all funding sources, respondents declare
that potential investors view patenting as much less important for software
and Internet as for biotechnology companies.
These industry differences are also marked in our venture-backed sample.
Among the venture-backed biotechnology firms, for instance, friends and
family were much more apt to indicate that patenting was important (61%)
than among venture-backed software firms (18%). This difference is also
notable in the responses concerning commercial banks, with companies
reporting that this funding source indicated patenting as being important for
almost three-quarters (74%) of venture-backed biotechnology firms, but for
less than one-third (31%) of venture-backed software companies. There are
also significant differences among angel investors (78% for biotechnology
and 36% for software), venture capital (97% and 59%, respectively), other
companies as investors (90% and 51%, respectively), and investment banks
(81% and 40%, respectively).
In sum, our survey respondents report that patents are being widely
demanded by different sources of entrepreneurial capital, though that
demand does not extend to all funding negotiations, and the incidence of
interest in patents is highly variable. While a caveat is in order—these
findings are based upon the perceptions of the recipient about what was in
the mind of the investor—the executives of the startups were nevertheless
privy to negotiations, and can be expected to have unique insights into what
occurred during their funding negotiations and what documents and
information were requested of their companies. We are therefore reasonably

confident that our data present at least a proximate window into the
importance of patenting to various startup investors.178
VI. THIRD FINDING: TECHNOLOGY ENTREPRENEURS
VARY IN THEIR REASONS FOR NOT SEEKING
PATENTS
There are several reasons for startup firms opting against patent
protection,179
including the belief that the technology is not patentable; the
high costs associated with prosecuting and enforcing the patent; the
perception that, with reverse engineering, that patents may afford relatively
weak protection; the fear of disclosure;180
and the availability of other forms
of protection.181
Rather than simply asking our respondents that hold no
patents to report on their motivations for choosing against patenting, we
wanted to uncover the nuances underlying decisions to forgo patenting—
even among those that were patenting other inventions. As such, all
respondents were asked whether the last major technology innovation they
did not patent was a product or a process (or not), and what reasons
motivated their company’s decision not to patent.
Our study of the literature and previous surveys, as well as discussions
with entrepreneurs and investors, allowed us to generate a list of the most
common reasons why, reportedly, startups choose not to patent their
178. In fact, our numbers may be biased downward. Although some investors may
uncaringly request a firm’s patents through pro forma “due diligence lists,” because patent
information is often publicly available, investors may often not disclose their interest in a
firm’s patents, rather than misrepresent concern when they have none.
179. For more analysis, see Sichelman & Graham, supra note 11, which contains a more
detailed discussion of our results on why startups choose not to patent.
180. Patenting is sometimes viewed as a “substitute” for secrecy, the former tending to
vitiate any long-term attempts at secrecy through its disclosure requirements. See, e.g., David
D. Friedman, William M. Landes & Richard A. Posner, Some Economics of Trade Secret Law, 5 J.
ECON. PERSP. 61 (1991). But cf. Stuart J.H. Graham & Deepak Somaya, Vermeers and
Rembrandts in the Same Attic: Complementarity Between Copyright and Trademark
Leveraging Strategies in Software (Feb. 23, 2006) (unpublished manuscript, on file with the
Social Science Research Network), available at http://ssrn.com/abstract=887484 (suggesting
that a complements view is more appropriate when viewing IP protection at the level of the
innovation or the firm).
181. Other forms of protection include copyright, which is available for computer
programs. See Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1246–47
(3d Cir. 1983) (source code and object code); Williams Elecs., Inc. v. Artic Int’l, Inc., 685
F.2d 870, 875 (3d Cir. 1982) (object code); Stern Elecs., Inc. v. Kaufman, 699 F.2d 852, 855
n.3 (2d Cir. 1982) (source code). Trade secret protection may also be available, generally
under state law. See, e.g., Jackson v. Hammer, 653 N.E.2d 809 (Ill. App. Ct. 1995); Gonzales
v. Zamora, 791 S.W.2d 258 (Tex. App. 1990); Oberg Indus. v. Finney, 555 A.2d 1324 (Pa.
Super. Ct. 1989).

innovations. These included: not wanting to disclose information; the cost of
getting the patent, including attorneys’ fees; that competitors could have
easily invented around the patent; that they believed trade secret was
adequate protection; the cost of enforcing the patent, including actions in
court; that they did not believe the technology was patentable; and that they
had no need for legal protection.182
By constructing our questionnaire in this
manner, we were able to collect information on what is essentially a sample
of recently un-patented major technologies generated by startup companies.
A. COST CONSIDERATIONS LOOM LARGE FOR STARTUPS IN DECIDING
TO FORGO PATENTING
We find that, among technology startups, the cost of getting a patent is
the most common reason cited for not patenting a major technology. Figure
4 shows the shares of reasons respondents reported for not patenting their
company’s last major technology innovation.183
Cost considerations in
patenting loom large, with the cost of prosecuting and the cost of enforcing
the patent cited by more respondents than any other reason. These
motivations are followed closely by the ease of inventing around the
patent.184
These results are similar to those found in a Small Business
Administration survey conducted in 1998 of small firms, which listed these
same reasons at the top of small-business motivations for forgoing
patenting.185
In contrast, the difficulties and costs of acquiring and enforcing
patents tended not to be salient for larger firms in other surveys.186
Yet, these
same studies show that even in the large firm surveys, relatively smaller firms
tend to report a significantly higher sensitivity to the costs of filing and
enforcing patents.187
182. Our questionnaire allowed respondents to indicate multiple reasons. In a follow-on
question, we asked our respondents to report which of these motivations was the most
important reason.
183. This question could be answered by respondents regardless of whether they had
filed for a patent. The percentages for each reason do not add up to 100% because
respondents could check one or more of these selections.
184. The difference between the reported percentage for the costs of acquiring and the
costs of enforcing the patent was statistically significant at a 99% confidence level. The costs
of enforcing the patent and the ease of inventing around the patent did not show statistically
significant differences from one another, but they were statistically significantly different
from the next reported reason to a 99% confidence level.
185. JOSEPH J. CORDES, HENRY R. HERTZFELD & NICHOLAS S. VONORTAS, A SURVEY
OF HIGH TECHNOLOGY FIRMS 55–58 (1999), available at http://sba.gov/advo/research/
rs189tot.pdf.
186. See Cohen et al., supra note 24, at 15–16.
187. See id. at 25.

Figure 4: Reasons for Startups to Forgo Patent Protection on Major Technologies
Respondents were asked to indicate all the reasons that applied (share of respondents
indicating that the option influenced the decision is reported).
Other evidence from our survey results indicate that the greater
sensitivity of smaller firms to costs is not merely due to capital constraints.
Another of our survey questions revealed that the average out-of-pocket cost
for a respondent firm to acquire its most recent patent was over $38,000.188
This figure is significantly higher than the averages for patent prosecution
reported in the literature, which vary from a low of $10,000 to a high of
$30,000.189
In one of the unstructured hour-long interviews we conducted
with respondents, one executive at a venture-backed semiconductor firm
stated that startups often pay significantly more than incumbents to their
prosecuting attorneys, because startups (1) tend to file for patents on
inventions that are more important to the company’s core business model
than large firms; (2) usually use outside instead of in-house counsel for patent
prosecution; and (3) often have difficulty monitoring outside counsel to limit
188. We asked this question only of those respondents who reported that their company
had both filed and been granted a U.S. patent.
189. See AM. INTELLECTUAL PROP. LAW ASS’N, REPORT OF THE ECONOMIC SURVEY
2007 78–81 (2007) (reporting average attorneys’ fees for prosecuting an original patent
application, filing one amendment, and issuing an allowed application as between $10,000
and $20,000, depending on the complexity of the technology); Mark A. Lemley, Rational
Ignorance at the Patent Office, 95 NW. U. L. REV. 1495, 1498 (2001) (estimating the cost of
prosecuting a patent to issuance as between $10,000 and $30,000).
Thinking about the last major technology innovation that your company did not patent . . . which
if any of the following influenced your company’s decision not to patent?
56.6%
44.6%
35.6%
45.5%
37.5%
17.5%
35.0%
0% 10% 20% 30% 40% 50% 60%
Did not want to disclose
information
Cost of getting patent
Competitors could
have invented around
Believed trade secret
was adequate protection
Cost of enforcing patent
Believed technology
was not patentable
No need for legal
protection

overall costs.190
Indeed, a non-trivial percentage of our respondents—about
10%—listed cost as the only barrier to filing for a patent from among the
options we offered. Additionally, when asked to indicate the most important
reason for not filing, more than one-third of the respondents selected the
costs of acquiring or enforcing the patent.191
Fewer respondents, but nevertheless a substantial number, reported that
their firms did not seek patent protection because they considered their
innovation unpatentable, believed that trade secret protection was adequate,
or were reluctant to disclose information.192
These last two reasons in fact
may be complementary, and may be associated with the cost considerations
cited earlier. The relative infrequency of startups citing these reasons tends to
track the responses by large firms in other surveys,193
although the reluctance
to disclose information appears to be more of a deterrent for large firms than
for our early-stage respondents. Part of this difference reflects our survey’s
heavy focus on software firms, whose executives less frequently cited
“reluctance to disclose information” than executives of startups in other
sectors. Finally, we note that about 18% of our respondents declared “no
need for legal protection” as a motive for not filing a patent for their last
major technological innovation.
B. STARTUPS’ REASONS TO FORGO PATENTING DIFFER BY INDUSTRY
A major finding of our study is that the most important reason that
biotechnology companies cited for not pursuing a patent on their last
innovation was a reluctance to disclose information, while software
companies most frequently cited patent prosecution costs.
1. Biotechnology Startups Most Commonly Cite Reluctance to Disclose
Information as a Reason Not to Patent
In an effort to better understand the drivers of startups’ choices to forgo
patenting on their major innovations, we segmented the responses by
technology and report the results in Table 2. We find that the most marked
190. Interview with anonymous semiconductor company executive (Feb. 20, 2009).
191. Specifically, respondents identified the following as the most important reasons for
not patenting their last innovation: cost of acquiring the patent (26.00%); did not believe
technology was patentable (20.92%); did not want to disclose information (15.84%); ease of
inventing around the patent (12.41%); cost of enforcing the patent (10.52%); no need for
legal protection (7.33%); and believed that trade secret protection was adequate (6.97%). See
infra Section VI.A tbl.2.
192. The responses for these reasons were not statistically significantly different from
one another, but they were from the next reason—no need for legal protection—to a 99%
confidence level.
193. See, e.g., Cohen et al., supra note 24; Levin et al., supra note 24.

divergence occurs between biotechnology and software companies, and we
note the differences in the share of companies that reported each motivation
(along with statistical significance, in the rightmost column of the table).
Biotechnology firms are more than twice as likely to cite “disclosing
information” as a reason to forgo patenting as are software firms (59% and
25%, respectively). Biotechnology firms are also more likely to believe that
trade secret is an adequate means of protecting their innovations than
software firms (49% and 29%, respectively), although this difference may be
a consequence of the differences in the likelihood of an unpatented invention
being a process technology, a possibility that we explore below.
Table 2: Reasons for Not Seeking Patent Protection – Selected Industries
Thinking about the last major technology innovation that your company did not patent . . .
which if any of the following influenced your company’s decision not to patent?
Reason
Category
Allrespondents
Biotechnology
Software
Difference
Testofdifference
Did not want to disclose 35% 59% 25% + 34% **
Cost of filing 55% 43% 64% - 21% **
Ease of inventing around 44% 42% 46% - 4%
Trade secret was adequate 36% 49% 29% + 20% **
Cost of enforcing 44% 36% 52% - 16% **
Did not believe patentable 38% 28% 42% - 14% **
Did not need protection 17% 17% 20% - 3%
Total responses 1,057 136 589
** Differences noted, significant at the 95% confidence intervals. Tests for differences in
means were conducted between columns, within rows.
2. Software and Internet Startups Most Commonly Cite Cost Considerations
as a Reason Not to Patent
Patenting and enforcement costs are cited much more frequently by
software and Internet firms as motives for not patenting, a finding that is
consistent with the lower significance (as we report above) that software
firms ascribe to patents as a means of securing competitive advantage.194
We
194. If the asset is considered “less valuable,” sensitivity to cost may be expected to be
higher.

note that software firms were also substantially more likely to say that they
did not believe that the technology was patentable than were biotechnology
companies (42% and 28%, respectively), although we are unsure whether the
term “unpatentable” triggered a subjective belief in the respondent about the
requirements of the patent laws or a more philosophical belief about what
ought to be patentable subject matter.195
3. The Most Important Reason Not to Patent Also Differs by Industry
To add even greater specificity to our results, we asked our respondents
to report which of the several reasons for choosing not to patent the
technology was the most important. The results show that, among all
respondents, the cost of filing and the belief that the technology was not
patentable are most highly cited (25% and 21%, respectively). As with many
of our other results, however, there are substantial industry-specific
differences.
Among biotechnology firms, over one-third (34%) cite a reluctance to
disclose information as the most important consideration, a level that is
interestingly nearly matched among venture-backed IT hardware firms
(32%). These industry differences notwithstanding, the cost of filing remains
a significant impediment for these startup firms, with greater than 20% of
companies in each sector citing this reason as the most important
determinant of forgoing patenting. This finding adds weight to other results
in this survey suggesting that these technology startups are sensitive to the
costs of patenting, even when patenting is seen by the executives as an
important factor in their commercial and entrepreneurial success.
C. STARTUPS’ MOTIVES TO FORGO PATENTING DIFFER BY INNOVATION
TYPE
We further explore the differences in the reasons to forgo patenting by
examining whether the innovation is a product or process technology. The
results suggest that the cost of applying is a particularly salient factor for
those companies that chose to forgo patenting on a product technology, with
nearly one-third (32%) citing this reason as the most important factor. When
firms choose to leave process technologies unpatented, they are most likely
to cite three reasons about equally: reluctance to disclose information (24%),
a belief that the technology was unpatentable (22%), and, again, the cost of
195. See generally Pamela Samuelson & Robert J. Glushko, What the User Interface Field
Thinks of the Software Copyright “Look and Feel” Lawsuits (and What the Law Ought to Do About It),
22 ACM SIGCHI BULL. 13 (1990) (reporting survey results and finding that software
engineers preferred copyright protection over patent protection).

filing (21%). As such, because biotechnology companies were more likely to
report that their last unpatented innovation was a process innovation, part of
the inter-industry differences described earlier may be explained by
underlying differences in the types of technologies respondents were
contemplating patenting.
VII. TECHNOLOGY ENTREPRENEURS MUST RECKON
WITH PATENTS HELD BY OTHERS
We were not only interested in determining how entrepreneurial
companies use (or choose not to use) the patent system, but also how they
deal with patents held by others in their market environment. When viewed
as barriers to innovation, patents may create a minefield for various
innovative activities, from invention, to development, to commercialization.
This minefield analogy may be particularly relevant in the information
technologies, to the extent that these arts are more likely characterized by
innovation that is both cumulative (building on earlier generations) and
complex (requiring more than one patentable technology for
commercialization). Nevertheless, relying on interviews and anecdotes,
Ronald Mann has suggested that patents in the competitive environment are
often ignored, at least by startup software firms.196
Another downside of patents in a startup’s competitive environment is
the threat of patent disputes and, when negotiation fails, costly litigation.
Startups may be particularly sensitive to accusations of infringement because
they are likely to experience resource constraints when faced with the costs
of funding a suit, estimated for most suits to be between $3 million and $6
million per litigant through appeal.197
Suits may come in the form of
“bullying” by larger competitors trying to put the startup out of business,198
or even from “trolls” or non-practicing entities seeking royalty payments.
These accusations of infringement are particularly problematic when the
underlying patent being wielded against the startup is more likely than not
invalid:199
the resource-constrained startup may find that its least-costly
alternative is simply to pay licensing fees, thus allowing the firm to avoid
suffering the huge costs of litigation—even though the patent is on its face
196. See Mann, supra note 92, at 977.
197. See AM. INTELLECTUAL PROP. LAW ASS’N, REPORT OF THE ECONOMIC SURVEY
2009, at 29 (2009) (reporting that patent litigation suits with over $1 million at stake cost
roughly between $3 million and $6 million).
198. See Graham & Sichelman, supra note 5, at 1080–81.
199. All patents are probabilistic rights until the last court has spoken. See Mark A.
Lemley & Carl Shapiro, Probabilistic Patents, 19 J. ECON. PERSP. 75, 75–76 (2005).

invalid. If the litigation is launched by a “bully” attempting to put the startup
out of business, the suit may indeed yield such a result if the startup is unable
or unwilling to tap the capital markets to fund lengthy and expensive
litigation.200
But patents in the market environment may be viewed positively by the
startup, too. Patents can serve as mechanisms by which markets for
technology develop, allowing some firms to specialize in a technology market
in a manner analogous to Adam Smith’s division of labor.201
Patents may
therefore serve as a means by which technology, information, and know-how
can be more easily transmitted, since there are a host of problems associated
with transacting in intangible knowledge assets that patents-as-definable-chits
help to solve.202
Given these discordant, but not necessarily mutually
exclusive, views of the roles played by patents held by parties external to the
startup, we fashioned a series of questions aimed at better understanding
how early-stage companies react to patents in their competitive environment.
A. LICENSING-IN PATENTS: (SOME) STARTUPS LICENSE FROM OTHER
PATENT-HOLDERS
We were interested in discovering how commonly startups license
patents from third parties. Moreover, given the theories elucidated above, we
wanted to ascertain whether, and under what circumstances, patent licenses
were taken to gain technology, information or know-how, or to settle
disputes. We find that among D&B companies, 15% of respondents
licensed-in a patent. This figure is significantly higher, over one-third (37%),
among the venture-backed sample.203
In addition to these differences among
companies based on their funding source, we again find divergence based on
the sector in which the company operates: in the D&B sample,
biotechnology companies are significantly more likely to license-in (37%)
than are software firms (8%).
200. See generally CONSTANCE E. BAGLEY & DAVID LANE, X-IT AND KIDDE (A) (2003)
(detailing a startup’s experience with infringement by a larger competitor, and the difficulty
experienced by the startup in securing funding to pursue litigation).
201. ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF
NATIONS 12–13 (1776). Instead of some specialized employees in a pin factory making the
shafts and others making the heads, the analogy would be that some firms make technology
inputs like software while other firms make the technologies to which those inputs are
applied, such as hardware.
202. See Ashish Arora & Robert P. Merges, Specialized Supply Firms, Property Rights and
Firm Boundaries, 13 INDUS. & CORP. CHANGE 451, 454 (2004).
203. Difference significant at the 99% confidence interval.

1. Startups License Both to Gain Knowledge and to Settle Disputes
At least in part, the rationale for having a patent system is that by
offering a limited monopoly on inventions, society will acquire more
invention.204
This property right is limited in both scope and time, with the
understanding that after a period of years, the patented invention will fall into
the public domain and be available for all to use. In the meantime, many of
the patent law’s provisions are tailored to require adequate disclosure of the
invention, so that other innovators may learn from the disclosure, and
possibly improve upon it.205
The operation of markets for technology are also
believed to help in this dissemination function—specifically, by relying on
the markets to exchange patented knowledge, and thus permitting these
intangible chunks of creativity to be propertized and transacted over.206
Startup firms reported that they often seek to gain knowledge,
information, or know-how by licensing patents from others, yet they also
indicated that they frequently—and sometimes only—license to avoid a
patent dispute. When asked why their company took their last patent license,
a majority of all biotechnology company respondents (81%) indicated that
they intended to gain (at least in part) technology, information, or know-how,
while three in ten responded that they licensed-in the last patent (at least in
part) to avoid a patent dispute, or for other defensive or freedom-to-operate
considerations.207
Among the (fewer) software firms that took patent licenses,
79% reported doing so at least in part to gain information, technology, or
know-how. Among both the biotechnology and software D&B companies,
less than one in ten reported that the only reason they took a patent license
was to avoid or settle a patent dispute.
Among the companies receiving venture funding, biotechnology firms
were again significantly more likely to in-license a patent (72%) than were
software startups (13%). We find that nearly nine in ten of patent-licensing,
venture-backed biotechnology startups declared that the last patent licensed
was taken to gain (at least in part) technology, information, or know-how.
Nearly two in ten of these licenses were taken (at least in part) to settle a
dispute. Among the same firms, only two of sixty-three (3%) said that the
sole reason they took their last license was to avoid or settle a patent dispute.
As such, our results suggest that, on average, early-stage biotechnology
204. See Arrow, supra note 4.
205. ROBERT P. MERGES & JOHN FITZGERALD DUFFY, PATENT LAW AND POLICY:
CASES AND MATERIALS 259 (3d ed. 2002).
206. See ARORA ET AL., supra note 9, at 116–17 (suggesting that intellectual property
protection supports more efficient markets for technology).
207. These latter categories were self-defined by the respondents in an “other” category.

companies are not facing demands for licensing payments on patents that are
unrelated to technology that they are working upon or can foresee working
upon. In general, these firms appear to be taking licenses to patents that
bring some knowledge capability into the startup.
2. Venture-Backed IT Startups Take More Patent Licenses
We uncover that some early-stage IT companies may be more likely to
face nuisance patent disputes than has been commonly reported. Among the
venture-backed IT companies responding to our questions, nearly four in ten
(39%) IT hardware firms (semiconductor, communications, and computer
hardware) reported taking a patent license, compared with just over one in
ten (12%) among venture-backed software firms. These patent-licensing IT
hardware and software firms are almost equally likely (about seven in ten) to
have taken their last patent license to (at least in part) gain technology,
information, or know-how.
In a surprising result, both these types of venture-backed IT startups
report that, among those that took a patent license, approximately one in
four (25% and 22%, respectively) of their last patent licenses were taken to
avoid or settle a patent dispute, but not to gain technology, information, or
know-how. This share is several times higher than the same figure reported
by D&B software companies (8%) and by biotechnology companies (6%)
regardless of their funding characteristics.
We find this result intriguing—that a quarter of venture-backed IT firms
that have taken patent licenses report that the last license was taken solely to
settle a dispute, and not to gain technology, information, or know-how. In
fact, these respondents did not suggest any other reasons for taking these
licenses,208
but there are some caveats we must offer. While one-quarter of
venture-backed software firms suggest that ending a dispute was the sole
reason for taking their last patent license, the number of firms taking any
patent license is quite small (12%). As a result, only 3% of all software firms
in our sample report taking their last license solely to avoid or settle a patent
dispute.
But we can apply the same calculation to the hardware firms in our
sample, all of which are venture-backed, and find that nearly four in ten
report taking a patent license. This result shows that one in ten (10%) of the
venture-backed IT hardware startups take a patent license solely to avoid or
to settle a patent dispute. We note that in contrast to the pattern exhibited by
208. Respondents were given the following choices: “For the last patent that your
company licensed in, was the license taken (mark all that apply): (a) to gain technology,
information, or knowhow; (b) to settle a legal dispute; (c) other [specify].”

biotechnology firms, these figures associated with settling a patent dispute
are much higher for venture-backed IT firms than among their (generally
non-venture-backed) D&B software counterparts.209
What is behind this increased likelihood of venture-backed IT firms
facing threats of litigation? The unstructured hour-long interviews that we
conducted with a sample of our respondents produced one story of just such
a patent dispute. One executive of a venture-backed IT company informed
us that his firm had been the target of a cease-and-desist letter during the
company’s initial SEC Registration prior to its IPO. He believed the patent
was invalid, and that it was simply a nuisance suit aimed specifically at the
firm at a time when they were most vulnerable—precisely when the
executives were trying to convince investors in their IPO “road show” that
the company offered a solid investment opportunity.210
Anecdotes like this one offer a possible explanation for the pattern that
we find. Specifically, that one-tenth of venture-backed IT hardware firms
may be paying royalties for a patent license that provides no beneficial
knowledge or information raises questions about the operation of the
“market for patents” as a knowledge exchange mechanism. We surmise that
the higher share of licensing merely to avoid suits among IT firms may be the
consequence of several influences: a combination of the type of innovation
and the nature of the firm’s funding.
It is well accepted that information technologies are different from
biochemistry innovations.211
While the latter are termed “discrete”
technologies for which a single patent can often adequately protect the entire
invention, the former are characterized as “complex” technologies in which
many separately patentable inventions are commonly needed to
commercialize a product.212
Complex technologies have been theorized to
increase the transaction costs associated with commercialization,213
and the
problems associated with clearing patent rights are well-documented.214
There
209. This difference between venture-backed and D&B IT company responses is
significant at the 95% confidence interval. Statistically, there is no difference between the
biotechnology results for the D&B and venture-backed firms (8% and 4%, respectively).
210. Interview with anonymous executive (Apr. 2009).
211. See Cohen et al., supra note 24, at 19. But cf. Arti Rai & James Boyle, Synthetic Biology:
Caught Between Property Rights, the Public Domain, and the Commons, 5 PLOS BIOLOGY 389 (2007),
available at http://www.plosbiology.org/article/info:doi/10.1371/journal.pbio.0050058
(discussing a convergence of these technologies).
212. Cohen et al., supra note 24, at 19.
213. See Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The
Anticommons in Biomedical Research, 280 SCI. 698, 699 (1998).
214. See JAMES BESSEN & MICHAEL J. MEURER, PATENT FAILURE: HOW JUDGES,
BUREAUCRATS, AND LAWYERS PUT INNOVATORS AT RISK 69–70 (2008).

are also claims from engineers that, at least in the software fields, many of the
patents issued since the 1980s have been on trivial inventions. Patented
technology considered trivial coupled with the complex nature of the
technology (and a liberal injunction rule) lends itself to hold-up and could
result in the pattern we observe.
But the “venture funded” characteristic of these firms also appears to be
playing a role in this difference. We note that the types of software
companies we surveyed from D&B are able to operate generally free of the
threats that appear to be at the heart of our finding. The venture-funding
event is an important one in the life of a startup, and is often publicized—
commonly by the startup itself because it provides a positive signal of quality
to other investors, competitors, and consumers alike. Moreover, commercial
research firms (such as Thomson) collect and report on these investments.
Therefore, a startup’s venture-funding event is news, and it may raise the
profile of the company sufficiently to make it a target for holdup of the type
we describe above. Companies that are venture funded are also more likely to
have other significant liquidity events like IPOs or high-value acquisitions
and mergers: these too may increase the potential pay-off to patent holders
external to the firm when threatening these startups with infringement. While
this hypothesis is intriguing, a fuller understanding must await further
research.
B. CHECKING THE PATENT LITERATURE BY STARTUPS: MIXED
FINDINGS
Another little-understood aspect of operating in an environment with
patents concerns the propensity and timing of patent searching by
innovators. When we consider the goals of the innovator and society, there
are substantial benefits that may flow from searching the patent literature.
Because innovation is often cumulative, the cost of innovation for both the
innovator and society may be reduced when greater information about the
current state of the technology is easily discoverable by the innovator.
Moreover, to the extent that the underlying subject matter is a complex
technology that is “modular,” searching the patent literature may allow the
innovator to find existing inputs to its ongoing creative process, thus
preventing duplicate innovation that tends to squander society’s resources.215
By searching the patent literature, innovators may also avoid the risk of
investing in R&D ex ante only to discover that they cannot practice the
inventions ex post due to existing and blocking patent rights.
215. We speak here of duplicate efforts on the same composition, method, or process—
it may be that different means could be used to reach the same outcome.

While these benefits suggest that searching the patent literature may be
efficient and desirable, it has been suggested that entities may actually shy
away from conducting searches.216
Specifically, the patent system may have
unintentionally created disincentives to patent searching, because doing so
can expose the searcher to the risk of liability for willful infringement.217
Under the existing patent laws, entities that are aware of existing patent rights
and engage in willful infringement can suffer treble damages.218
This rule has
led to advice from attorneys that companies should not do searches at all.
(However, the continuing viability of such advice has been cast into doubt by
recent case law.219
) Moreover, searches may be expensive in both money and
time, and in new and embryonic technology areas, or ones that are very
general in application, there may be added difficulty in discovering the proper
scope for patent searching.220
Accordingly, we were interested in discovering which way these
conflicting incentives might cut. We therefore inquired whether our
respondents’ companies regularly check the patent literature to determine if
someone else has a U.S. patent that covered what they were doing or were
considering. For those respondents answering “yes,” we also asked at what
stage of commercialization the company usually conducts that search: prior
to design; during design and development; after launch; or (notably out of
temporal order) only when the firm was planning to apply for a patent.
A substantial share of the respondents to this question reported regularly
doing patent searches. Among D&B respondents who answered, slightly
more than one-third reported conducting these searches. This likelihood was
particularly high for biotechnology (nearly seven in ten) and medical device
(over half) companies, while slightly less than one-quarter of software
companies reported doing regular patent searches.
Among the venture-backed sample, searching was substantially more
common. Among all the respondents to this question, nearly six in ten
venture-backed firms reported that they regularly searched the patent
literature. Again, this propensity was particularly high among biotechnology
(nearly nine in ten) and medical device (over nine in ten) firms. Nevertheless,
nearly three in ten venture-backed software startups and over six in ten
similarly funded IT hardware companies reported doing so. This finding is
216. See BESSEN & MEURER, supra note 214, at 70.
217. See id.
218. See 35 U.S.C. § 284 (2006).
219. See In re Seagate Tech., L.L.C., 497 F.3d 1360 (Fed. Cir. 2007) (en banc) (adopting a
rule making it more difficult for plaintiffs to show “willful infringement”).
220. See BESSEN & MEURER, supra note 214, at 69–72.

notable, because it casts doubt on previous anecdotal evidence that venture-
backed software companies, by and large, do not perform patent searches.221
Our findings on the timing of searches are also noteworthy given that
companies may face conflicting incentives. Because these searches are costly
(both in terms of money and technology employees’ time), and given that
these small startups are resource constrained (both in terms of money and
time), it would stand to reason that at the margin, companies would tend to
delay these searches, if not put them off altogether. Conversely, to the extent
that effective patent search is an information input into the innovation and
technology planning processes, early search might yield greater benefits,
especially to technology startups for which technical information is critical for
both ongoing innovation and effective competition.
We find that those startups that do patent searches tend to conduct them
relatively early in the commercialization process. Among the D&B
population of companies, 65% report usually doing searches prior to product
or process design, and 70% report that these searches are usually done during
design and development.222
We may have also uncovered an element of
patent strategy associated with this searching among our respondents: 14%
report usually conducting examinations only when the company is planning
to apply for its own patent (an event that may occur early or late in the
commercialization process).
It is also noteworthy that one-third of the companies that conduct
searches report usually doing so only after commercial launch. This result
raises the possibility, consistent with our finding on patent licensing, that it is
not uncommon for threats or other competitive information to arrive only
after product launch. Since the company’s technology is likely to be most
notorious after product launch, it is conceivable that the company’s
competitors, or those interested in collecting royalties from the company,
would be most active at that point. It is also possible that some companies
221. See Mann, supra note 92, at 1004. Mann states,
For one thing, none of the startup firms to which I spoke suggested a
practice of doing prior art searches before beginning development of their
products. As far as I can tell, the only occasion in the software industry in
which a startup is likely to experience such costs is when the startup is
founded on a specific piece of existing technology spun off from an
existing company or from a university laboratory.
Id.
222. These percentages can sum to more than 100% because respondents were allowed
to mark more than one category when identifying at which stage the company “usually”
conducted the patent search.

put off costly searching until they are more certain of the economic value of
a technology—a certainty that may only come to light after product launch.
A similar pattern surfaces for the respondents in our venture-backed
sample. For these companies, nearly six in ten relate usually doing searches
prior to product or process design, with three-quarters reporting that these
searches are usually done during design and development. Like the D&B
companies, one-third note that the company usually searches the patent
literature only after commercial launch, while nearly one-quarter report that
they usually conduct examinations only when planning to apply for their own
patents. But, because venture-backed firms are more likely to hold patents,223
it may be that this increased share influences the higher likelihood among
venture-backed firms to do searching at all when compared with the D&B
respondents, fewer of which hold patents. That there may be a “patent
feedback mechanism”—with startups engaged in patenting also being more
likely to examine the patent literature—is an interesting possible finding of
our study deserving further research.
VIII. IS THE PATENT SYSTEM WORKING FOR U.S.
TECHNOLOGY STARTUPS?
Our evidence suggests that for startup companies, by and large, the
patent system is neither working well, nor poorly. We asked our respondents
one purely attitudinal question, without a specific definition: “Overall, how
well is the U.S. patent system working . . . for your company,” and “for your
industry?” We offered the respondents five options, including “very well,”
“well,” “neither well nor poorly,” “poorly,” and “very poorly.” We had few
expectations about what answers this question would yield, although we
hypothesized that given the ongoing debate over the utility and validity of
many software patents that we would see answers from software companies
skewed toward the poorly end of the scale. Moreover, we were particularly
interested to see whether the responses from startups would exhibit an
essentially “U-shaped” distribution, with answers populating
disproportionately the polar ends of the scale, with many answering “very
well” and others answering “very poorly,” with few in the center. Such a bi-
modal distribution of answers would raise the possibility that our
respondents were self-selecting into our survey based on how passionate they
felt about the patent system, whether they had a “love” or a “hate” attitude
toward it.
223. See supra Part III.

In fact, we find that the responses to both questions essentially took a
classic bell-shaped form, with a mean and mode around the central answer.
This result suggests that executives in early-stage technology startups in the
United States find that the patent system, whether they are considering their
company or their industry, is working neither well nor poorly. In essence,
they appear in general to believe that the patent system is “muddling
through.”
There are some inter-industry differences in these responses, but the
deviations are not as great as we surmised they would be at the project’s
inception. For instance, over 35% of respondents from the biotechnology
industry answered that the patent system is working “well” or “very well” for
their company, but the most common answer (the mode of the distribution)
is still the central answer, “neither well nor poorly.” Among software
companies, the most common answer (the modal answer) is again the central
answer, with over 55% of the respondents selecting this middle choice.224
Surprising to us was the opinion among these startups that the patent
system is generally working less well for their industries than for their
companies. Among the biotechnology companies for example, the pattern
for “how well is the patent system working for your industry” is the mirror
image of the answers to the “company” question. The mode was the same
(the central answer), but over 35% of the respondents said they believe the
patent system is working “poorly” or “very poorly” for their industry. Given
that patenting in the “discrete” technology of biotechnology is usually held
out as an example of how well the U.S. patent system is operating, this
shared opinion among these biotechnology executives raises more questions
than it answers. Software and Internet executives’ answers are virtually
identical on the “industry” question to those of the biotechnology responses,
with the most common answer in the center of the choices, but over 35% of
respondents indicating that the patent system is working “poorly” or “very
poorly” for their industry.
Therefore, executives from both the D&B sample (essentially drawn
from the population of early-stage technology companies in the U.S.) and the
VentureXpert sample of high-quality, venture-backed firms are saying, at best,
that the patent system is neither working poorly nor well. At worst, they
224. It is worth speculating whether these respondents were prone to the “central
answer” bias reported elsewhere in the literature on surveys, although this same
phenomenon did not seem to dominate their answers on other questions. See generally Eric A.
Greenleaf, Improving Rating Scale Measures by Detecting and Correcting Bias Components in Some
Response Styles, 29 J. MARKETING RES. 176 (1992) (finding bias when using certain
configurations of response scales).

sense it is working poorly for their companies and their competitors. Such a
finding does not bode well for our system. In the opinion of this
“entrepreneurial class”—arguably one of the key drivers of innovation in the
United States—the patent system does not appear to be functioning
particularly well.
IX. CONCLUSION
By conducting a reasonably comprehensive survey on the relationship of
the U.S. patent system to technology entrepreneurship, we have attempted to
fill an important gap in the considerable body of work exploring intellectual
property and more generally, innovation. Notably, our detailed results do not
offer simple answers to this inquiry. For instance, we discover that
technology startups are generally more likely to file for patents, as well as
hold greater numbers of patents, than was previously believed. But we also
reveal that these same companies report that patents provide mixed to
relatively weak incentives for core innovative activities, such as invention,
development, and commercialization. Part of the foregoing analysis attempts
to uncover the motives for technology entrepreneurs acquiring and filing
patents when those patents—according to the judgment of those same
entrepreneurs—do not offer particularly strong innovation incentives.
Our response to the questions raised by these discordant streams has
been both nuanced and multifaceted. We report that a large share of startups,
especially in the software industry, opt out of patenting altogether. Although
startups appear to be more aggressively accessing the patent system than
previously reported, we find that these effects reflect our survey’s ability to
measure difficult-to-capture patent holdings. Specifically, our survey includes
the reported number of patents originating from founders, acquisitions, and
filed patent applications, rather than merely the number of patents recorded
for a given firm name at the Patent Office. As such, we do not believe our
larger numbers reflect an upward shift in filing rates among startups in the
past several years.
We also report that for many startup companies, patents are an important
part of the mix of strategies used by them to capture competitive advantage
from their technology innovations. But this important role tends to be much
more pronounced among biotechnology and “hardware” companies
(including both medical hardware such as surgical devices, and IT hardware,
such as computers and semiconductors) than among software and Internet
startups. In fact, we find that for software and Internet companies, patents
generally serve a much less important function in almost all of the
entrepreneurial activities about which we surveyed.

These disparate findings trumpet a major result of our study: the industry
in which a startup operates tends to exert a strong influence on the role that
patents play in the firm’s entrepreneurial activities. This finding may be
driven by underlying technology differences in these sectors, variation in
industrial organization, or other unseen factors. The deep differences we find
in the use and utility of patents by startups across industries tracks many of
the patent reform debates of recent years, and while some of the
understanding that flows from those debates is useful in explaining our
results, we find that startups can be quite different from their larger
counterparts in their patenting behavior. As such, more research into the
drivers of these industry differences at the level of the startup is needed.
This Article also demonstrates profound differences in the manner and
extent to which patents are used by venture-backed companies. In a related
series of findings, we report that patents are useful to startups in attracting
entrepreneurial capital and for improving the likelihood of a successful exit
event (such as being acquired or going public). In an important new showing,
we demonstrate that patenting may play a previously underappreciated and
important role in helping startups to secure investment from various sources,
including “friends and family” and commercial banks, as well as angel
investors and venture capital—although these results, too, are context-
specific. These findings may partly explain why venture-backed startups are
generally more apt to use patents, and consider them important, since our
evidence suggests that these companies have been “selected” upon by VC
investors for their patents. But here too, more study is needed to uncover the
dynamics of the patent-financing relationship in technology
entrepreneurship.
Our survey also reports why technology entrepreneurs use the patent
system. Contrary to some previous anecdotal accounts, those firms that file
for patents report that they do so primarily to prevent others from copying
their products and services. Additionally, our study is the first to suggest that
startups use patents in strategic ways, such as to improve bargaining
positions in cross-licensing deals and defend against infringement suits. This
finding undermines the previously held belief that the strategic uses of
patents are significant motivations only for larger-firm patenting.
Finally, we find that our respondents believe, by and large, that the patent
system is not working particularly well for their companies or their industries,
even in the fields of biotechnology, medical devices, and computer hardware,
where our survey suggests patents are considered to be more useful for a
range of reasons. Because many studies have shown that entrepreneurs and
their firms play a substantial role in driving innovation, employment, and

economic growth, we strongly believe that further study is warranted to
determine how the system might be reformed to better serve the needs of
startups.
In the meantime, following on this Article, we plan to further explore our
dataset in a series of more focused articles. These foci include the drivers of
patenting by entrepreneurs, patenting among software and Internet startups,
patents in entrepreneurial “markets for technology,” the effects of patents in
allowing startups to enter new markets, and the relationship of patenting to
market valuation and exit, among others. In sum, we plan to use our dataset
to study a host of topics shedding additional light upon the role that
patenting is playing in technology entrepreneurship.225
225 We thank Robert Barr, Executive Director of the Berkeley Center for Law and
Technology (BCLT), for his consistently helpful comments and unflagging support in
making this survey project a success. We received beneficial insights from our project’s
Advisory Board (Hank Barry, John Barton, James Bessen, Tom Ciotti, Wesley Cohen, John
Duffy, Rebecca Eisenberg, Brad Feld, John Freeman, Richard Gilbert, Michael Goldberg,
Bob Gunderson, Bronwyn Hall, Mitchell Kapor, Peter Menell, Mark Myers, James Pooley,
Walter Powell, Arti Rai, AnnaLee Saxenian, Carl Shapiro, Robert Strom, Lee Van Pelt, and
David Yoffie), and from Peter Ang, Brian Broughman, Colleen Chien, Jesse Fried, Dietmar
Harhoff, Bob Litan, Gladys Monroe, Bob O’Connor, Sheridan Paulker, E.J. Reedy, Alicia
Robb, F.M. Scherer, and John Walsh. We also thank participants at the 2008 Berkeley
Technology Law Journal Symposium on Patenting and Entrepreneurship, the 2008
Kauffman Foundation Symposium on Entrepreneurship and Innovation Data, the 2008
OECD-DIME Patent Statistics for Managers Conference, the 2009 OECD-Kauffman
Workshop on Entrepreneurship and Innovation, the National Bureau of Economic
Research’s Summer Institute 2009, the 2009 Conference on Empirical Legal Studies, the
2009 IP Scholars Conference, the 2009 Creativity, Law, and Entrepreneurship Workshop at
the University of Wisconsin Law School, the 2009 Kauffman Foundation Summer Institute,
the 2009 Northwestern Law School Searle Center Conference on the Law and Economics of
the Entrepreneur, the 2009 West Coast Research Symposium, the 2009 Works in Progress in
Intellectual Property Conference, and faculty workshop participants at the Bar-Ilan School
of Law, DePaul Law School, Georgia Tech College of Management, Harvard Business
School, Stanford University Economics Department, and the University of California,
Berkeley, Haas School of Business and School of Law. We thank Galen Hancock for
working closely with us as our chief research assistant since the inception of the project, and
David Grady and Louise Lee for administrative support. We acknowledge helpful advice
from Bob Lee and UC Berkeley’s Survey Research Center, and research assistance from
Peter Dimitrov, Andrew Harris, Deepak Hegde, Christine Rhyu, Erin Trimble, Stephen
Ullmer, and Brian Weissenberg. This research was funded by the Ewing Marion Kauffman
Foundation. The contents of this article are solely the responsibility of the grantees/authors.
All errors and omissions are our own.

High technology entrepreneurs and the patent system. 2008 Berkeley

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