Patent Demands & Startup Companies: The View from the Venture Capital Community

Abstract

This paper presents a study of patent demands against venture-backed startups, conducted through members of the National Venture Capital Association and their portfolio companies. The results of surveying 200 venture capitalists and their portfolio companies provide strong indications of the impact that patent demands are having on the venture-backed community. Both the companies and the venture capitalists overwhelming believe that patent demands have a negative impact on the venture-backed community, with all or most of those assertions coming from entities whose core activity involves licensing or litigating patents. These impacts are described in terms of the specific costs expended by the companies and by the distraction to management, engineers, and other employees. Most important, participants described the human toll that patent demands have had on entrepreneurs. In addition, when making funding decisions, the vast majority of venture capitalists do not consider the potential for selling to assertion entities if the company fails. On the flip side, 100% of venture capitalists indicated that if a company had an existing patent demand against it, it could potentially be a major deterrent in deciding whether to invest.Finally, one venture capitalist provided an excellent summary of the impact of patent demands on venture-backed companies. When companies spend money trying to protect their intellectual property position, they are not expanding; and when companies spend time thinking about patent demands, they are not inventing.