The demands of protecting intellectual property are putting outsize demands on small, venture-backed startups, according to a study released Tuesday by the National Venture Capital Association.
The study found that 80 percent of survey respondents say the number of patent demands they have received has increased in the last five years, posing a challenge to their ability to innovate.
“The economic and human toll of patent demands on startup companies is substantial, Robin Feldman, professor of law and director of the Institute for Innovation Law at the University of California Hastings said in a statement. “When startup companies must spend time and money thinking about patent demands, they are not inventing and they are not expanding.”
The survey, titled “Patent Demands & Startup Companies: The View from the Venture Capital Community,” was distributed to members of the NVCA and the CEOs of member firms’ portfolio companies.
The impact of these patent assertions across industry sectors is uneven, according to the survey results. Of the VCs surveyed, 70 percent identified IT as the industry sector most impacted by patent demands, followed by life sciences at 30 percent. Cleantech was cited by 10 percent of those surveyed.
The survey comes as Congress considers patent reform legislation. The Association for Competitive Technology, or ACT, a group that advocates for small and mid-size app developers and IT firms, on Monday submitted a letter to the House Judiciary Committee expressing support for the effort but also concern that the expansion of the transitional program for covered business method patents will result in additional and more costly litigation:
“Instead of prolonging the post-grant process, we believe the next stage of patent improvement should come from a more robust pre-grant examination process. That is where the uncertainty about overly-broad patents can be more easily addressed and the tech community can be protected from bad patents without affecting the owners of patents that were properly granted.
“Patent reform is needed to address the threat patent trolls hold over the entire tech community and we commend your efforts to address those threats. However, we respectfully urge you to reconsider this section of the bill to ensure that the good intentions of this legislation do not result in additional uncertainty and costs for innovative small companies.”
Concern about patent trolls also figured into the NVCA survey results; 60 percent of VC respondents said that patent demands came from entities whose core activity is licensing or litigating patents.
But defending patents is expensive. Sixty percent of respondents pegged the average cost to prepare for and defend against patent demands at more than $100,000. Some put the costs in the millions of dollars. Just 20 percent estimated these legal costs would be between $50,000 and $100,000.
While these patent demands are distracting to company manage and expensive to litigate, they also have a negative effect on investment prospects. The survey said that every VC respondent indicated that an existing patent demand against a prospective portfolio company could factor into his or her decision to invest in that company, while 50 percent said it would be a major deterrent.
Jennifer Connell Dowling, the VC association’s senior vice president of federal policy and political advocacy, said that the study confirms what the NVCA has been hearing anecdotal from its members and underscores the need for reform.
“As more startups are targeted, more resources are devoted to litigation rather than to innovation,” Dowling said in a statement. “Balancing the need for reform with the need to maintain strong protection for patent-dependent startups will be a critical challenge.”
