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

I. Overview of the Study A. Background on Modern Patent Monetization B. Key Study Results C. Choosing Terms and Points of Measurement: A Politically Charged Endeavor D. Brief History and Overview of Startup Financing E. Design of Study and Participants F. Study Limitations G. General Characteristics of Respondents II. Results A. The Extent of Patent Demands Against Venture-Backed Companies B. Source and Timing of Demands C. Significance and Cost of Impact of Patent Demands on Venture-Backed Startups D. The Human Factor: Respondents Elaborate on the Impact of Patent Demands 1. Extraordinary Impacts 2. Distractions to Management and Engineers 3. Cost Impact 4. The Human Face 5. Other Assorted Impacts 6. Weak Claims; Wasteful Process E. Is Patent Assertion Helpful or Harmful for the Venture-Backed Community? III. Conclusion I. Overview of the Study This article presents the results of a study conducted on the topic of patent demands against venture-backed startups. The study was conducted through the members of the National Venture Capital Association and their portfolio companies. (1) The article details responses from more than 200 venture capitalists and their portfolio companies. Results include quantitative information on the frequency of patent demands, (2) the percentage of demands that came from those whose core business involves licensing or litigation patents, the costs of responding to demands, the possibility of demands timed in relation to funding, and the distribution of demands in different industry sectors. Results also include the respondent's views on whether patent demands are a significant problem in the sector, whether venture capitalists consider the possibility of selling patents in determining whether to invest in a company, and whether venture capitalists would be deterred by patent demands against a company they were considering adding to their portfolio. Finally, the article provides qualitative information on the effects of patent demands on the lives of venture-backed startup companies--documenting both the human and the economic costs of patent demands. A. Background on Modern Patent Monetization Patent monetization has existed in some form since at least the 19th century. In recent years, however, the market for patent trading and patent assertion has expanded dramatically, growing both in scope and in the level of sophistication. As a result, the percentage of patent lawsuits filed by those who do not make products has increased dramatically from roughly 25% in 2007 to almost 60% in 2012. (3) In other words, as of 2012 the majority of patent lawsuits are filed by those whose core business involves licensing and litigating patents as opposed to making products. Before the rise of the today's patent assertion market, most patent litigation operated more as a tool of last resort which was primarily used by companies that created their own products against other companies that also created products. In this context, the threat of litigation ensured a form of mutually assured destruction. For example, if one product company launched its patents against a competitor, the target company would wield its own set of patents in retaliation, putting the original company's products at risk. The tendency toward risk aversion, acted as a limiting factor on patent demands and patent lawsuits. In today's patent assertion market, however, entities that do not make products use litigation as a profit-generating weapon, often relying on a product company's fear of the high costs and risks of patent litigation to encourage settlements. The complexity and uncertainty of the patent system tends to work in favor of those who do not make products. For example, it is tremendously difficult to know what the language of a patent covers, and it can cost as much as $6 million to find out through a patent lawsuit. …