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

Yale Journal of Law and Technology Volume 16 Issue 2 Yale Journal of Law and Technology Article 1 2014 Patent Demands & Startup Companies: The View from the Venture Capital Community Robin Feldman University of California Hastings College of Law Follow this and additional works at: https://digitalcommons.law.yale.edu/yjolt Part of the Computer Law Commons, Intellectual Property Law Commons, and the Science and Technology Law Commons Recommended Citation Robin Feldman, Patent Demands & Startup Companies: The View from the Venture Capital Community, 16 Yale J.L. & Tech (2014). Available at: https://digitalcommons.law.yale.edu/yjolt/vol16/iss2/1 This Article is brought to you for free and open access by Yale Law School Legal Scholarship Repository. It has been accepted for inclusion in Yale Journal of Law and Technology by an authorized editor of Yale Law School Legal Scholarship Repository. For more information, please contact . Feldman: Patent Demands & Startup Companies: The View from the Venture Cap PATENT DEMANDS & STARTUP COMPANIES: THE VIEW FROM THE VENTURE CAPITAL COMMUNITY Robin Feldman* 16 YALE J.L. & TECH. 236 (2014) ABSTRACT With the high level of interest in patent monetization and its effects on US companies, data on the topic is increasingly important. This study examines one aspect of the topic, focusing on the effects of the rising patent monetization market on startup companies. The study provides one of the rare glimpses of monetization activity outside of lawsuits. It provides both quantitative and qualitative information on the startup community’s experience with and perspectives on patent demands. Among other issues, the study tests a narrative that has circulated suggesting that patent monetization creates for venture capital investment. According to the theory, venture capitalists will be attracted to the possibility of monetizing a startup company’s patents if the company fails, and this attraction spurs investment. The study tests that narrative through the eyes of the venturebacked community itself. Results include the following: When making funding decisions, the vast majority of venture capitalists do not consider the potential for selling to assertion entities if the company fails. Thus, patent monetization does not appear to provide investment incentives. In addition, both the companies and the venture capitalists overwhelming believe that patent demands are having a negative impact on the startup community, and all or most of the demands they experience are coming from those whose core activity involves licensing or litigating patents. The effects of these demands are described in terms including the specific costs expended by the companies and the distraction to management, engineers, and other employees. Most important, participants detail the human toll that patent demands have had on entrepreneurs. * Professor of Law, Harry & Lillian Hastings Chair and Director of the Institute for Innovation Law at the University of California Hastings College of the Law. This work was supported by the University of California Hastings Institute for Innovation Law. No corporation or other entity outside of UC Hastings provides more than 10% of the Institute’s funding. The National Venture Capital Association has provided no funding for this or any other work conducted by the author. I am grateful to Colleen Chien, Jennifer Dowling, Ira Ehrenpreis, Osagie Obasagie, Carolyn Spencer, and Kelly Stone for their suggestions on the design of the study. I also wish to thank Sara Jeruss, David Schwartz and Michael Risch for their comments on the results, as well as Alice Armitage, Kristy Brady, Jake Wexler, and Josh Wolf for their invaluable research assistance. 236 Published by Yale Law School Legal Scholarship Repository, 2014 1 Yale Journal of Law and Technology, Vol. 16 [2014], Iss. 2, Art. 1 16 YALE J.L. & TECH. 236 (2014) 2013-2014 I.   OVERVIEW OF THE STUDY ..................................................................... 237   A.   Background on Modern Patent Monetization ................................ 238   B.   Key Study Results ........................................................................... 242   C.   Choosing Terms and Points of Measurement: A Politically Charged Endeavor ......................................................................... 244   D.   Brief History and Overview of Startup Financing ......................... 254   E.   Design of Study and Participants................................................... 258   F.   Study Limitations............................................................................ 259   G.   General Characteristics of Respondents........................................ 261   II.   RESULTS ............................................................................................... 263   A.   The Extent of Patent Demands Against Venture-Backed Companies...................................................................................... 263   B.   Source and Timing of Demands ..................................................... 266   C.   Significance and Cost of Impact of Patent Demands on Venture-Backed Startups................................................................ 268   D.   The Human Factor: Respondents Elaborate on the Impact of Patent Demands ............................................................................. 272   1.   Extraordinary Impacts ............................................................. 272   2.   Distractions to Management and Engineers............................ 273   3.   Cost Impact .............................................................................. 273   4.   The Human Face ...................................................................... 274   5.   Other Assorted Impacts............................................................ 275   6.   Weak Claims; Wasteful Process .............................................. 275   E.   Is Patent Assertion Helpful or Harmful for the Venture-Backed Community? ........................................................ 276   III.   CONCLUSION ......................................................................................... 281   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 1 This study was conducted by a law professor and was supported by the professor’s academic institute. See author’s note. 237 https://digitalcommons.law.yale.edu/yjolt/vol16/iss2/1 2 Feldman: Patent Demands & Startup Companies: The View from the Venture Cap PATENT DEMANDS (...truncated)