Patent Strategies of Technology StartupsCELIA LERMANSTANFORD LAW SCHOOL - FULBRIGHT SCHOLARROTMAN, SZLAK & LERMAN – ARGENTINAJULY 2015

Innovation

Startups

How do patents affect a tech startup’s growth?

• Under what conditions should a tech startup pursue patents?

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Approach: A Quantitative Study

Startup Launch

Investment

Acquisition / IPO

Analysis of startup patent applications: How do they correlate with companies’ milestones?

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Approach: A Quantitative StudyCombining two databases that have not been used jointly before:

Techcrunch’s Crunchbase

United States Patent

Office Database

Crowdsourced Startup Index Official Patent Applications Database

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Methodology◦Patent applications 2008 – 2012

◦US-based startups with 10K USD starting capital–9,208 startups

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Data Analysis

Startup Overview

Patenting Activity Findings

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Data Analysis

Startup Overview

Patenting Activity Findings

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Who Are The Companies?

Software/Internet73%

Biotechnology/Agriculture10%

IT/Hardware9%

Medical Industry8%

Industry

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Where Are They Located?

* 65% of the companies are based in these five states

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

What Is Their Funding Situation? Half of all companies received $ 1.5 M or less Very high standard deviation

Almost all companies received between 1 and 5 funding rounds Virtually half of them (48.5%) received only 1 round

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

What Is Their Exit Status?

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Data Analysis

Startup Overview

Patenting Activity Findings

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

How Many Tech Startups Patent?

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Tech Startup Industry & Patents• Software companies are less likely to patent than those in all other industries

• Hardware companies are more likely to patent than biotechnology and medical ones

• In Hardware and Medical, many companies with a high number of patents drive the high averages

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Bigger Companies Patent More• (Although not as much as would be expected!)

• Positive but very low correlation (r=0.15, p<0.001)

•Suggests that patents are just one factor in driving funding

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Are Startups in Certain States More Likely to Patent?

•No statistically significant differences between states, except for California (!)

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

How Can We Explain California?

+ bigger companies

+ software companiesCO

MPA

NY

SIZE

INDU

STRY

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

When Does a Startup File Its First Patent?

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

When Does a Startup File Its First Patent?

• Software: First patents are better distributed across rounds• Suggests patentable innovation arises when companies are more mature, or patents as a luxury

• Time between patent application and Round 1: +- 2 years

• Possibly decreasing patent signals over time: companies which took longer to get funding after the patent application, tended to receive total lower funding

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Data Analysis

Startup Overview

Patenting Activity Findings

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Methodology: Regressions and Basic Model• Multivariate OLS linear regression model

• Controlling for funding rounds, company age, industry and location in California

y = a + Patents* xpatents + funding_rounds* xfunding_rounds + age* Xage + hardmarket* xhardmarket + California* xCalifornia + e

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Signals to Investors: Does the Number of Patents Matter?

Patents just as

“Checkbox”

Vs. Number of patents

does matter

Finding: Number of patents associated with higher total

funding530k more per additional

patent

Limited investor

patent due diligence

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Patent Timing: When Do Patents Most Affect Funding?

• Significantly

• Very significantly

• Not significantly

Before Round 1

Rounds 1-3

Rounds 4 and after

Role of patents in

funding evolving over

time

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Patents, Exit & VC Funding• Companies with patents were more likely to be acquired (1.01)

• VC-backed companies tended to patent more than non VC-backed, and to have a higher absolute number of applications

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Role of Patents in

Tech Startups

More Patents,

More Funding

Evolving Importance in Startup

RoundsPatents,

Industry & Location

Reconciling views in VC & industry

Counseling clients

Celia Lerman – Stanford Law School / Rotman, Szlak & Lerman – @celialerman

Innovation

Startups

celia@estudiorosz.com.ar

@celialerman

Questions?

Full study:

http://ssrn.com/abstract=2610433