Patents, Entrepreneurial Performance and VC Financing
Jerry Cao (Assistant Professor, of Finance Singapore Management University) and Po-Hsuan Hsu (Assistant Professor of Finance, University of Connecticut) recently looked at patent data for VC-backed firms in the U.S. from 1976 through 2005 to empirically examine the signaling effect of start-up firms’ patents on entrepreneurial performance and financing patterns of venture capitalists (VCs).
From their findings:
Not only does patenting play an important signaling role between VCs and entrepreneurs, but our results show that start-up companies’ patenting prior to any VC investment is credible by leading to higher IPO success rates. Accordingly, entrepreneurs tend to wait for patent filing before asking for VC money and tend to file more patents when the degree of information asymmetry is higher. Consequently, patenting start-up firms not only attract larger and more experienced VCs in first VC financing round, but also receive significantly larger amounts in first rounds or all rounds of investment, and experience longer investment incubation periods. All these findings are consistent with the signaling role of patents in equilibrium. Patent filing also helps to enhance entrepreneurs’ control in start-ups: new ventures with prior patents are significantly less likely to be acquired in trade sale than those without patents.
Read/download the full study here (link)
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Precisely. Not only that, but in practice, it seems VC approach the negotiating table much more seriously in the presence of Patent rights, than where there isn't any, or only a few.
Merely fyi:
Academics still running amok in IP: VCs and patents
the link to the research paper seems broken. do you have an update url?
thanks!
I think this is absolutely true in that patents give a way to back up claims of achievements in innovation prior to commercialization of a product. It is also true in that patents help VC's turn around and hype the company. Patents when issued can also be collateral for loans. But no doubt patents give credibility and enhance value for a start up.
It should certainly be no surprise to anyone that VCs heavily favor those start-ups that have committed to obtaining patents on their innovations. Although the study likely will not silence those anti-IP ideologues who insist on a world without patents, it at least provides additional evidence as to the importance of patents for start-up companies.
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