What is the worth of a patent for a startup?

Main points:

  • The possibility of financing increases for a startup with an initial patent granted at least in the US and European experience.
  • Few AI startups file patents but the big technology companies see their importance.

Unquestionably, the number of startups rising to the challenge of solving a social need using technology is increasing, which is attributed to a fostering environment caused by the partnership of government and private sectors. The setting is sufficiently enabling that a person with a good idea for a start-up can attend startup boot camps in one of the country’s innovation hubs and receive benefits that allow him to turn an idea into an actual product or service (for free).

A general observation of startup founders during these conferences aside from their eagerness to collaborate and share their ideas is their lack of knowledge about intellectual property. Only a few know the difference between a copyright and a patent, thus, showing a lack of IP knowledge among startup founders, which may be a reflection of the same in the broad majority.

Because startup founders are considerably no-nonsense individuals, the effort to educate them has to be more than just giving them a rundown of the kinds of IP rights. It has to be persuasive enough for them to believe that there is a benefit in going through the motion of filing for protection of business-related IP rights. However, data on how much beneficial IP protection for Philippine startups is wanting, hence the effect of IP to local start-ups remains to be seen.

Patents attract funding

In the face of missing actual data for Philippine start-ups, one can use studies based on the experience of other countries to derive an argument for patenting. Within the extant literature, the recent Farre-Mensa et al. paper stands out because it correlates the quantifiable economic gains US startups receive with their success in the patent application process.  Farre-Mensa et al.’s data span more than four decades of approved and rejected patent applications. After having filtered for applications made on or after 2001 by first-time small entity applicants with address in the US, and having correlated this list with databases of companies in the US, Farre-Mensa et al. found 34,215 start-up applicants. This number comprises 31.6% within the ICT sector; 17.8% within the pharmaceutical industry; and the remaining 50.6% within either transportation, construction, mechanical engineering or manufacturing. Only around 64.5% of the first-time applications have been granted over the sample period. The data suggest that success in the first patent application translated to an increase in employment growth by 54.5% or around 16 employees on average and 79.5% increase in the average sales growth translated to approximately $10.6 million accumulated sales over the next five years. Moreover, a first patent increased a start-up’s chance of receiving funding from venture capitalists by around 47% over the next three years. It also doubles the prospect of raising financing from public investors through an initial public offering. A subsequent patent, however, has little effect on sales and employment growth.

The same effect of patenting is observed among European start-ups. A study of 116 German and 74 British biotechnology start-ups by Haeussler et al. indicates that applying for patent protection at the EPO accelerates venture capital financing. Moreover, the examiner’s finding on novelty and inventiveness affects the timing of funding.

The ability of patents to attract investors is already widespread in the literature since Lemley’s paper in 2000. Lemley notes that aside from providing exclusionary rights for exploitation, patents provide an external signal about the quality of the invention and increases the salvage value of the firm that owns the patent should it fail. The property of a patent to signal quality bridges the asymmetry of information between the inventor and investor.

(A very recent literature survey by Bronwyn Hall of UC Berkeley further explains the correlation of patenting with venture financing.)

Big tech vs. small tech

While the success of obtaining a patent is generally beneficial, a few challenges of note dishearten startups from proceeding with the patent application process. In the US, the average cost to patent alone is around $20,000, and the cost of filing in the EPO is generally higher than in USPTO. The entire process from filing to enforcement can be expensive and complicated in specific industries. Within the AI industry, for example, the existence of open-source libraries complicates the claiming of the scope of protection. AI startups are also confident of their monopoly because access to a proprietary algorithm still requires access to data. Regardless, since 2009, around 11% of the 1150 AI companies analyzed by CB Insights filed patent applications. Google leads in applying for AI patents, and among all tech companies, Microsoft still leads in applying for patents.

The results of Farre-Mensa et al. and Heussler et al. are yet to be demonstrated in the Philippine context. The startup scene is relatively young and the number of patent filings from startups scarce. Still, these results serve as predictors of the future trajectory of start-ups in the country. The main takeaway from them is to continue to encourage start-ups to file their initial patent applications. There is sufficient reason to believe that venture capitalists in the Philippines act in the same way as their counterparts in the US or Europe, that is, when presented with two start-ups, with all other factors being mostly similar, the venture capitalist will most likely be persuaded to finance the one with a patent.  

Moreover, there is little doubt that we’re riding on a wave of increased awareness of intellectual property as seen from an increasing number of IP filings year-on-year. This phenomenon alongside a similar wave of increasing number of start-ups being founded every year point to an inevitable situation where filing patents becomes part of standard business practice, which will fuel innovation for years to come.