A scholarly approach to patent value for startups, with a surprise twist
Opinion sometimes seems to weigh against the value of patents to a startup. Startup founders themselves are reticent to believe in patents, because if they do, they may feel compelled to invest a few thousand dollars with a registered patent attorney to draft a good provisional patent specification, and that is before a revenue event.
While we at Foundry have witnessed first hand the power of a patent to its owner, one swallow does not a summer make - and those anecdotes are not always related directly to startups. Over the break, I reviewed a couple of scholarly papers which carefully assessed the value of patents to startups. I was genuinely excited to see research which quantified a patent’s value to a software startup. The numbers are striking; they make investment in a startup company that does not have a patent seem almost foolhardy.
First, here is the Haydn surprise. Before you wince about a tone-deaf patent attorney making a self-interested justification of his own fees, there was also a genuine twist in one of the papers. According to a research paper by Mann & Sager the startup is not required to invest millions of dollars in patents; rather, for the startup to obtain the benefits associated with (I would love to say “conferred by”!) patents, one patent is enough.
Quoting from the Mann & Sager abstract: “we find significant and robust positive correlations between patenting and...firm's performance (including number of rounds, total investment, exit status, receipt of late stage financing, and longevity)”. And here’s the part about how many patents you need: “the relationship between patent metrics and firm performance depends less on the size of the patent portfolio than on the firm's receipt of at least one patent”.
How much will a single patent buy my startup? I hear you ask. For that, we excerpt a summary of Mann & Sager by Dr Ian Maxwell, a former VC and inventor:
Companies with patents received about 73% more funding than those without patents, representing an average funding gap of $10.7m
Companies without patents are twice as likely to go bankrupt compared to companies with patents
13% of the companies in the study with patents went to IPO compared to only 3% of companies that did not have patents. That is, the companies with patents were more than 4x more likely to go to an IPO
Maxwell, with his cold VC blood pumping, goes on to discuss IRR numbers, citing some other research papers by Hellman and Bienz: He crescendos: “IPOs usually represent the most lucrative return for venture investors….and startups with patents are 4x more likely to go to an IPO where the financial returns are 4x greater.” He also clarifies that the average patent family size in the Mann & Sager study is three, the (absolute and ) relative cost of which, compared to to the $10.7m value increase and the lower risk profile, is miniscule.
Of course, there is no magic spell of profitability and bankruptcy protection cast by the mere presence of a patent for the startup; we are talking statistics here.
While it cannot make money by itself, a single granted patent may be enough to bring a startup company multiple benefits worth many multiples of its cost. If you would like to talk about your invention or innovation, and its protection, please get in touch.
Photo: Daria Nepriakhina on Unsplash