Most Software Startups Don't Patent

In A comment on “Do Patents Facilitate Financing in the Software Industry?”, James Bessen explains:

“Do Patents Facilitate Financing in the Software Industry?” by Ronald J. Mann contributes empirical evidence to our understanding of how software startups use patents. However, a close examination of the actual empirical findings in this paper points to rather different conclusions than those that Mann draws, namely: few software startups benefits from software patents and patents are not widely used by software firms to obtain venture financing. Indeed, among other things, the paper reports that 80% of venture-financed software startups had not acquired any patents within four years of receiving financing.

Mann’s principal argument is that …a substantial number of software startups do have patents of sufficient strength to exclude competitors. That important finding, taken with the fact that the principal targets of those patents are much larger firms, suggests patents are more beneficial to small firms than to large firms. (pg. 962)

The only actual quantitative evidence Mann cites regarding licensing revenues concerns Forgent, a company that has recently obtained tens of millions of dollars for a patent it acquired that was filed in 1986 and that reads on the JPEG image compression standard. Because large companies (and small) have widely adopted this standard since it was introduced in the 1980s, it is not surprising that Forgent has been able to obtain large settlements.

However, Forgent cannot be accurately classified as a “software startup.” Forgent began corporate life as Video Telecom (later “Vtel”) in 1985, a company producing videoconferencing systems, so although it might be called a “re-start,” it is hardly a startup… Forgent’s activities regarding image compression are those of a patent licensing business (that is, a “troll”), not those of a software developer—it offers no image compression software. Despite substantial patent revenues from companies using JPEG, Forgent’s actual software business continues to shrink.

Mann asserts that there are “substantial numbers” of firms like his three examples, but he admits that there is no statistical evidence to support this assertion.

However, other evidence in Mann’s paper reveals that most startup software firms do not benefit from patents. We know this because Mann provides evidence that most small software startups choose not to get patents. If patents were valuable to them, they would acquire patents and plenty of them. But in a more comprehensive sample of 788 software startups, Mann reports that the mean number of total patents acquired was 0.6.

And fully 80% of these software startups that received venture financing in 1998-99 had not acquired any patents by 2003.

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Who does patent?

Software patents are mostly bought by large firms (like IBM, Sun, Microsoft) and patent arsenals (like Open Innovation Network and Intellectual Ventures). Small firms don't buy patents because they cost too much and take far too long to get (would you wait seven years for a patent?). If they do buy patents, they find they are at more risk of being sued than before. If they try to enforce their patents against large firms they find patent arsenals being used against them. Going to court is expensive - $500,000 and up.