One in three startups and 70% of VCs face accusations of patent infringement, according to report.
One in three US startups and as many as 70% of venture capital firms face assertions of patent infringement, according to a new report conducted by the National Venture Capital Association (NVCA) and the University of California Hastings.
The sector with the most disputed patents is IT, followed by life sciences and clean tech, and can prove a costly battle for startups to fight. The NVCA reports that the average cost for defending a patent can cost a company on average $100,000, with some cases running into millions of dollars. The process often lands a crippling financial blow on cash-strapped startups, with 60% of startup chief executives reporting a moderate-to-high negative impact on the company’s operations.
The arguments over patents can also stifle future investment, as 48% of VCs report that they would be deterred from investing in a company facing a patent demand, with the remainder saying that it would remain a factor in their decision.
VCs argue that the majority of these infringement cases stem from entities known as ‘patent trolls’, companies who buy and licence patents with the intention of suing others for infringements. In 2011, patent trolls accrued $29bn in damages following infringement claims. While a large chunk of this cash came from bigger firms, many startups were still targeted where revenues are considerably smaller and fighting a claim is significantly more costly to the company.
Robin Feldman, director of the Institute for Innovation Law at the University of California Hastings, said: “The economic and human toll of patent demands on startup companies is substantial. When startup companies must spend time and money thinking about patent demands, they are not inventing and they are not expanding.”
Jennifer Connell Dowling, senior vice president of federal policy and political advocacy at the NVCA, added: “This study confirms what we’ve been hearing anecdotally from our members: The current patent system is working well for some portfolio companies, but not for others. The trend line, however, is not heading in the right direction. As more startups are targeted, more resources are devoted to litigation rather than to innovation. Balancing the need for reform with the need to maintain strong protection for patent-dependent startups will be a critical challenge.”
