Show Me the IP! Venture Capital Success Based on Patents

By Gene Quinn
March 12, 2010

Earlier today Dale Halling, of Halling IP and State of Innovation Blog, brought to my attention an article on the IAM Magazine Blog from a few weeks ago. Joff Wild of IAM blogged about a study conducted by IPVision, Inc., which focused on analyzing the intellectual property positions of over 9,000 US venture capital backed technology companies. The study was conducted with the assistance of faculty at the MIT Sloan School of Management, and not surprisingly determined that there is a strong correlation between intellectual property assets, particularly strong patent portfolios, and success. In fact, the IPVision study shows that VC-backed technology “[w]inners are many times more likely to hold intellectual property than losers.” Further proof that those who due to ideological reasons forgo pursuing a patent portfolio are dooming themselves, and their investors, to an unnecessary uphill struggle right from the start.

According to the IPVision study:

Analysis shows that across all sectors a significantly higher percentage of venture capital backed winners (companies that have been acquired or have gone public) have patent portfolios as opposed to losers (companies that are out of business).

Joff Wild writes:

According to the metrics applied by IP Vision, 86% of the VC-backed winners (ie, companies that are acquired or go to an IPO) they identified had strong as opposed to typical intellectual property assessments. In other words, while a healthy IP position may not guarantee that a start-up technology company is going to be successful, it is going to find it a whole lot harder to succeed if it does not have one. And ,crucially, it is not just ownership of IP that is important, it is understanding the IP that is key.

Those who are anti-patent and against any form of intellectual property rights are sure to be enormously upset by this study, which quite clearly shows the virtues of intellectual property and patents in particular.  On the pages of IPWatchdog.com I have from time to time engaged in debates with the anti-patent crowd, and in one particular instance went back and forth with a gentleman by the name of Ian Clarke who professed to be an innovator who doesn’t like patents, particular software patents.  He claimed to see no reason for software patents and stated they should not exist.  He even went on to say that he is a prolific inventor and entrepreneur who has raised over $15 million in venture capital without patents, relying only on copyright protection and trade secret protection for his software related innovations.  See comments at Praying the Supremes Get Bilski Right in 2010.

We got into a heated debate because I proclaimed, and rightfully so, that sophisticated VCs require patent assets and sophisticated VCs do not invest in companies that lack intellectual property portfolios.  I explained what everyone in the patent and innovation industries know to be true, which is sophisticated VCs want to know about your patent rights and evaluate them to see if you will be able to exploit a competitive advantage.  In fact, none other than Dean Kamen, probably the most influential and prolific American inventor of our time, has repeatedly explained that without patents there will be no investment.  Yet, folks like Ian Clarke and others who have a philosophical and ideological aversion to patents want others to believe that success is possible without patents.

This IPVision study quite clearly demonstrates that if you are not pursuing a patent strategy you are unnecessarily making it harder to succeed.  Having a patent portfolio does not guarantee success, but is sure makes if far more likely than if you do not have a patent portfolio.  Of course, having a strong patent portfolio is best, and that is indeed what successful and sophisticated VCs are looking for when they evaluate investment opportunities.

As Wild explains:

So, if you are a VC and you are not looking carefully at your portfolio companies’ IP positions and strategies, the chances are that you are missing an important trick. While if you are part of the management of a company looking for VC backing it would be as well to have a good IP story to tell in your documentation and when you are sitting opposite potential investors at the negotiating table.

The truth is that there is no reason to make success any more difficult than it needs to be.  Succeeding in business, and in life, is hard work.  Making choices that make succeeding all the more difficult is rather stupid if you ask me.  Why would you ever want to pursue a path that is not likely to succeed when there are paths with a proven track record of success available?  Beats me really, but that is why some companies fail and others succeed I suppose, and what makes the world go round.

So the next time you hear that patents are not necessary, that you should not pursue a patent path because there are other, better things to do, you might want to make further inquires about the bias of the individual or entity providing such advice.  It is well known in the patent and innovation industries that innovating is the first step, but a critical second step is protecting that innovation by all means possible.  Those that would have you believe such protections are not necessary are ignoring overwhelming proof to the contrary, and likely have an agenda, which may be driven by any number of things, including ideology.

So, as I have warned before, beware those who say patents are not necessary.  They are ignoring reality and you will be the one who suffers if you follow such “sounds too good to be true” advice.  Of course it sounds too good to be true, because it is too good to be true.  There are no shortcuts to success, and those who are looking for such shortcuts are going to be taken advantage of and realize that too late to do anything about it.

IAM Magazine subscribers can access the full text of the article published describing the results and outcome of the study. IAM Magazine provides a free trial subscription, which includes full archive access.

In keeping with the obviously unconstitutional FTC endorsement guidelines that went into effect on December 1, 2009, allow me to point out that IAM Magazine is not an advertiser and has not paid me, or even asked me, to write this or any other article. I merely find this study quite interesting and since they offer a free trial subscription I thought I would bring that to the attention of IPWatchdog readers.

The Author

Gene Quinn

Gene Quinn is a Patent Attorney and Editor and President & CEO ofIPWatchdog, Inc.. Gene founded IPWatchdog.com in 1999. Gene is also a principal lecturer in the PLI Patent Bar Review Course and Of Counsel to the law firm of Berenato & White, LLC. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 16 Comments comments.

  1. Ian Clarke March 12, 2010 2:42 pm

    Gene, trying to have an intelligent discussion with you about this is like trying to have an intelligent discussion with a brick wall. No matter how often your silly arguments are debunked, you just keep repeating them. Nonetheless, perhaps I can at least educate some of your readership:

    Let’s start with a simple scientific principal known to most high school students, but apparently unknown to Gene: Correlation does not imply causality.

    Most unsuccessful software companies fail quickly, within a year or two, less time than it takes to obtain patents. Successful companies are (obviously) around a lot longer, and therefore have much more time to acquire patents.

    It is therefore entirely specious to cite (as you are doing) this as evidence that there is a causal relationship between having a patent portfolio and success.

    Moreover, you make the sophistic argument that those opposed to software patents are opposed to all IP. I believe that innovation in this country would be better off without software patents, this doesn’t mean that I’m opposed to copyright, trade secret, or trademark law. As a lawyer I hope you understand the difference between these forms of IP and patents.

    There is an argument for acquiring patents as a defensive measure, just as there is an argument for having nuclear weapons if other countries have them. This doesn’t mean that we wouldn’t be better off without nuclear weapons. Similarly, it doesn’t mean that we wouldn’t be better off without software patents.

  2. Gene Quinn March 12, 2010 3:16 pm

    Ian-

    You are too funny. Talking to me is like talking to a brick wall. That is a good one.

    You are the pretender, the one who ignores reality and the one who has an ideological and philosophical predisposition that puts you, your company and your investors at a substantial disadvantage. That is a YOU problem, not a ME problem. Excuse me for pointing out the truth and making sure that your bias and factually incorrect view of business and innovation doesn’t lead the unsuspecting to make enormously bad decisions.

    What is really amazing is how you choose to ignore facts.

    Since you don’t seem capable of making logical arguments and want to engage in misdirection and appeal based on unsubstantiated superiority I would think you could come up with some rebut of Dean Kamen. Your refusal to address any issues and just resort to childish debate tactics is telling for those of us who interested in debate, facts and truth. You throw insults (i.e., “brick wall” and “most high school students, but apparently unknown to Gene”) but you don’t provide any analysis, facts or logic.

    You are quite pathetic. Why don’t you go back to trying to dominate your industry without relying on patents and relying only on copyrights and trade secrets. Oh, that’s right, despite what you think you know trade secrets don’t protect software. Anyone familiar with the law knows that.

    -Gene

  3. Adam March 12, 2010 4:00 pm

    This is just too rich! Let me see if I understand this correctly:

    1) An IP management company tries to create a mathematical model evaluate startups based on IP portfolios, to help them sell their services, which help companies get patents.

    2) They want you to hire them, so they write a marketing article with almost no details in it, that says they may have been able to fit a model to 1/9th of the data they had to work with. The conclusion (surprise!) is that you and the companies you’re funding need to get more patents and you should hire them to help you do it.

    3) An IP industry magazine publishes this article.

    4) A patent lawyer writes another article praising it.

    And Gene wants to talk about bias! Beautiful, just beautiful.

  4. Gene Quinn March 12, 2010 4:53 pm

    Adam-

    You are priceless! I guess we should just ask the homeless guy on the street about IP assets and what venture capitalists are interested in. That way we don’t get any bias. Oops… we won’t get an informed opinion either…. oh well… who cares about that really, right?

    I am still waiting for someone to challenge what Dean Kamen says. The silence is defining!

    So why don’t you enlighten us Adam. Exactly how should inventors and businesses without patent rights pitch VCs? What pitch have you found works in the absence of any patent assets? What VCs do you know that are willing to invest in a technology company without any patents or protectable innovations? Please enlighten the rest of us, won’t you?

    -Gene

  5. Gene Quinn March 12, 2010 5:50 pm

    Still waiting for a rebuttal based on facts and reality. Still waiting to hear folks challenge what Dean Kamen says. Still waiting for some proof that companies without patents attract VCs. Still waiting for some evidence that this study is wrong and companies without patents and a developed IP portfolio are likely to succeed.

    Amazing how the anti-patent crowd always wants to rely on studies that suggest their position is correct, but ignores all other proof, reality, history, economics and business realities.

    -Gene

  6. Adam March 13, 2010 9:43 am

    “I guess we should just ask the homeless guy on the street about IP assets and what venture capitalists are interested in. That way we don’t get any bias.”

    That would be silly. But don’t pretend that the sources you’re using are any less biased than e.g. Ian Clarke, when they’re clearly not. In both cases there are idealogical and practical reasons for what they do and how they evaluate the world. In fact, in the above chain of events that I listed, the livelihoods of every single person in the chain depend on the results of the study coming out a particular way. Interestingly, Ian Clarke’s livelihood does not depend on patents being good for business. He can either apply for them or not, but his business is technology, not patents.

    I’ll respond to this assertion: “Dean Kamen, probably the most influential and prolific American inventor of our time, has repeatedly explained that without patents there will be no investment.”

    This is simple enough to refute, even given the facts you discuss on this page. I don’t have the full article in front of me anymore, but as I recall, in the IP Ventures article itself, at least 20% of the VC-backed winners had no IP portfolio whatsoever. So, this required that they not only receive funding, but they were successful in the marketplace. Add in that the study only looked at 5 of the top VC firms, and you’ve got a situation where top VC firms are funding startups without IP, and those startups are being successful. Again, recalling from memory, about 40% of the funded startups in the study had no IP at all. It’s not clear to me how this situation can coexist with Dean Kamen’s assertion. If he were right, no startups would get VC funding without patents, but this clearly biased study reports that close to half of funded startups have no IP. How can Dean Kamen be right?

  7. Adam March 13, 2010 11:56 am

    Correction: when I said “in the IP Ventures article” above, I meant “in the IPVision article”.

  8. Gene Quinn March 13, 2010 11:58 am

    Adam-

    Please re-commence keeping your head in the sand.

    I wish more anti-patent people had the same feelings. It would make it far more easy for responsible inventors and businesses to succeed. If you want to start behind the 8-ball and make success extremely unlikely then who am I to stop you.

    Readers can decide who they believe. Ian who says software is protectable via trade secrets (which it clearly is not), this study conducted in part by MIT Sloan School of Management, plus the most successful inventor of our time, plus the thousands of successful companies who have built on strong patent portfolios. Sure, there are some rather careless and naive VC types who will put money in without patents, but those companies fail. Whether you want to believe it or not that doesn’t change the reality. On top of that, there is a big difference in VCs funding a company that has protectable assets and pursuing a patent portfolio, which is possible, and those funding companies that choose to ignore IP. Those that choose to ignore IP assets fail, period. Even open source companies and companies like Facebook apply for patents. So who is fooling who? You are kidding yourself, why I don’t know, but please feel free to continue.

    -Gene

  9. Just visiting March 13, 2010 3:25 pm

    Having a patent is an advantage to the holder of the patent and a disadvantage to those not holding the patent but wishing to practice the patent.

    This advantage, for those that hold the patent, is a business advantage. You are able to exclude others (for a limited amount of time) from coming into your space. I don’t think anyone can disagree with that. Granted, in many instances, you have to take active steps (i.e., sue infringers) to prevent that from happening, but you don’t have to do so in all instances. Regardless, having a patent provides a business with an advantage over one that doesn’t.

    As a venture capitalist, my goal is to maximize the return on my investment. There are many factors to consider when investing, but all things being equal, would I invest in a company with a patent portfolio or one that does not? To me, that is an easy question to answer – I choose the company with a patent portfolio because it has an advantage that the other company does not, which increases the chances that the return on my investment will be greater than if I invested in the company that did not have this advantage.

    Identifying individual companies that succeeded with patents or succeeded without patents is not particularly relevant. If you are providing a well-known service or a previously-made product where technology is not an issue in the marketplace, then patents will not be that great of a factor in deciding winners and losers (although trademarks can certainly play a role). However, where technology is a factor, then patents, IMHO, will almost certainly be important. Regardless, there are too many factors that determine success to base an analysis on a few cherry-picked examples. However, what this study appears to show is there is a positive relationship between having strong intellectual property and having a successful startup.

    This positive relationship reflects my experience in the real world.

    I’ve asked this (or a similar) question before, yet none of the anti-patent people want to answer it. How does an inventor (with an inventive product/service that can be easily copied) with little capital break into a market dominated by larger players when you don’t have patents? Why should that inventor disclose their idea when that inventor will very, very likely not be compensated for that disclosure?

    FYI – if the best answer you can come up with altruism, then don’t bother answering

  10. Gene Quinn March 13, 2010 3:30 pm

    Just Visiting-

    Do you have any interest in writing up your comments above for publication as an article on IPWatchdog.com? I think what you are saying here deserves to be read and not buried in a comment chain. If you are female we can publish under the name Sue D. Nym. If you are male we can come up with an appropriate name, perhaps something like Elmer F. Gantry.

    Send me a message via this form if you are interested:

    http://www.ipwatchdog.com/about/gene/#F

    -Gene

  11. Adam March 13, 2010 4:55 pm

    “this study conducted in part by MIT Sloan School of Management, plus the most successful inventor of our time”

    I just gave numbers from this very study, to show the “most successful inventor of our time” is wrong. Why don’t you show me how my analysis is incorrect, instead of just trotting out the same “your head is in the sand” horse again? If talking about the empirical evidence that you brought up is keeping my head in the sand, then I guess I don’t even know what that metaphor means.

    “How does an inventor (with an inventive product/service that can be easily copied) with little capital break into a market dominated by larger players when you don’t have patents?”

    That’s (quite literally) the million dollar question, and aside from the standard business advice about branding, customer service, product quality, supply-chain management, pricing, salesmanship, and other tried-and-true competitive practices, I don’t think I have a good answer for it.

    In the same vein, can you answer this question for me: How does an inventor (with an inventive product/service that can be easily copied) with little capital break into a market dominated by larger players when you DO have a patent? I wouldn’t have the slightest clue how to leverage a patent to compete directly against Microsoft or Sun or Apple, since I couldn’t create a competing product without infringing on their existing patents (as Jonathan Schwartz describes here: http://jonathanischwartz.wordpress.com/2010/03/09/good-artists-copy-great-artists-steal/ ). Do you know how I would do that?

    “Why should that inventor disclose their idea when that inventor will very, very likely not be compensated for that disclosure?”

    This is begging the question, so I obviously can’t respond to it in any meaningful way.

    But to your main point, Just visiting, it’s true that patents are often a competitive advantage to those who hold them. Some would say that the patent situation in software is currently so bad that they’re actually not going to be much of an advantage, so early-stage software companies can do just fine without patents in practice, should they prefer. These claims seem a little shaky to me, but there are certainly people doing it, so I guess they must be at least partly right.

  12. Gene Quinn March 14, 2010 10:15 am

    Adam-

    You have lost all credibility when you say that Dean Kamen is just wrong, without any support for that statement.

    You also demonstrate you are a neophyte when you say “I obviously can’t respond to it in any meaningful way.” Your lack of knowledge and understanding, however, hasn’t prevented you from vocally presenting an absurd argument. To all who would be tempted to listen to Adam be careful, he is admitting he doesn’t know the industry and cannot respond substantively. So he is just providing his uninformed opinions. Unfortunately, he is presenting them not as opinion and as fact. That is careless indeed.

    To those who really want to know the truth and are trying to figure out how to proceed responsibly, listen to Adam, Ian and others who say similar things at your own risk. If you want to succeed in business you should model yourself after those who have succeeded. Modeling yourself on Dean Kamen would be a good place to start since he is a prolific and decorated inventor, and extraordinarily successful. Modeling yourself off companies like Apple, innovates and then vigorously obtains patents, is also wise. Modeling yourself off those companies that are disproportionately likely to fail out of some philosophical hatred of patents is just plain stupid. You can do it if you like, but when you fail you will have only yourself to blame.

    -Gene

  13. Just visiting March 14, 2010 2:05 pm

    “That’s (quite literally) the million dollar question, and aside from the standard business advice about branding, customer service, product quality, supply-chain management, pricing, salesmanship, and other tried-and-true competitive practices, I don’t think I have a good answer for it.”

    All well in fine for the big boys who have hired marketing experts, distribution experts, great salesman, already have a supply chain to low-cost manufacturers in China as well as distributors. These are not readily available to the guy with the next big idea.

    Why would the guy with the next big idea ever bring his idea to big business when he cannot prevent big business for stealing it on the spot?

    Explain to me, how is that guy going to get compensated for his idea if he lives in a world where anybody can steal his idea?

    The corollary to that question is why would that guy ever put in the effort to take that first spark of an idea and develop into something that can be implemented? In my world, people demand to be rewarded commensurate with their efforts/contribution. Except for the altruistic few — no reward = little effort. If you want proof, just look at all the failed communist states of the 20th century.

    “How does an inventor (with an inventive product/service that can be easily copied) with little capital break into a market dominated by larger players when you DO have a patent? I wouldn’t have the slightest clue how to leverage a patent to compete directly against Microsoft or Sun or Apple, since I couldn’t create a competing product without infringing on their existing patents.”

    First, many of the products by the likes of Microsoft, Sun, Apple, etc., are not just a single product or technology. Instead, they are bundles of hundreds, if not thousands, of different idea/technology. That being said, if you are like Jonathan Schwartz and you unveil a prototype “Linux desktop,” odds are that you and your team didn’t recreate all that technology from scratch. Instead, you built upon someone else’s ideas and added a few of your own. If so, don’t be surprised that you are infringing multiple patents.

    What is interesting is that in the same article, Schwartz wrote “Concurrence was a presentation product built by Lighthouse Design, a company I’d help to found and which Sun acquired in 1996.” This was in response to him asking Steve Jobs if he owned the IP to Concurrence since “Keynote looks identical to Concurrence.” Sounds like a successful startup story in which a company with technology, gets some intellectual property, and then is able to sell the company for $22 million. You were looking for a clue as to how to leverage a patent, you should have looked at your article a little closer.

    “This is begging the question” OK … let’s try a different tact, either answer the question or challenge my presumption that the “inventor will very, very likely not be compensated for that disclosure.”

    “Some would say that the patent situation in software is currently so bad that they’re actually not going to be much of an advantage, so early-stage software companies can do just fine without patents in practice, should they prefer.”
    When that company fails and the principles are little wiser and poorer, they’ll invest more in intellectual property and less on foosball tables.

    Of course, the real reason for Schwartz’s patent angst is the following:
    “Their case was eventually heard before a jury in Rochester, New York, famous for being home to… the Eastman Kodak company. Lo and behold, the local jury decided Sun should pay Kodak more than a hundred million dollars.” This goes back to when Schwartz was the CEO of Sun. FYI – Sun Microsystems has over 7,000 U.S. patents.

  14. Adam March 15, 2010 10:07 am

    “Why would the guy with the next big idea ever bring his idea to big business when he cannot prevent big business for stealing it on the spot?”

    Maybe he shouldn’t do that.

    “Explain to me, how is that guy going to get compensated for his idea if he lives in a world where anybody can steal his idea?”

    Make his idea into reality and sell it, without patent protection. This is the most common way of making money. This seems to work well in the software world (where I work), but I wouldn’t presume to expand the advice into other areas.

    “You were looking for a clue as to how to leverage a patent, you should have looked at your article a little closer.”

    I’m not very good at searching for patents, but I couldn’t find any that Lighthouse Design had when they were acquired. Am I missing something, or did you just make up the part about them leveraging patents to compete against competitors?

    “Why should that inventor disclose their idea?”

    Obviously, some of the incentive to disclose ideas would disappear with the removal of patent protection. However, there are other reasons that many would find compelling. Regulatory pressure creates disclosure in some industries (e.g. health care). It might be a competitive advantage for your customers to understand your products better (e.g. in cryptography). In many cases, it’s not necessary for the inventor to disclose the invention, since it can be reverse engineered. Surely there would be many cases, just as there are today, where inventors and companies would prefer to keep things secret, and society at large would not benefit from this knowledge. In any case, lack of incentive to disclose is certainly a good reason to question the wisdom of the elimination of patent protection.

  15. OldTimer March 15, 2010 10:49 am

    Ian, I continue to believe that your anti-patent bias is colored by your experience, and somewhat by your lack thereof. Put simply, you’ve never stuck around a venture long enough to transition to an ongoing commercial entity. (Frankly, it is not clear whether any of your ventures have made it to a viable commercial entity).

    Also, to be perfectly blunt most of the projects you have worked on are not particularly innovative. Rather, they are just variations on existing technology coupled with rote data processing. Your current project, SenseArray, is exemplary: collect user’s historical data, analyze, predict user’s behavior based on historical pattern. It has all been done before, so I agree with you that your software system should not be patentable. This doesn’t mean that your company is not going to succeed or be commercially valuable, it just means that you are not making a meaningful contribution to the progress of the sciences or the useful arts. Nor was there anything particularly technologically innovative about Freenet, Fairshare, or Revver.

    In this respect I think Gene makes a good point. You may be a commercial innovator, but from a technology perspective you are a follower, not a leader. Therefore, you are more likely to be on the receiving end of patent disputes. I can see why you would develop a distaste for the patent system.

  16. Greg Foutz October 19, 2013 12:48 pm

    I would have to agree with this article. Very well said! VC’s will be allowed to see what I have on the table in the up coming weeks ahead. There isn’t any Competition. It is a Municipality Plan and the high end is covered as well. It is the future of water and power conservation at the individual level and all. Have a wonderful day, and God Bless to all.
    Sincerely,
    Greg Foutz
    Ceo and Owner/NCC and the time piece shower head patent.
    http://showerheadclock.blogspot.com/