Patents are indeed the lifeblood of innovation. Of course, without innovation nothing else happens, or matters, but there is definitely a symbiotic relationship between innovation and patents. The innovation that we say we most want is that innovation that is cutting edge, not just an improvement upon what already exists; paradigm shifting innovation or technologies that could be characterized as disruptive in nature. It is with paradigm shifting, disruptive innovation that we see leaps forward. Those leaps forward lead to the formation of new start-up companies and frequently to the birth of entire new industries. It is with this type of highly desirable innovation that we see enormous job growth, which the U.S. economy could use right about now. Unfortunately, this type of innovation does not come cheap.
One week ago I was in New Mexico at the University of New Mexico (UNM) to deliver the keynote speech at the 8th Annual Creative Awards Reception, which recognizes researchers and scientists at UNM who have obtained patents in the previous year. The event is sponsored by STC.UNM, a non-profit founded in 1995 by the Regents of UNM to protect and transfer faculty inventions to the commercial marketplace. My speech was entitled “Patents, the Lifeblood of Innovation.” My speech is provided courtesy of STC.UNM at the bottom of this page, followed by my PowerPoint presentation. For more on my day at UNM, technology transfer at UNM and some of the top UNM researchers see University of New Mexico Honors Innovators.
As I was preparing my speech I received an advance copy of the book Great Again: Revitalizing America’s Entrepreneurial Leadership, which is written by Hank Nothhaft, who has been the CEO of several highly successful high-tech start-up companies, and David Kline, the acclaimed author of Rembrandts in the Attic: Unlocking the Hidden Value of Patents. Simply stated, Great Again is one of those books that everyone in the industry should read, and one that Members of Congress and their staff’s should read twice! Realistically, I would be happy if Members of Congress just read the Introduction. I suspect most of those who are seriously interested in fixing the U.S. economy would be so captured by the Introduction that they would read the rest. Great Again tells a sad tale of how we managed to get a “recovery” without jobs and no signs of innovations on the horizon that will meaningfully change that. Best, however, it offers real solutions.
Great Again lays everything out right there and assembles the pieces as if putting together a jigsaw puzzle. There is discussion of the state of venture capital today, why more start-ups are not getting funded, the problems of the Patent Office, what losing manufacturing has done to drain our domestic intellectual property development, how myopic immigration policy effectively keeps out the best and brightest who America has always sought to attract and how taxes and regulation create one of the most unfavorable business climates in the world.
According to Steve Wozniak, who is quoted in Great Again, Apple could not receive funding from venture capital firms today because it would be too risky and the people involved didn’t have a strong enough track record. Amazing! One of the co-founders of Home Depot provided the same opinion. If these giant companies couldn’t get funded today we have enormous issues and without a comprehensive and coherent national innovation policy there is little that we will be able to do to turn the tide.
But why care about venture capitalists? They provide the funding that is essential for start-ups to get off the ground. Without funding most start-up companies simply could not exist, particularly those developing those innovations that we all say we want, and the ones that the Supreme Court would deem beyond the scope of “common sense” and worthy of the mantle of an issued patent. Discoveries that lead to scientific breakthroughs that lead to engineering feats that turn discoveries and breakthroughs into reality takes time; a lot of time. A lot of time spent researching, discovering and engineering means a lot of money. Just look at the path we are taking with respect to various clean, green, alternative energy technologies. It isn’t like we don’t know what we are looking for, or what the holy grail is. It will just take decades to get there. Similarly in the life saving technology areas, such as biotechnologies, companies can easily spent a decade sucking in money and not being profitable. Without funding that which society, our leaders in DC and the Judges wearing the black robes all want cannot come into being, period!
Venture capitalists love patents. 76% of venture backed entrepreneurs indicated that existence of patents was an important factor in VC investment decisions. 60% for software companies; 73% for biotech companies; and 85% for medical device companies (85%). So it doesn’t matter what industry you are in, significant percentages of VCs place a premium on patents when making funding decisions. You can not like that reality, but it is the reality known to everyone involved in the high-tech start-up world.
It only makes sense that VCs would put such a high premium on patents. The patent grant provides to the owner of the grant the right to exclude others from making, using, selling, offering for sale or importing in the U.S. anything that would infringe one or more of the claims contained in the patent. The patent right is an exclusionary right, which by its very nature means the owner of the patent has a competitive advantage. Without a competitive advantage capital intense start-ups cannot be justified from an economic standpoint, at least as far as investors are concerned.
As I tell all my clients who want my opinion regarding whether to move forward with a patent, you need to have an definable advantage over and above what is presently available in the marketplace such that consumers will be willing to pay a premium for your good or service. If you have that then moving forward to protect and insulate your turf makes all the sense in the world. If you don’t protect your turf, as well as claim alternatives and variations that competitors would want to employ, then you will soon find yourself with numerous competitors and no advantage. In fact, you will have a disadvantage because you will have paid for all the research and development that others simply copied. That means they will be able to offer a lower price point because they don’t have to recoup research and development costs. So they will compete with you, with your technology and at a lower price point. No VC on the planet would invest in a business that will be at a competitive disadvantage.
But why care about venture capitalists? Because most job growth for start-up companies comes after an initial public offering (IPO), and 60% of start-ups that undertake an IPO are venture backed firms. According to the National Venture Capital Association job growth at VC-backed firms is 1.6% versus .2% at non-VC-backed firms, making VC backed firms roughly 800 times more productive at creating jobs. According to the National Venture Capital Association, since 1970 VCs have invested roughly $500 billion in more than 27,000 start-ups, employing 12 million people today and contributing $3 trillion to the US economy, which is 21% of total US GDP. These last two sentences I took from Great Again. You really need to read that book!
Indeed, Nothhaft, who sometimes writes guest articles for IPWatchdog.com, once wrote in an article published on IPWatchdog.com:
[E]very patent is associated with somewhere between 3 and 10 new jobs. In my previous company Danger, which had 100 issued and pending patents, the number was 4 jobs per patent and patent application.
See Start-up Reality.
So patents are critical to job creation because they offer the competitive advantage necessary to justify the speculative investment, which can frequently be enormous, in early stage high-tech start-up companies. If we want cutting edge innovation, if we want sustained job growth, if we want high paying technology jobs we absolutely must fix the United States Patent and Trademark Office. That means adequately funding the USPTO and Congress not using it as a piggy-bank; diverting user fees for other purposes. The USPTO could be 100% self sufficient, funded only by those who seek a service, but instead they are deprived of adequate funds because Congress can’t help but use the USPTO as a revenue generator.
We must also make America competitive for companies, lower corporate tax rates and provide incentives to companies for doing high-tech manufacturing here in the United States.
What we really need is for everyone in the industry to get engaged. My message over and over again at the University of New Mexico was that innovators are rockstars, and rockstars get what they want. When I interviewed Senator Birch Bayh (ret.) he told me the way to get patent legislation passed is get Universities engaged because Members of Congress listen to Universities. With all the incubated companies that are growing out of University developed technology there are a lot of people with a vested interest who have the ability to make a difference. Universities and start-up technology based companies can make a difference. So it is time to make that difference and be heard.