Michael D. Moberly August 19, 2010 (Part II)
This is the second of a two-part post to provide readers with insights into ‘the 2008 Berkeley Patent Survey’ with respect to how software start-up firms (a.) perceive, (b.) use and (c.) are affected by patents.
And, again, please trust me on this, if you are an entrepreneur, part of a tech company management team, board member, or part of the technology investment community, this post should be on your ‘must read’ list.
The surveys principle investigators obviously wanted to know more about why some tech entrepreneurs choose to forgo patenting? To obtain the necessary insight, they posed two sets of questions framed as follows; (1.) for the last innovation for which the (your) firm chose not to seek a patent, what factors influenced this decision?, and (2.) what was the most important factor in that decision?
The costs (expense) associated with actually obtaining and enforcing patents (their intellectual property rights) were cited as being both the first and second most frequent explanation (response). While the ease of inventing around the innovation and satisfaction with trade secrecy were also cited as influencing factors for software start-up firms not to seek patents, seldom were they considered the most important factor.
Interestingly, 40+% of the software executive respondents cited the unpatentability of the invention as a factor in their decision to forgo patenting, with 25% (+/-) rating unpatentability as being the most important factor.
However, the investigator’s remarked that it is difficult to know precisely how to interpret the ‘unpatentability finding’. One possible explanation they said, may be that the software entrepreneur respondents believed that patent standards of novelty and non-obviousness, etc., are so rigorous which lead them to feel their innovation would not likely satisfy patent requirements. Another possible, perhaps more esoteric, explanation offered by the investigators to this question is that a significant number of the entrepreneurs hold philosophical and/or practical objections to patents in their field, i.e., software.
Another important and very relevant question presented in the survey was how important are patents to achieving competitive advantages. Interestingly, respondents ranked patents (literally) dead last among seven strategies for achieving competitive advantage.
It’s important for readers to recognize that the relative unimportance of patents for competitive advantage given by survey respondents in the software field contrasts sharply with the perceived importance of patents in the biotech industry, where patents are ranked as the most important means of achieving competitive advantage.
Instead, software start-ups regard ‘first-mover’ advantage as the single most important strategy for achieving competitive advantage, followed by ‘complementary assets’ , e.g., providing services for licensed software or offering a proprietary complement to an open source program, etc, in other words, intangible assets. Interestingly, these two strategies for achieving competitive advantage (i.e., first mover and complimentary assets) outweigh actual intellectual property rights.
Among intellectual property rights though, the survey findings revealed copyrights and trademarks, followed closely by (trade) secrecy and difficulty in reverse engineering as outranking patents as an important strategy for achieving competitive advantage.
So, what incentive effects do patents have for tech entrepreneurs? With respect to the four types of innovation, (1.) inventing new products, processes, or services, (2.) conducting initial R&D, (3.) creating internal tools or processes, and (4.) undertaking the risks and costs of commercializing innovation, the survey investigators applied a scale, where 0 = no incentive, 1 = weak incentive, 2 = moderate incentive, and 3 = strong incentive.
Somewhat surprisingly, the respondents reported that patents provide weak incentives for engaging in core activities, such as invention of new products and commercialization. On the other hand, biotech and medical device firms reported that patents provided moderate incentives.
So, here’s the paradox. If patents provide only a weak incentive for investing in innovation among software start-ups, why are two-thirds of the VX firms (largely VC-backed) and at least one-quarter of the D&B firms seeking patents?
The answer to this paradox, according to the survey investigator’s, may actually lie in the perception held among software entrepreneurs. That perception is that patents may be perceived as important to potential – prospective funders, such as venture capitalists, angel investors, commercial banks, and friends and family.
The investigator’s base this answer on the (survey) finding that sixty percent of software start-up respondents, who had actually negotiated with venture capitalist’s, reported that that they perceived patents to be an important factor in the VC’s invest – don’t invest decision. Between 40% and 50% of the software respondents also reported that patents were perceived to be important to other types of investors, such as angels, investment banks, and other companies.
So, what’s the larger message from this surveys findings? In my view, it’s that tech entrepreneurs ought not assume patents are the only, or necessarily the best strategy (option) for achieving success and competitive advantage. Each form of intellectual property, i.e., patent, trademark, copyright, and trade secrecy carry upsides and downsides. And, perhaps equally important, tech entrepreneurs ought not overlook or dismiss the complimentary (intangible) assets that routinely accompany and/or evolve from innovation to become valuable and competitive advantage driving assets!
(This post was adapted by Mr. Moberly from the work of Professor Pamela Samuelson’s article in ‘O’Reilly Radar’ and the recently published article, “High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey.” )
The ‘Business IP and Intangible Asset Blog’ is researched and written by Mr. Moberly to provide insights and additional views for company management teams, boards, and employees to aid in identifying, assessing, valuing, protecting, and profiting from their intangible assets. I welcome and respect your comments and perspectives at [email protected].