76% of Venture Capitalists Believe that Software Patents are Important (NOT!)

If you are a regular reader, you know that Brad and I hate software patents.  We’ve worked hard both publically and behind the scenes to try to affect change.  Our general thesis is that the software patent ecosystem (as it stands today) is harmful to innovation – the very premise of the patent system in the first place.

Recently, there has been a lot of press about how VCs value software patents.  The statistic is that “76 percent of startup managers report that venture capital investors consider patents when making funding decisions” and it being used as dispositive that VCs value patents and because VCs understand innovation, software patents are good.  It’s been thrown around by our very own USPTO, as well.

I wanted to vomit when I saw this statistic, because my 12 years in this industry has anecdotally taught me that nothing is farther from the truth.  Informed VCs realize that software patents, at best, are defensive mechanisms from poor behaving trolls and other entities and are an unfortunate expense when one would rather be hiring engineers.**

The statistic is gleaned from the recent paper by Stuart Graham, Robert Merges, Pam Samuelson and Ted Sichelman entitled “High Technology Entrepreneurs and the Patent System: Results of the 2008 Patent Survey”.

I was on a panel last week with Pam regarding software patents, open source and innovation at a conference sponsored by the Silicon Flatirons. While I’ve always found Pam to be very thoughtful and smart, I was prepared to dispute her report which indicated folks like me cared about patents.

I couldn’t have been more surprised and happy with her comments about the subject, namely that the report does NOT say anything about what VCs think about patents, rather the report indicated that this what what entrepreneurs PERCEIVED VCs to think.  (Huge difference).  If you go back and read the quote, it’s technically correct, but it’s being used in public both written and verbally that the vast majority of VCs support software patents.

Now, let’s look into the entrepreneurs that were surveyed about this perception of VCs.

88% of software startups that the study identified and queried (through Venture Expert and Dun and Bradstreet) did not respond to the survey.

There was generally a 1/3rd 2/3rd mix of companies between Venture Expert to D&B. It appears to me that none/few of the D&B companies are venture backed. (My proof is that very few D&B companies reported to aspire to be acquired or go public, which most/all VC-backed companies hope for this).

So the actual sample size of the venture-backed software startups is very small.  Pam indicated that they did research on the non-responders (the 88%) and don’t believe that they differ materially from those companies who respond.  But one can’t rule out that selection bias affected the report, as the 12% could have had a bone to pick, or something different about them that could not be picked up in the study. 

Also there is another thing worth considering:  only 75% of the software respondents actually answered the question regarding perceived importance to VCs, which does suggest that the other 25% may have skipped this question because they didn’t perceive patents to be of importance to investors.

That suggests to me that patents were deemed unimportant to financing for close to 200 of the software respondents who did not answer that question, although they answered many other questions more completely.

So bottom line?  No VCs were actually polled to come up with this statistic.  A small number of companies responded and might be over weighted to D&B companies as opposed to VC-backed companies.  So when you hear that stat thrown around, know the truth behind the numbers and feel free to show them the way, if you are one of those fighting the “good fight” against software patents. 

** I realize that there are cases where software patents might be valuable, but the vast majority of the time, they are a deadweight loss on innovation and our economy.  In a coming post, I’ll actually talk about times when I think they are appropriate. 

  • CSG

    Any analysis of the value proposition of patenting "software based innovations" should take into account the differences (and "real world" difficulties) encountered when asking a court to enforce rights through application of the Patent Act versus the Uniform Trade Secret Act. As someone who has had to litigate IPR under both, the cost/benefit analysis tends to favor maintaining one's competitive edge in the marketplace by taking appropriate steps to retain as confidential the methods, formulas and algorithms as expressed in the code.

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