Sign up for a free trial to IAM magazine including full archive access by clicking on the button below
You need to have cookies enabled in your browser to permanently hide this pop up.
Recent research from the New America Foundation’s Open Technology Institute has sought to illuminate the economic relationship between NPEs/’trolls’/PAEs, start-up businesses and venture capital. The study – entitled ‘Patent Assertion and Startup Innovation’ – concludes that while NPEs can benefit start-ups, their impact on early-stage businesses is negative overall.
The research team – led by Colleen Chien, associate professor of law at Santa Clara University and a well-known commentator on ‘trolls’ and patent reform – surveyed a mix of over 300 start-ups and venture capitalists from the information technology and life sciences industries.
As reported by Chien over at TechCrunch, the findings suggest that the negative effect on early-stage businesses of NPE patent assertions outweighs any benefit that start-ups derive from working with NPEs to monetise their own IP assets. While 4% of start-up respondents said that they had monetised patents through an NPE (with 5% of VC respondents saying that one or more of their portfolio companies had done the same), 20% reported that they had received licensing demands from an NPE (with 75% of VCs’ portfolio companies receiving NPE demands).
On the impact of NPE demands, 48% of start-ups and 49% of VCs responded that such activities caused “one or more significant operational impacts”, with 16% and 23% respectively reporting a “loss of customers/revenue” and 3% and 12% respectively saying that NPE demands had led to them exiting the business or business line.
The threat of NPE assertions appears to be much more prevalent in the information technology industries, where 28% of start-ups and 88% of VCs found themselves on the receiving end of NPE demands. In contrast, just 5% of biotech, pharmaceutical and medical device start-ups (and 13% of VCs investing in such companies) were subject to NPE licensing demands. Life sciences start-ups and their VC backers also appeared to be slightly more open to joining forces with NPEs to monetise their patents than their counterparts in the information technology-related industries.
The study defines an NPE (a term which it uses interchangeably with PAE throughout) as “an entity that asserts patents as a business, not including universities or start-ups” and/or “a company that asserts patents, rather than makes products, as a business”. As is so often the case when trying to pin down precisely what an NPE/’troll'/PAE is, that definition is rather vague, especially when you consider that many VCs and start-ups are unlikely to be fully aware of the often very detailed business models of entities from which they receive licensing-related letters. For example, patents being asserted against the survey respondents could have been assigned to the NPE in question by start-ups and VC firms – and, of course, by larger operating companies – and those assignors will be making a cut of any licences offered to those patents. NPEs/PAEs are often the middleman.
It is also unclear where companies which invest heavily in R&D and have business models focused on licensing out the technology they have developed stand in relation to the NPE/PAE definition offered by the study. The fact is that any kind of licensing demand letter is bound to be unwelcome to a start-up and its financial backers; thus, the temptation to label anyone sending one “a troll” without exploring their business model in any depth is surely going to be strong. To borrow a phrase: one person’s troll is another person’s legitimate licensing business.
The researchers state that “we understand and believe our survey respondents to understand [that the term NPE] does not include universities or start-ups”. But there is no reason why an early-stage business or its VC investors should consider two demand letters to be different purely on the basis that one has come from a university IP office or a fellow start-up and the other has come from a patent licensing company, which happens not to be a start-up. Ultimately – disregarding the specific assertions made and terms offered, reasonable or otherwise, in such a letter – both demands are asking a business to pay a licence fee. The nature of the entity that has made the demand is not entirely relevant and does not, in and of itself, have a bearing on the impact that demand might have on the business that receives it.
Additionally, one feels compelled to question whether the majority of the businesses and investors surveyed can actually be considered to be ‘IP mature’. The prime concern for start-ups is to get their business up and running, and to get their innovations to market. This is also a key focus for VCs, who are keen to build traction in a business while getting a return as quickly as possible. Unfortunately, this often means that IP strategy falls by the wayside or, even worse, is seen as an irritation and an obstacle to a business’s progress.
Where such a culture prevails, it is no wonder that start-ups and their investors fail to see the benefits of partnering with experienced patent monetisation entities. It may also explain why early-stage companies are apparently receiving so many demands from NPEs; perhaps their lack of IP nous means that they did not properly survey the risks and obstacles in the existing patent landscape when getting their businesses off the ground. Intellectual property should be viewed as part and parcel of doing business, not as an unwelcome cost or distraction. Not only can it lead to extra revenue through licensing; it can also open the doors to collaboration with other companies – something that could be a huge boon to a company in its earliest stages. Thus, perhaps the most important finding of ‘Patent Assertion and Startup Innovation’ is that, for start-ups and VCs, IP strategy is still not getting the attention it deserves.
IP management, Licensing, IP litigation, Patents, IP business, IP finance
I well remember a conversation I had with a major UK venture capitalist who complained bitterly that, even in the formation stage of a start-up in the telecoms area, he had already received a demand from a major US company for licence fees: it's not only an NPE story....!Stephen Potter, Iprova Sàrl on 12 Sep 2013 @ 10:11