And solve innovation

We next investigate how state anti-troll laws affect startups’ innovative activities. Critics of the laws worry that efforts to limit the activities of NPEs may have the unintended consequence of making it harder for startups to monetize their inventions and enforce their patent rights, thereby disincentivizing innovation and patenting. Proponents of the laws, on the other hand, claim the laws will foster innovation by making costly patent-infringement claims less likely. Overall, our results suggest that the second effect dominates: We find that IT patent applications filed by individual inventors or small firms increase by approximately 9% following the adoption of anti-troll legislation, an effect that is strongest in the software sector, where NPEs are most active (GAO 2013).4 We also find that citations (a common measure of patent quality) increase for those software patents that are in the top quartile of the quality distribution, suggesting that both the quantity and quality of innovation increase following the adoption of anti-troll laws. There are multiple channels that potentially explain the positive effect of anti-troll laws on high-tech startups’ ability to create jobs and innovate. For one, the laws likely have a direct effect in reducing the incidence of patent-infringement claims by NPEs. Frivolous claims are costly, especially for startups, which often have limited access to capital (Kerr and Nanda 2011, 2015). Indeed, Chien (2014) finds that NPE claims against startups impose monetary costs that routinely exceed 5% of revenue and can have significant operational impacts. By reducing the threat of frivolous claims by NPEs, anti-troll laws help startups avoid having to devote their scarce resources to counter such claims. Another potentially important channel is the effect of anti-troll laws on startups’ ability to raise capital. By reducing the risk of frivolous patent-infringement claims, the laws may increase the NPV of investing in startups, thus making them more attractive investment targets. We test this financing channel by first analyzing the effect of anti-troll laws on venture capital (VC) investment. In line with our hypothesis, we find that the passage of anti-troll legislation in a state is associated with an increase in VC financing in the state—particularly when the state already has an established VC presence. Specifically, in the full sample of US states, we find evidence that anti-troll laws lead to an increase in the number of firms in a state that raise venture capital, though this effect is noisily estimated. The magnitude of the estimated effect nearly doubles to 14% (and is significant at conventional levels) when we limit the analysis to states with an established VC presence prior to the passage of the laws. These findings suggest that the adoption of anti-troll laws, on its own, is not sufficient to attract VCs to states where they have historically not invested. However, the laws do increase VC investment at the intensive margin in those states where VCs are already present. Consistent with our employment results, we find that the increase in VC investment is driven by IT firms, while it is negligible in other industries. Importantly, the effect of anti-troll laws in facilitating access to finance is not confined to venture capital. Mann (2017) shows that patent-backed loans have become an increasingly important source of capital for innovative firms. We find that the passage of anti-troll legislation leads to an increase in the number of small inventors pledging patents as loan collateral. Consistent with our employment findings, this effect is driven by IT firms. Taken together, our results indicate that by decreasing the risk that startups face of being targeted by NPEs and thereby increasing the NPV of investing in startups, anti-troll laws facilitate startups’ access to both equity and debt capital.