Patents substantially increase the chance of startup success

While layoffs in big-tech companies claimed hundreds of thousands of jobs in recent years, many of those departing walked away with generous severance packages and a lot of good ideas. We could be on the cusp of a new innovative and entrepreneurial boom.

That means a new generation of companies seeking venture capital and a new wave of investors betting on their future.

Such disruptive innovation in the technology sector has been routine since the 1980s. Many startups fail, and venture capitalists anticipate that only a minor percentage of their startup investments will produce sizeable returns.

Investors want to know what makes a startup unique, what problem it is solving, and how quickly it can scale. Equally critical, they want to know all about the intellectual property the founders own or control in the form of a patented technology, which offers the potential to offer a bigger return on investment.

According to one Pitchbook study, between 2011 and 2020, more than 58% of venture capital investment went to startups that had patents or had submitted patent applications. Over the same period, deal sizes for patent-holding startups were between 40% and 60% larger than deals for non-patent-holding companies. That’s an enormous leg up in funding.

The same study also found that startups at the angel-investor stage with patents or patents pending were valued 93.2% higher on average than their non-patent counterparts and that patent-holding companies go public at a rate more than five times higher than non-patent-holding companies.

Other data from across the tech industry validate Pitchbook’s findings. For example, researchers at MIT found that startups with a patent are a staggering 87 times more likely to grow than those without.

Unfortunately, a series of Supreme Court decisions attempting to reconcile our centuries-old patent code rendered entire categories of inventions ineligible for patents. At the same time, well-meaning reforms intended to promote innovation have actually made it harder for startups to defend their patents against attacks from well-resourced rivals.

Thankfully, lawmakers on both sides of the aisle have proposed common-sense solutions. Notably, the Patent Eligibility Restoration Act, sponsored by Sens. Thom Tillis, R-N.C., and Chris Coons. D-Del., would modernize our patent laws by clarifying that inventions in a variety of high-tech fields are indeed eligible for patents. Another bipartisan proposal, the PREVAIL Act, would protect small inventors from excessive and costly litigation.

Both bills would help startups secure the venture funding needed to bring revolutionary ideas to the marketplace. America’s entrepreneurs are counting on Congress.