Strong patent protection key to investor confidence

Intellectual property rights, especially patents, not only safeguard a firm's innovation. They also foster venture capital ("VC") financing. In a 2009 study investigating how patent applications and grants held by new firms impact their ability to attract VC financing, the authors found that investors rely on patents as signals to overcome the tremendous uncertainty involved in assessing the prospects of potential portfolio companies. 50Link to the text of the note The study found that in the presence of patent applications, VC financing occurs earlier. Confirming the findings of earlier work, this study further establishes that for startup firms the patenting process generates valuable quality signals that assist them in obtaining funding. 51Link to the text of the note Patents are believed to reduce information asymmetries between financiers and innovators, thus spurring market entry by startups. 52Link to the text of the note Fundamentally, patents facilitate access to VC financing, market entry, and job creation. Without patents and an effective IP environment, the process stalls, and, in some cases, firms may never emerge. Admittedly it is difficult to find evidence of what might have been. However, there are some striking examples of firms unable to secure a patent that lost their VC funding and disappeared. Case in point: Innate Immune. Stanford immunologist Sam Strober developed a new treatment for Lupus [*877] and founded the startup Innate Immune. 53Link to the text of the note After recruiting Dr. Andrew Pearlman as CEO, the former director of clinical research at Genentech, Innate Immune lined up venture capitalists ready to commit $ 30 million to develop the drug. 54Link to the text of the note Unfortunately, the firm was unable to secure a patent due to the slow pace of approvals at the underfunded and overburdened U.S. Patent Office. 55Link to the text of the note The venture capitalists withdrew their funding, and the firm, the drug, and the jobs never materialized. 56Link to the text of the note The 2008 Berkeley Patent Survey of Entrepreneurs found that 76 percent of venture-backed entrepreneurs and 67 percent of all entrepreneurs believe that patents are absolutely essential to obtaining funding. 57Link to the text of the note