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$22b drop in VC funding caused by patent trolls

StartupsNews
by Jamie Hinks
, 12 Jun 2014News
$22b drop in VC funding caused by patent trolls

Patent trolls are stifling innovation and startups after it was revealed that almost $22 billion [£13.06 billion] less venture capital funding has been raised over the past half a decade due to high levels of patent litigation.

A study released by Catherine Tucker, professor of marketing at MIT’s Sloan School of Business, found that over the past five years VC investment "would have likely been $21.772 billion [£13 billion] higher... but for litigation brought by frequent litigators."

"In the beginning, in general, patent litigation is good," said Tucker in an interview with Ars Technica. "It suggests a well-functioning patent system and has a positive effect. However, when you get to a certain point, that's no longer the case. Then, the more patent litigation you have, the worse it is for venture capital investment."

The study looked at patent litigation between 1995 and 2012 with the paper identifying “frequent litigators” as those that file 20 or more patent lawsuits. It found that at no point is there a positive correlation between any amount of activity by frequent litigators and increased VC investment.

Related: Google and Apple reach peace settlement in smartphone patent wars

Tucker and her team worked out the correlation by using a complex mathematical technique known as regression analysis and even ran the analysis with alternate scenarios to check them over. One example of this was to exclude areas with heavy patent litigation but little VC investment, such as the Eastern District of Texas, and the results remained unchanged, with Tucker professing to being surprised at how strong the correlation is.

"You hear these anecdotes, of VCs being a little nervous [because of patent lawsuits]," Tucker added. "But I didn't think it would necessarily be strong enough to have an empirical effect."

One of the anecdotes that is included in the first part of the paper is X-Plane, a South Carolina company, that was sued over using copy protection software provided by Google which "was forced to abandon product upgrades and new products that were in development." 

Tucker’s study has been released just after a patent reform bill lost a key debate in the US Senate due to a lack of hard data available on the pro-reform side of the table and it remains an uphill struggle for those hoping for a change to the rules.

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