Patents, Thickets and the Financing of Early-Stage Firms: Evidence from the Software Industry

Legal changes in the patentability of software since the mid 1990s have resulted in a substantial increase in the number of patents on software inventions. We focus here on the impact of transactions costs associated with patent “thickets” on new entrants' interactions with the capital markets....

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Bibliographic Details
Published in:Journal of economics & management strategy 2009-09, Vol.18 (3), p.729-773
Main Authors: Cockburn, Iain M., MacGarvie, Megan J.
Format: Article
Language:English
Subjects:
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Business strategies
Business studies
Corporate finance
Entrepreneurship
Financing methods
Impact analysis
Small and medium sized enterprises
Software
Software industry
Startups
Studies
Transaction costs
Venture capital
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Summary:Legal changes in the patentability of software since the mid 1990s have resulted in a substantial increase in the number of patents on software inventions. We focus here on the impact of transactions costs associated with patent “thickets” on new entrants' interactions with the capital markets. Using data on the financing of entrants into 27 narrowly defined software markets, we show that start‐up software companies operating in markets characterized by denser patent thickets saw their initial acquisition of VC funding delayed relative to firms in markets less affected by patents after the mid 1990s. The relationship between patent thickets and subsequent financing activity such as IPO or acquisition is more complex, but there is weak evidence that firms without patents became less likely to go public if they operated in a market characterized by patent thickets. Firms with patents are more likely to be funded or experience a liquidity event. However, the application for a patent appears to matter more than its grant.
ISSN:1058-6407
1530-9134
DOI:10.1111/j.1530-9134.2009.00228.x