What Is a Patent Worth? Evidence from the U.S. Patent 'Lottery'

Joan  Farre-Mensa; Deepak  Hegde; Alexander  Ljungqvist

Working Paper | 2017

What Is a Patent Worth? Evidence from the U.S. Patent 'Lottery'

by Joan Farre-Mensa, Deepak Hegde and Alexander Ljungqvist

Abstract

We provide evidence on the value of patents to start-ups by leveraging the random assignment of applications to examiners with different propensities to grant patents. Using unique data on all first-time applications filed at the U.S. Patent Office since 2001, we find that start-ups that win the patent “lottery” by drawing lenient examiners have, on average, 55% higher employment growth and 80% higher sales growth five years later. Patent winners also pursue more, and higher quality, follow-on innovation. Winning a first patent boosts a start-up’s subsequent growth and innovation by facilitating access to funding from VCs, banks, and public investors.

Keywords: Patents; Business Startups; Innovation and Invention;

Language: English

Format: Print

60 pages

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Citation:

Farre-Mensa, Joan, Deepak Hegde, and Alexander Ljungqvist. "What Is a Patent Worth? Evidence from the U.S. Patent 'Lottery'." NBER Working Paper Series, No. 23268, March 2017. (Previous version circulated under the title “The Bright Side of Patents”.)

Young, and particularly high-growth ventures often need to raise significant external finance, since their internal cash flow is usually insufficient to support the investments needed to grow. Although raising equity from venture capital or angel investors is the most well-known source of external finance for high-growth ventures, many entrepreneurs, particularly small business owners, rely on debt and other non-equity sources of capital to finance their ventures, either because equity capital is not available to them or because they want to avoid the ownership dilution and governance constraints associated with equity investments.

This note focuses on these non-equity sources of financing for entrepreneurs, paying particular attention to how the emergence of new technologies in risk assessment have expanded their availability for young firms.

We analyze how frivolous patent-infringement claims made by “patent trolls” affect small firms’ ability to create jobs, raise capital, and survive. Our identification strategy exploits the staggered passage of anti-patent-troll laws at the state level. We find that the passage of this legislation leads to a 2% increase in employment at small firms in high-tech industries, which are a frequent target of patent trolls. By contrast, the laws have no significant impact on employment at larger or non-high-tech firms. Anti-troll legislation is also associated with fewer business bankruptcies. Financing appears to be a key channel driving our findings: in states with an already established VC presence, the passage of anti-troll laws leads to a 19% increase in the number of firms receiving VC funding. Our findings suggest that measures aimed at curbing the litigation threat posed by patent trolls may play an important role in reducing both the real and financing frictions faced by small businesses.

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What Is a Patent Worth? Evidence from the U.S. Patent 'Lottery'

Abstract

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