US start-up employment and sales growth rates boosted by patents, new research reveals

A new paper entitled “The Bright Side of Patents” has thrown fresh light on the economic benefits that patents bring to start-up businesses. In doing so, it provides a clear response to the groundswell of research in recent years that has led to claims that the US patent system hinders innovation as companies struggle with the high cost of litigation and, it is alleged, receive little benefit from their patent filings. 

The authors, Joan Farre-Mensa of Harvard Business School and Deepak Hegde and Alexander Ljungqvist of New York University’s Stern School of Business, focused on all first-time patent applications filed at the US Patent and Trademark Office by start-ups since 2001 that received a preliminary decision by 2009 and a final decision by the end of 2013 – the total number of assets covered is 45,819. What they found leads them to state: “Our analysis shows that patent approvals help startups create jobs, grow their sales, innovate and eventually succeed.”

Among the key points of the research are that:

• The approval of a start-up’s first patent application increases its employment growth over the next five years by an average of 36%.
• The effect on sales growth – a 51% increase – is even larger.
• A first patent grant also has a strong causal effect on a firm’s ability to continue innovating, increasing both the number of subsequent patents the business is granted (by 49%) and their quality (the average number of citations per subsequent patent increasing by 27%).
• Approval of a patent application increases a start-up’s probability of securing funding from VCs over the following three years by 2.3 percentage points, which is a 53% increase over the unconditional probability.
• Patent grants more than double the probability that a start-up is eventually listed on a stock exchange.

On the other side of the ledger, there are significant downsides to delays in handling start-up applications:

Processing delays indeed impair startups’ ability to create jobs, grow their sales, be innovative, and gain a stock market listing. These negative effects are substantial: each year of delay in reviewing a firm’s first patent application that is eventually approved causally reduces the firm’s employment and sales growth over the five years following approval by 21 and 28 percentage points, respectively. Delays also negatively affect subsequent patenting—with each year of delay reducing the number of subsequent patents the firm is granted by 14% and the number of citations-per-patent these patents receive by 7%. Delays even reduce the probability of going public, by as much as a half for each year of delay. Economically, a two-year delay has the same negative impact on a startup’s growth and success as outright rejection of the patent application.

This leads the authors to strongly imply that one area for reform that should be a priority for Congress is the way in which the USPTO is funded:

The USPTO has historically faced budgetary constraints that limit its ability to allocate more resources to patent review. The constraints force the agency to make choices among various priorities, including speeding up reviews and improving review quality. Our findings suggest that the benefits of speeding up reviews can be immediate and substantial, particularly for small inventors whom the patent system is intended to protect.

Just how the patent system affects the start-up community is one of the most widely debated parts of the current push for patent reform in the US. The pro-reform side regularly warns of the risks posed by the threat of infringement litigation to small businesses and questions the overall value that patenting brings, while the other side insists that patent filings are a crucial part of any company’s ability to realise a return from their R&D investments and ultimately compete against larger competitors.

Although the paper paints a particularly positive view of the business benefits of patent filings, the authors insist that they are not subscribing to an anti-patent reform agenda. Instead, they state: “Our study does not imply that the US patent system is optimal or even net-welfare enhancing and so should not be reformed. But our findings do alter the balance of evidence available to those considering a major revamp of the system by highlighting the real benefits of patents, particularly for startups.”

The authors don’t take a position on any of the proposed bills currently before Congress, but it is hard to see their work as anything other than a counter-balance to the kind of broad-based reform proposed in legislation like the Innovation Act. What makes it so significant is that it is not anecdotal and it is not based on survey responses, while there is complete transparency around the data that has been used.

There is no doubt that Farre-Mensa, Hegde and Ljungqvist have produced an important piece of empirical research that should be required reading for all sides in the ongoing reform debate. Patents, it turns out, are kind of important to start-ups; whoever would have thought it?