Guest Post: Why Bilski Benefits Startup Companies


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I asked Professor Ted Sichelman to provide his thoughts on how the Bilski decision impacts start-up companies and their incentive to innovate. DC

By Ted Sichelman, University of San Diego School of Law

Before practicing law and becoming a professor, I founded and ran a small software company that sells speech recognition software to taxicab companies. After my company designed its technology, we filed for patents. Later on, when raising financing from angel and venture capital investors, they reviewed our pending applications carefully and considered them a way to stop potential competition. Indeed, in a recent survey of startup firms, the Berkeley Patent Survey—which I conducted with Robert Merges and Pamela Samuelson of UC Berkeley School of Law and Stuart Graham (now Chief Economist at the PTO)—startup executives reported that nearly 70% of venture capital firms and 50% of angel investors said that patents were important to their investment decisions. Relatively broad patentable subject matter assists startups in raising needed funds. As I have argued elsewhere, another reason for broad subject matter is that startups engage in substantial amounts of post-invention—but pre-commercialization—innovation that is not always technological in nature. For instance, many startups generate marketing, financial, legal, and other types of non-technological innovations during the costly commercialization process. Providing IP protection for these innovations not only can produce more of them, but also can help drive technology commercialization.

Assuming the Federal Circuit and the PTO do not go astray in implementing Bilski—which admittedly leaves many doors open to do so—the opinion will allow startups to continue to use patents to garner financing and will, hopefully, set an appropriate balance on the patentability of non-technological inventions. In particular, as I urged in an amicus brief with Professors Mark Lemley, Michael Risch, and Polk Wagner—Bilski rightly adheres to the 150-year old tradition that as long as the claimed invention is a machine, manufacture, composition of matter, or a process, only natural phenomena, laws of nature, and abstract ideas should be excluded from eligible subject matter.

One might contend that by allowing business methods—as well as software and other “intangible” innovations—to be patented, startup firms will encounter a greater “thicket” of patents, making it more difficult for them to enter particular markets. For example, an amicus brief in Bilski filed on behalf of “entrepreneurial and consumer advocates” argued that “if the PTO is permitted to grant broad business and service process patents, small start-up businesses would face an entirely new regime of business regulation – essentially requiring businesses to request private permits to operate from their competitors who have patents, independent of whatever technology the new business uses to compete.” Justice Stevens’ echoed this view by writing in his concurrence that business methods patents “can take a particular toll on small and upstart businesses.”

In actuality, under the Federal Circuit’s previous State Street Bank opinion, in operation for a decade prior to Bilski, the PTO regularly granted “broad business and service process patents” and there is little evidence that these patent-holders required startups to license them in any significant numbers. The Berkeley Patent Survey found that only 8% of the population of respondent software companies and 12% of venture-backed software companies had licensed-in even one patent. In sum total, a relatively low percentage, 0.6% and 3%, respectively, reported licensing a patent solely to avoid a lawsuit. And while Bilski ultimately holds that business methods are not per se unpatentable, the practical effect of the outcome will be to place unapplied business methods into the precluded “abstract idea” category. If implemented properly, such an approach will ensure that startups—and, indeed, larger and more established companies—are not unnecessarily subject to overly broad patents while maintaining robust incentives to innovate.

Ted Sichelman is an Assistant Professor at the University of San Diego School of Law, where he teaches patent law and other intellectual property courses.

45 thoughts on “Guest Post: Why Bilski Benefits Startup Companies

  1. Thanks Ramon,

    Care to be a little more explicit about which side being discussed is not quite right, and why you think this way? What exactly about the matter should we be studying?

    Don’t be a tease – tell us more.

  2. would hunk = woulda thunk

    I kinda’ liked the original expression better. Keep up the good work, ping. When IANAE is not around, you’re the man!

  3. Posted by: Nathanael | Jul 20, 2010 at 03:37 PM: Business methods and software are abstract ideas.

    Prove it.

    Oh..thats right you CAN’T!

    The only thing that is an abstract idea is saying, “Business methods and software are abstract ideas.”

  4. So by “pure mathematics” all this software stuff already exists and needs not the hand of man.

    Wow, who would hunk that all this software is already out there? I guess we shouldn’t pay software engieers any money, since all they do is already out there in nature.

  5. The professor shows his grave ignorance:

    “Bilski rightly adheres to the 150-year old tradition that as long as the claimed invention is a machine, manufacture, composition of matter, or a process, only natural phenomena, laws of nature, and abstract ideas should be excluded from eligible subject matter.

    One might contend that by allowing business methods—as well as software and other “intangible” innovations—to be patented,”

    Business methods and software are abstract ideas (occasionally with laws of nature tucked in, but not usually).

    Putting these two sentences back to back shows a fundamental failure to understand the nature of software, which consists entirely of pure mathematics. (And yes, every practitioner in the field of software will tell you this.)

  6. Ever so Maxie.

    Take an answer you don’t like and rephrase it so it fits your world view.

    “patents are more than” does not equal bigger blankets.

    Accept the answer given.
    Refute the answer given.
    Just don’t be dishonest and change the answer given.

  7. Well, ping, I got my answer from H, didn’t I? It was:

    “Quality patents are more than a comfort blanket in today’s enviornment.”

    Funny, the way I see it, it is just that investors today crave such comfort blankets more than they ever did previously. That’s why filing activity at the USPTO is ever more frenetic, H. You have found out that you need ever bigger and better blankets.

  8. Henry,

    Maxie wasn’t really looking for an answer. he likes to present his views over and over again and again and your view threatens his view.

    The nuance is that while seemingly “seeing nothing contradictory“, Maxie feels compelled to beckon Henry to “be honest and speak again, implying that his first offering was, at the least, not fully honest.

    An observation for new posters: If that pile of branches on the path looks a bit suspicious, find a better way down the path.

  9. MaxDrei
    People are almost always the most important ingredient in a venture success. Rarely a new innovation is such a significant advance that the human element is secondary.
    However, the tools that can be brought to bear by the team will have a significant impact on the degree of success that can be produced and the amount of time required and the degree of difficulty. Quality patents are more than a comfort blanket in today’s enviornment. I am not certain when patents started playing a greater role, but my experience was that starting in the mid to late 80′s formalized IP as documented by patents became more visible and has subsequently continued to be more important. This is parralled by the number of patents being issued by the USPTO.
    H

  10. I read with interest what Nothhaft writes above. I note what the piece at the top of this thread says, namely: Relatively broad patentable subject matter assists startups in raising needed funds.

    And I recall what a VC veteran (physics post-Doc turned finance whizz) told me, that in all the hundreds of deals he put together over his career, in only three was the patent portfolio going to determine whether the venture would or would not be profitable. In all the rest, frankly speaking, the job of the patent portfolio was to reassure nervous investors. He called it a “comfort blanket”. The veteran then went on to explain which factors are the decisive ones, in whether the venture will succeed. It comes down to people, not patents.

    I should add that this VC veteran did not touch chem/bio. there, he observed, the situation is entirely different.

    I don’t see anything in Nothhaft’s contribution that contradicts the VC veteran. On the contrary, Henry’s bit tends to confirm it for me, that what matters is the person in the driving seat. Be honest Henry, was the VC veteran right?

  11. I was the CEO of 4 VC backed companies, a CMO of two others over a 35 year period. All the companies had exits, some very successful. My last firm had 100 issued and pending US patent applications. The firm was sold for $500M. I am certain that IP was one of the key considerations that led to this price. It also facilitated raising $110M from VC’s and strategic investors to achieve this result.
    I also served on the Board of more than 10 VC backed firms over the years and was/am a limited partner investor in a number of well known VC funds.
    I am also an active angel investor. The last angel investment I made was based on the team, the market opportunity and the patented, innovative IP.
    Over my career, the ability to patent and protect innovation (IP) has becme progressively more important in order to raise funds, lawsuit avoidance, develop competitive strategies and to support profitable exits.
    I am very familiar with the Berkley Patent Survey and believe that the results are valid and highly relevant based on my own personal experiences.

  12. >>Honestly, some of you need to get a grip on >>the difgference between observable reality and >>your own attempts to explain it to your >>satisfaction.

    David Kline: the irony of what you wrote is that the point of recognizing that people often don’t know why they did something is so that one’s attempt to understand the world does not become one’s “own attempts to explain it to [one's] satisfaction.”

  13. Maybe we can’t reliably prove why people get married. Maybe the people who get married don’t fully understand why they get married.

    But if 76% (or whatever) of the population gets married and says that they do so because they find it valuable, it’s kind of funny to listen to a bunch of intellectual critics arrogantly argue that these married people don’t know what they’re doing or why they’re really doing it — and that they shouldn’t do it anyway because you in your lofty wisdom happen to believe it’s bad for them.

    Honestly, some of you need to get a grip on the difgference between observable reality and your own attempts to explain it to your satisfaction.

  14. Well no one can dispute that patents benefit start ups I am not sure how specifically the Bilski decision was a benefit.

    After all, Bilski did lose his bid to get a broad based patent. And that means start ups lost some potential claim scope for their inventions.

    None the less the SCOTUS did not strike business methods as patentable subject matter. And that will mean more funding for more small businesses to hire more employees and compete. And thats a good thing for our economy, country and capitalist system.

  15. One point you may consider is that people often don’t know why they do things. This is fundamental to experiments in psychology. So asking why isn’t always helpful.

  16. Jason,

    I’m very sorry to hear that you’d rather stick to your anecdotal views than put some money down to systematically survey VCs. My take on your so-called “facts”:

    “1. You interviewed no VCs. I live and breathe with them and you have no low level of certainty. You never talked to the group you are supposedly representing their feelings about. And yes, Ted, we VCs talk about this all the time.”

    –Actually, our research team did speak directly with a number of VCs during the interview process. But it was certainly far too few to make for a sample. Nonetheless, you–with your incredibly biased view of the patent system–are asking me to disregard the responses of over 500 software startups and, instead, take your word that VCs as a whole do not think patents are important in their investment decisions in software companies. To be sure, I think you are 100% sincere, but without some hard evidence on your side, no, I’m not going to discredit the survey results.

    Indeed, you state below that “Perhaps VCs care about patents simply because the system is so screwed up, we need them as shield for patent trolls and other junk,” showing that there are coherent reasons why VCs may think patents are important. Although I explained earlier that I don’t think patent trolls are a serious threat to most startups–even venture-backed ones–defensive and strategic aims, such as avoiding a lawsuit and engaging in cross-licensing negotiations were rated as moderately important reasons on our survey for startups to file for patents. And it is evidence like this that makes me believe–whatever some software VCs say otherwise in the public policy sphere–that patents are usually taken seriously in the investment process.

    “2. All of your data about VCs comes from entrepreneur which may or may not have a clue what VCs think. (I bring up my parent / kid analogy that while the parent knows the kid, it’s hard to get insider their heads)”

    –That’s an overstatement. Certainly, responses from parents–at least most of them–about what’s important to their kids will have a strong correlation to the actual views of the kids. Same here. And I’d much rather rely on systematic data from 1000 companies than your personal experience and conclusory assertions about what the VC community thinks.

    “3. Your entrepreneur set was at best 50% VC backed”

    –Red herring. As I stated earlier, and as outlined in our paper, when we limit the response set purely to VC-backed firms, the percentages go up, from 70% to 76%. For software firms specifically, D & B firms reported that 60% of VCs said patents were important to their investment decisions, while 59% of the VentureXpert firms reported the same. So taking out the non-VC backed companies doesn’t change the results.

    “4. Your data says that entrepreneurs based their decisions at least partially, if not completely, by questions asked in due diligence”

    –No so. I just provided that as an example. As our article states, “[W]e asked respondents to report whether each of the funding sources had indicated that the startup having patents was an ‘important factor’ in that source’s funding decision.” As such, the question was not centered on due diligence as the basis for the responses.

    “5. You have no idea if the diligence was simply the VC lawyers asking questions about patents or if the VCs themselves asked. If you think that VCs sit around supervising their lawyer’s legal diligence, then this is wrong as well. As a standard diligence package from any law firm they’ll ask about patents, if nothing else to cover their butts.”

    –Again, this is a red herring, because our question didn’t ask about due diligence. Even when I referred to due diligence, I stated in my post, “and if an investor spends a lot of time during due diligence reviewing and asking about patents.” Our survey question specifically asks respondents to state whether the “funding sources had indicated . . . .” It seems unlikely that a few questions from lawyers about patents or a line-item in a due diligence package would, at least for most respondents, be sufficient for them to check “yes” on this question.

    “But here’s the big one: Even if you were right (which your not), you don’t know WHY VCs care about patents. Your study didn’t figure this out – your are simply guessing.”

    –First off, we haven’t been arguing this point. Nonetheless, I agree this is the rub. I also agree that our survey does much less to answer this more important question. Nonetheless, the studies I cited above indicate that patents are important to firm survival and to improving the chances of being acquired. Additionally, when we asked firms why they filed for patents, they rated prevented copying, improving the chances of an exit, and defensive/strategic reasons as moderately to very important. So while the study isn’t conclusive here, I think the current data is better than a “guess.”

    “Perhaps VCs care about patents simply because the system is so screwed up, we need them as shield for patent trolls and other junk.” “But you don’t know because the questions weren’t asked, if you you did ask them you would have asked entrepreneurs.”

    –In my main post, I addressed the patent thicket problem. Based on our data, it appears that only a small percentage of startup software firms—even venture-backed ones—are subject to patent thickets. Additionally, it appears very few startups are sued by non-practicing entities (NPEs). Of course, it could be that even though few software firms are ultimately subject to thickets, the reason this is the case is that they avoid heavily patented areas (cf. Lerner (1995) (making this observation for biotech companies)). But unlike biotech firms, I don’t think most software firms perform extensive searches of patents before entering a particular product space (and the survey data supports this view, with only 25% of software firms reporting doing patent searches).

    Rather, it seems more likely that software VCs and startups are unaware of the litigation and licensing data and over-estimate the troll problem. But the data indicate that there are other, value-enhancing reasons for VCs to care about software patents—namely, in driving up valuation upon exit (including IPOs, acquisitions, and bankruptcies) and helping to ensure firm survival. Also, as I argued above and in a separate paper, I think that patents can help promote the post-invention, commercialization process for startups.

    So while it could theoretically be the case that even though a small number of software startups are accused of infringement, the total costs borne by these companies are so heavy that they outweigh any beneficial effects from patenting (cf. Bessen & Meurer (2008) (making a similar finding for publicly traded companies))—given the small pot of funds available to plaintiff patentees from startups and the reported positive effects of patenting, this situation seems unlikely.

    Of course, it would be nice if we had more exhaustive data on these issues. But we don’t, and again, I rely on the best available data to make my claims. As I’ve stated by now numerous times, I think this data is not only sufficient for this purpose—but much better than the scattered set of anecdotes most commentators rely upon.

    “Perhaps VCs think they are worthless for innovation which is all that we should care about with studies like these.”

    –Actually, all we should care about on this issue is whether, in fact, patents are valuable (or not) to innovation, not what VCs think about patents. The data points toward the market (including VCs) generally finding patents important, which is a critical first step in answering the question. And while I agree patents often do little to drive initial invention itself for startups, I do think there are strong arguments that they help promote commercialization and hedge against competitive risk in the marketplace. The more difficult question, I think, is: When we open the door to include larger companies, do patents still promote innovation, particularly in the software industry? There, the data is much more equivocal. As we’ve discussed in person, my sense from the literature and my own experience is that 20-year patents, especially ones with broad scope, do more harm than good in the software industry. But my post was about startups. Even more broadly, I don’t think getting rid of software patents is the best solution. Instead, I’d rather see a short-term patent (e.g., 5-7 years) with much narrower scope, along the lines I outlined in a recent article, link to ssrn.com . Yet, this is an entirely separate debate—but one well worth having after recuperating from this one.

  17. Responding to HierarchyOfPontificationBuckets:

    The citations to the Morse case has given me hives for years, but your post points us in the correct direction.

    The unpatentability of Morse’s claim 8 has been used (wrongly) by SCOTUS and other courts to analyze (1) written description, (2) patent-eligible subject matter, and (3) overly broad claims (the vague notion of it rather than any statutory provision).

    In my opinion, this holding in the Morse case begins and ends on the issue of enablement (which is the correct, statutorily supported principle of the case). Morse utterly failed to enable most of the possible uses of the motive power of electric or galvanic current for marking or printing intelligible characters, signs, or letters, at any distance. It would have (and did) require undue experimentation for others to later develop some of these uses. Thus, a lack of enablement completely and sufficiently justifies and accounts for the Morse decision on claim 8.

    Regarding written description, while it is true that Morse also failed to describe most of the possible uses of the motive power of electric or galvanic current for marking or printing intelligible characters, signs, or letters, at any distance, a lack of written description was not the basis of the Morse decision. As has been discussed and argued in various recent cases involving written description, the modern view of the separate written description requirement was not acknowledged or explicit at the time of Morse, the Supreme Court did not discuss it, and, even if the principles of the modern written description requirement had been in existence at the time, the Morse decision was not based on it. As we all know, just because the facts of a case might fit with a different legal rationale not discussed by the court, we cannot cite those decisions as holding that the case stands for (or establishes) that legal rationale. I mention establishment here especially because the Morse case has been misinterpreted as establishing the modern written description requirement. A decision consistent with an unmentioned legal rationale does not cause that case to stand for or establish that legal rationale. Of course, if SCOTUS says a prior case stands for a legal principle….

    Regarding patent-eligible subject matter, the same principles apply even more forcefully. The Morse decision simply does not describe claim 8 as being subject matters for which a patent cannot be granted. Had Morse presciently included descriptions of myriad uses of the motive power of electric or galvanic current for marking or printing intelligible characters, signs, or letters, at any distance (thus enabling the broad scope of claim 8), then it is hard to see how claim 8 could have been considered as being beyond patent protection (especially since the means Morse did describe were and are unquestionably paten-eligible). Again, a decision consistent with an unmentioned legal rationale does not cause that case to stand for or establish that legal rationale.

  18. As to the studys, even if it was given that

    ‘nearly 70% of venture capital firms and 50% of angel investors said that patents were important to their investment decisions’,

    ‘that only 8% of the population of respondent software companies and 12% of venture-backed software companies had licensed-in even one patent’,

    or a ‘relatively low percentage, 0.6% and 3%, respectively, reported licensing a patent solely to avoid a lawsuit’.

    I don’t see how these ‘facts’, even if true, remotely support the theme ‘Why Bilski Benefits Startup Companies.’.
    I would expect that investors consider software patents ‘important’, even if only a necessary evil. Like with oil spills, ‘important’ doesn’t equate to ‘good’ or ‘beneficial’. The more interesting question on whether investors think that patents present a good ROI and/or make the world a better place seems to be implied but isn’t supported.

  19. Ted, this is getting worse. If you really are only holding your hat on what VCs think, then you are even farther off base than I thought.

    Let’s talk facts, not inferences or guesses.

    1. You interviewed no VCs. I live and breathe with them and you have no low level of certainty. You never talked to the group you are supposedly representing their feelings about. And yes, Ted, we VCs talk about this all the time.

    2. All of your data about VCs comes from entrepreneur which may or may not have a clue what VCs think. (I bring up my parent / kid analogy that while the parent knows the kid, it’s hard to get insider their heads)

    3. Your entrepreneur set was at best 50% VC backed

    4. Your data says that entrepreneurs based their decisions at least partially, if not completely, by questions asked in due diligence

    5. You have no idea if the diligence was simply the VC lawyers asking questions about patents or if the VCs themselves asked. If you think that VCs sit around supervising their lawyer’s legal diligence, then this is wrong as well. As a standard diligence package from any law firm they’ll ask about patents, if nothing else to cover their butts.

    But here’s the big one: Even if you were right (which your not), you don’t know WHY VCs care about patents. Your study didn’t figure this out – your are simply guessing.

    Perhaps VCs care about patents simply because the system is so screwed up, we need them as shield for patent trolls and other junk.

    Perhaps VCs think they are worthless for innovation which is all that we should care about with studies like these.

    But you don’t know because the questions weren’t asked, if you you did ask them you would have asked entrepreneurs.

    As for the endeavor of me giving you funds to support another study which would be “more fruitful than continuing our present debate” that is perhaps the worst business plan that I’ve been presented as a VC. At least with the entrepreneurs I back, they don’t spin the information they give me.

  20. Jason,

    On this particular issue, I do think the data stands for itself in the sense that regardless of my personal views, it’s clear that the respondents to this question by and large believe that their VC investors said patents were important to their investment decision. So I think you mischaracterize my assertions by essentially labeling them as anecdotal.

    Moreover, Pam Samuelson’s data is my data. The dispute centers on how to interpret the results. I agree with you that the data is not perfect–i.e., it is subject to grayness–but where you and Pam and I differ (and I also took statistics) is on how reliable the data is vis-a-vis answering the question-at-hand.

    You want a high level of certainty, and my argument is that given the paucity of data on this issue–and the need to engage in policymaking–I think a lower level of certainty is more than sufficient.

    Furthermore, I think this lower level of certainty in our data is indeed more reliable than your experience and communications with other VCs–at least on the importance of patents to VC investments in software companies. (And, of course, I did not assume that you think in vacuum. For this reason, I asked whether you have communicated with many or most of the VCs funding the 250 startups you’ve dealt with on this issue.)

    In the end, I agree we could have a much more authoritative answer to this question, and I’m happy to take a bet on it with you. Of course, I agree we need to conduct the survey with VCs to settle the score. I suggest your firm throw some funds into the kitty, and we see if we can raise the rest from the usual suspects and resolve the question once and for all. And perhaps we can agree that that endeavor would be much more fruitful than continuing our present debate.

  21. Ted,

    You are missing the point. Any person who thinks that a social science study “speaks for itself” is not schooled properly in scientific method. This isn’t chemistry and even that is hard to decipher sometimes.

    We can go back and forth and I think my points that I made previously still stand despite your attempts otherwise.

    1. Your authors aren’t standing behind you.
    2. One of your authors was the genesis of my posts. The data was hers and she agreed.
    3. For you to assume that this is just my opinion also means you’ve done NO study of what VCs really think. There are many of them who feel the way I do and I would be willing to bet you anything that a majority of early-stage VCs agree with me. I’m the one in the ecosystem, on the NVCA board and on portfolio company boards. To think that I form these opinions in a vacuum is really short sighted of you.
    4. As for preconceptions, I agree. I have them. My biases, as a lawyer have been for strong patents. I’ve done a complete 180 degree turn after being in the real world and seeing how these things really work.
    5. And as for anecdotal assertions, I’m sorry but your tired story of “this one time, at a startup” is the whole basis of your argument. We may both be guilty of the same thing, but I have a lot more stories than you.

    Like I’ve told you, I think that good minds can have different opinions, that’s fine. We don’t agree on patents. That’s fine. What I am really disappointed with is you attempting to make the “findings” of your study much more black and white than the grey matter it really is. It’s very, very clear to anyone who has done real statistical research (as I did in undergrad) that there are holes in it. I’m not say throw it out. On the contrary, I’m saying be more objective and open to the possibilities that there aren’t “patently obvious” (pun intended) conclusions from it. I’m sure you’ll agree if and when we hear conclusions from your colleagues.

  22. this discussion is laughable! 100k plus startups created in last decade and no one can point to 5 non-vc backed web startups that have financially benefited from their patents

  23. There is also the small matter that most of the people actually involved in day-to-day serial entrepreneurship and venture investing would laugh at the suggestion that patents are either unnecessary or even harmful to startup financing and business success.

    Just because we haven’t yet found a way to measure precisely every effect that patenting has does not mean that in the real world we don’t see those effects every single day.

    Is there not a certain diletante intellectualism behind the notion that observable reality is less valid than our imperfect means of measuring it?

  24. Jason,

    Yes, we are friends, but that doesn’t mean we can’t vigorously disagree on important patent law issues. And, indeed, you got this all started with your earlier post on our study (which, incidentally, you never forwarded to me at the time).

    In any event, in a second round of good-natured—yet partially (and deservedly) acrimonious—debate, here is my reply to your recent blog post:

    1. Fitting My Theories to the Data: You argue that I have “intuitions on patents based on [my] experiences and [have] used the data to fit [my] theories, rather than using the data in an unbiased way to figure out what is really going on with patents and startups.” While I use my experience founding and running a software startup; being an inventor; and practicing, teaching, and reading and writing about patent law to aid in understanding and unpacking the data, I think the data stands for itself. (And in this regard, I only use “we” in my posts when referring to assertions made in my entire research team’s paper.) Numerous startup companies (over 700 in our survey) informed us that venture capital firms with whom they negotiated said that patents were important to their investment decisions. Just because, you, Jason Mendelson believe that patents are not important to your investment decisions does not belie that data. So, if anyone is fitting a pre-conceived theory to the situation and “pretend[ing] to know much more than they really do,” it is you, who do not rely or cite any systematic data whatsoever.

    2. Response Rates: My post states that over 500 (not 175, as you state) of the respondents were VC-backed startups. Of those, 175 were software firms. Given the paucity of other data, in my view, these are large numbers. As for the Dun & Bradstreet vs. VenturExpert ratio, as I stated earlier, the split for this question is about even. (Pam Samuelson’s comments refer more to the sample size across all questions.) So there is no weighting towards D & B companies in the results for this question. In any event, as I stated, when the sample is limited to the VentureXpert group, the percentages of VCs finding patents important only go up.

    And while you may have had experience with some 250 startups—and please excuse me for relying on the number solely on the companies in your current portfolio—have you’ve asked all (or even many) of them or their VC investors whether patents were important to the VCs’ investment decisions?

    Perhaps most importantly, when you state that “just because [we performed] the most comprehensive study doesn’t make the study necessarily any better” and the study is not “rock solid clear,” you start to sound like the global warming skeptics. The reality of policymaking is that we need to base our decisions on the best available data, compensating appropriately for the risk that the available data may be wrong. In this situation, the current data point towards a strong tendency between patenting and venture capital. Besides our survey results, Kortum & Lerner (2000) examine patenting by venture-backed firms and postulate a strong causal relationship between venture capital funding and the rate of patenting. Additionally, Mann & Sager (2006) find a significant correlation between patenting activity and total financing as well as the number of rounds of financing. Jensen et al. (2006) find that among Australian startup firms, increased patenting is correlated with firm survival rates. And Hsu & Ziedonis (2007) find that a doubling in the patent stock of venture-backed semiconductor companies is matched with a 24% premium in market valuation upon exit. Rather than address the data directly, you simply reject it because it is pretty much not “perfect”—well, to quote a cliché, “the perfect is the enemy of the good.”

    3. Not Surveying VCs Directly – Your assertion that my response is basically “we couldn’t afford to interview VCs, so we just guessed by asking entrepreneurs” is thoroughly mistaken. Entrepreneurs, most of whom in our survey were serial entrepreneurs, who raise money from VCs generally know what those VCs find important in the investment process. As you know well, the due diligence process is usually involved and lengthy, and if an investor spends a lot of time during due diligence reviewing and asking about patents, I think it’s safe to say that the investor thought that the patents (or lack thereof) were important. To say this is “bad science” is again, assuming that which isn’t perfect, must be bad. If that were so, we’d throw all science out the window. Inference is present in every piece of data.

    All in all, you’ve done little to nothing to provide any evidence, other than your own anecdotal assertions, that VCs investing in software companies don’t find patents important in their investment decisions. Perhaps with all that money you’ve made from your 250 companies, you’ll fund a study directly of VCs showing otherwise (and I’m happy to participate). Until then, this is the best data we’ve got, and while it isn’t perfect, it’s pretty darned good.

  25. Wow. Ted, you really outdid yourself. And I thought we were friends. Well, if you want to get into it, here goes.

    I’ve just posted on my blog a full rejection of your comments regarding my post. It can be found here:

    link to fndry.gr

    But here are some fun excerpts for you:

    Sichelman attempts to refute my post in the comment section, but fails badly.

    First of all, it seems clear to me that Sichelman has intuitions on patents based on his experiences and has used the data to fit his theories, rather than using the data in an unbiased way to figure out what is really going on with patents and startups.

    I make this assertion based on a couple of observations:

    1. Everytime he speaks about patents, he begins with the story of his one experience with a startup company and how patents may have helped. I’ve had dinner with Ted and I’ve heard the story. I’ve also seen the story pop up in every situation he discusses patents. A sample size of one does not make a scientific set.

    2. Sichelman’s co-authors are no where to be found when he comes up with his conclusions. Ted acknowledges that he doesn’t speak for his co-authors, but very easily uses the word “we” when discussing the study and “his” conclusions. The blog post that I wrote refuting some parts of the conclusions of the study were not all my own ideas – they were the thoughts of his co-author Pam Samuelson who herself said the article really doesn’t say anything about VC attitudes toward patents.

    It’s really clear that Sichelman has a bias that was probably preconceived on a data set of one (his startup) and not supported by his fellow authors who have not backed him up publically.

    Furthermore if you read his comments on my blog post, his rebuttals don’t hold water as well. (And you’ll want to read the comments for this part of this post to make any sense).

    1. Response rates – just because you are the most comprehensive study doesn’t make the study necessarily any better. It might, it might not. I could be the world’s tallest midget and that still doesn’t get me much (no offense to midgets, sincerely). I never definitively said the sample size was too low, rather it’s not rock solid clear that it was the right size or targeted the right companies. It’s not an easy thing for them to do, granted, but we shouldn’t just accept the number “1300” being thrown out and assume that this is sufficient. And per Sichelman’s own admission in his comments, only about 175 of the respondents were VC-backed startup companies. This is not a large number.

    2. Only 75% answered the patent question and Sichelman says this is acceptable. This is not. In fact, others involved with the study have specifically questioned where the answer rate was a piece of data in itself. Again, I’m not saying definitively this is data, rather the way Sichelman uses data like this as “proof” is not dispositive.

    3. Results biased toward non-venture backed companies. Sichelman again presents a non-compelling argument. First, 2/3rd of the sample size, according to his co-author Pam Samuelson were D&B companies, not VentureExpert companies. Secondly, him trying to convince readers that I only have a sample size of 25 current portfolios is either poor research on his part about me, or ignoring the facts. I’ve been involved in VC for over a decade and with well over 250 companies, which alone is larger than his sample size of 175 companies.

    4. (My Favorite) – Just because we didn’t survey VCs doesn’t mean that we don’t know what VCs think. To quote him:

    “VCs were not surveyed directly – Although it would have been more reliable to survey VCs directly, unfortunately, our time and resources were limited. Nonetheless, there is little reason to believe that the reports of executives at startup firms regarding the views of VCs during the financing process—which is lengthy and involved—are inaccurate. Rather, executives are presumably well-aware of those items that VCs found important during due diligence.

    Basically his response is: “we couldn’t afford to interview VCs, so we just guessed by asking entrepreneurs.” This is totally bogus and backed up by Pam Samuelson herself in recent remarks at the University of Colorado law school. This only talks about perceptions that entrepreneurs have of VCs. This says nothing about what VCs think. To think that one study group can be substituted for another study group and presented as fact discredits the valid parts of the paper. This is just bad science. If it was good science, we’d just ask parents about what their kids really thought about things.

    In summary, it’s been a rough day thinking about what could have been with Bilski. I’m getting a ton of backchannel about the politics behind the decision, which just makes me more upset. To try to capitalize on the poor decision with articles like this just makes me more disappointed about the system and the supposed “experts” who pretend to know much more than they really do.

  26. You know what many companies don’t like about patents is that it forces the companies to innovate.

    Do you mean to say that other than because of the the patent system, companies would not be compelled to innovate? Your statement suggests there aren’t other important forces for innovation than use of the patent system. That seems quite wrong to me. For instance, the bulk of (but not all of) the innovative software that produced massive profit and massive public good in the last 30+ years was created by companies not using that patent system to protect those innovations.

  27. You know what many companies don’t like about patents is that it forces the companies to innovate.

    That tingling sensation means it’s working.

    “To promote the Progress of Science and useful Arts (etc.)”

  28. >>Do Not Equal Innovation\

    You know what many companies don’t like about patents is that it forces the companies to innovate. Basically, what patents mean is that you have to get on the innovation escalator (going up on the down escalator) and you have to keep pumping your innovation engine to stay even. Everyone is innovating and that is what patents force. It isn’t really fun for many companies, but that is what Reagon did to cure the Carter malaise.

    And guess what? The NPEs have just up’ed the ante. Now you have to innovate a generation ahead of your current product to stay ahead of the NPEs.

  29. confused SCOTUS: “Breadth of scope of a claim is different than abstractness of a claim. I suppose this is why Kennedy also mentioned 102, 103 and 112. The Bilski decisiion perhaps allows method claims to be more abstract, but whether the claims are overly broad triggers something other than 101″

    Practically, the broader a claim, the more likely it will have both 101 problems as well as 102/103 problems. SCt rejected Morse claim 8, stating

    “The first seven inventions, set forth in the specifications of his claims, are [patentable]. The eighth is too broad and covers too much ground. It is this. … The acts of Congress do not justify a claim so extensive. … No one, we suppose will maintain that Fulton could have taken out a patent for his invention of propelling vessels by steam, describing the process and machinery he used, and claimed under it the exclusive right to use the motive power of steam, however developed, for the purpose of propelling vessels.”

    Then look at claim 8 “the essence of my invention being the use of the motive power of the electric or galvanic current, which I call electro-magnetism, however developed for marking or printing intelligible characters, signs, or letters, at any distances, being a new application of that power of which I claim to be the first inventor or discoverer”.

    Is claim 8 abstract? galvanic current, marking/printing characters, these are concrete steps. Let’s suppose that the steps together were new and unobvious. The only way I understand the outcome is to take the Court on it’s word, that claim 8 was “too broad and cover[ed] too much ground”, despite the lack of prior art.

    Is Morse’s “too broad” equivalent to section 101′s “abstract” ?? Or, is there an uncodified rule in patent law, still standing, that a claim can simply cover too much ground? (let’s ignore the other basis for denying claim 8: insufficient specification support)

  30. Reno,

    My experience is that most software companies, including Internet-based ones, are filing for patents on software tied to a general purpose computer and/or generic network, which I think after Bilski, will very likely be considered eligible subject matter.

    Rather, in my view, ineligible unapplied/”pure” business methods would cover tax avoidance schemes, financial methods not tied to a computer, plot scripts, and other claims of a wholly abstract nature.

  31. Dear Patents Do Not Equal Innovation,

    You state: “That’s easier said than done, especially under this mess of a test. Messy test = higher costs of litigating = more startups being inhibited by patents of questionable patentability = more startups failing after reaching a crucial point of survivability due to frivolous lawsuit by a non-practicing entity.”

    To be certain, the Supreme Court in Bilski did not adopt a particular “test.” Rather, like KSR, the Court returned to first principles–anything that falls under Section 101 that is not a law of nature, natural phenomenon, or abstract idea is not patentable. Nonetheless, again like KSR, the Court did state that the machine-or-transformation test is a viable test, just not the sole test of determining eligible subject matter. Since most inventions will easily pass the M-or-T test–particularly now that software implemented on a general purpose computer is very likely going to pass muster under 101–I don’t think Bilski will be particularly messy in practice. Very few patent applications push the boundaries of the M-or-T test, much less the outer boundaries of what constitutes a law of nature, natural phenomenon, or abstract idea. Indeed, if one looks at all the appeals to the Federal Circuit since 1982, despite all of the ink spilled over them–very few have involved patentable subject matter issues.

    As for non-practicing entities filing suits against startups, the evidence points the other way. As I mentioned, a relatively small percentage of software firms had licensed-in even one patent. And very few had licensed a patent solely to avoid a lawsuit. Furthermore, very few of the software firms in our sample (including non-respondents) have been subject to an infringement suit. Although NPEs certainly approach startups in some instances, the target of NPEs are primarily large companies.

    And, in any event, you overlook the positive aspects of patents to startups that I mentioned earlier in the post. Without an inclusive analysis, it’s impossible to come to a balanced conclusion.

  32. but most Internet startups are trying to patent processes for determining something abstract, not tangible, not directly tied to a machine. Ted, wouldn’t these be rejected based on yesterday’s ruling?

  33. Peter Brown—Yes, I’ll respond to Jason Mendelson’s critique posted on his blog.

    I summarize each of his contentions below, then provide my responses. Please be
    aware that these responses reflect my personal views (and not necessarily those of my co-authors):

    1. The response rate is too low to be reliable – We address
    this issue at length in the paper.
    As an initial matter, the response rate is in the same range as rates for other
    surveys of small businesses, particularly those by the Small Business
    Administration. To ensure reliability, we tested a variety of company
    characteristics of respondents vs. non-respondents, including number of patents
    and applications held, size of the firm, location, age, and valuation at the
    first round of fundraising (if available). We found no significant differences
    other than a slightly western bias of respondents, a smaller size for medical
    device firms, and very small differences in firm age in a number of industries.
    In addition, we performed testing of early respondents (who responded by web
    and mail) and late respondents (who only responded after calling them and
    typically offering a prize) and found no major differences. Based on this
    testing, we stated in our paper that our responses are generally representative
    of the overall population of companies, which in my view, means that the
    companies responding had no particular “bone to pick,” as Mendelson asserts. And,
    finally, our survey, which contains the responses of over 1300 companies, is the
    most comprehensive data on startups available for policymaking, and substantially more
    reliable than the anecdotal assertions of a small number of VCs.

    2. Only 75% of software companies answered this question
    – Specifically, Mendelson argues that the non-respondent companies “may have skipped this
    question because they didn’t perceive patents to be of importance to investors.
    That suggests to me that patents were deemed unimportant to financing for close
    to 200 of the software respondents who did not answer that question, although
    they answered many other questions more completely.” Actually, the response
    rate on this question (about 75%) was not unusually low when compared to other
    questions of similar length. For example, the response rates for our question
    on whether patents provide incentives in the R & D process were roughly the
    same. Thus, it is unlikely that those who did not answer the question would
    have responded differently from those that did.

    3. The results are biased towards non-venture backed
    companies, which skew the results
    – As an initial matter, it is not the
    case that most of the respondents to this question were Dun & Bradstreet
    companies. Rather, about half, more than 500 companies, were from the
    VentureXpert database. Moreover, as we describe in our paper, venture-backed companies
    report that even higher percentages of venture capital firms said that patents
    were important to their investment decisions. Of these respondent companies,
    about 175 were software firms, which I don’t find to be a “very small” sample size.

    If anything, Mendelson’s investment portfolio—which based on
    a review of his firm’s website, numbers about 25 companies—is skewed, because
    many are “web” companies, which are known to rely on open source and other
    standards-based software for which patents are not particularly important. In
    this regard, web software companies are still by far the minority in terms of
    overall revenue. So, while it is not surprising that Mendelson and other VCs
    backing companies not needing patents are strongly opposed to them—since they
    can only create unnecessary costs through licensing and litigation—it seems
    unlikely that their vocal position represents that of VCs in general. In any
    event, it is not inconsistent for a given VC to want to eliminate software
    patents on an industry-wide basis, but still find them important on a
    company-by-company basis for particular investment decisions.

    4. VCs were not surveyed directly – Although it would
    have been more reliable to survey VCs directly, unfortunately, our time and
    resources were limited. Nonetheless, there is little reason to believe that the
    reports of executives at startup firms regarding the views of VCs during the
    financing process—which is lengthy and involved—are inaccurate. Rather,
    executives are presumably well-aware of those items that VCs found important
    during due diligence.

    In sum, Mendelson’s assertions are not in my view the “truth
    about the numbers” but generally unsupported (and, sometimes, inaccurate) assertions
    about the data and the study results. As such, his critique should be rejected.

  34. Although, I will say that I was not impressed with the survey. It could be much better done. Exit strategies are important.

    Also, you should step up in the world and get away from Lemley and Samuelson. Neither has a clue.

  35. Ted,

    You said: “And while Bilski ultimately holds that business methods are not per se unpatentable, the practical effect of the outcome will be to place unapplied business methods into the precluded “abstract idea” category.”

    My response: That’s easier said than done, especially under this mess of a test. Messy test = higher costs of litigating = more startups being inhibited by patents of questionable patentability = more startups failing after reaching a crucial point of survivability due to frivolous lawsuit by a non-practicing entity.

  36. You know the VCs are sophisticated and know how to play the system of patents.

  37. Plus, that is not true that no VCs want patents. Many VCs know that when you want to sell a company to Microsoft, for example, that you better have some protection or Microsoft may just copy what you have invented.

  38. >>…but I still can’t find many patent lawyers >>who get this. I wonder who’s profiting from >>all this patenting and litigation…

    What you are missing is that many VC’s don’t want patents because from their perspective they may merely interfere with their plans. But, they are only part of the ecosystem. The VC evaluates ideas/tech and puts together an execution team. For many VCs particularly those that are focused on execution, they don’t want patents. They want to execute and copy the technology.

    Other VC’s promote innovation including funding research in product development.

    The VC community is complicated.

  39. Dear Professor Ted Sichelman,

    Can you respond to the venture capitalists who say your conclusions from the report are incorrect and that co-aithor of the report Pam Samuelson Samulson agreed that such conclusions are bogus: link to ur1.ca

    “Now, let’s look into the entrepreneurs that were surveyed about this perception of VCs.

    88% of software startups that the study identified and queried (through Venture Expert and Dun and Bradstreet) did not respond to the survey.

    There was generally a 1/3rd 2/3rd mix of companies between Venture Expert to D&B. It appears to me that none/few of the D&B companies are venture backed. (My proof is that very few D&B companies reported to aspire to be acquired or go public, which most/all VC-backed companies hope for this).

    So the actual sample size of the venture-backed software startups is very small. Pam indicated that they did research on the non-responders (the 88%) and don’t believe that they differ materially from those companies who respond. But one can’t rule out that selection bias affected the report, as the 12% could have had a bone to pick, or something different about them that could not be picked up in the study.

    Also there is another thing worth considering: only 75% of the software respondents actually answered the question regarding perceived importance to VCs, which does suggest that the other 25% may have skipped this question because they didn’t perceive patents to be of importance to investors.

    That suggests to me that patents were deemed unimportant to financing for close to 200 of the software respondents who did not answer that question, although they answered many other questions more completely.

    So bottom line? No VCs were actually polled to come up with this statistic. A small number of companies responded and might be over weighted to D&B companies as opposed to VC-backed companies. So when you hear that stat thrown around, know the truth behind the numbers and feel free to show them the way, if you are one of those fighting the “good fight” against software patents. ”

  40. Just for context, here’s a list of venture capitalists who are vocal in supporting abolition of software patents:

    link to en.swpat.org

    …but I still can’t find many patent lawyers who get this. I wonder who’s profiting from all this patenting and litigation…

  41. “One might contend that by allowing business methods—as well as software and other “intangible” innovations—to be patented, startup firms will encounter a greater “thicket” of patents, making it more difficult for them to enter particular markets.”

    I completely disagree with the underlying premise that software is “intangible” as it is currently claimed in the practice. You either have computer readable storage media, process steps carried out by designated machines, or a machine itself operating according to stored instructions.

    The problem with most “business method” pure patents is that they are carried out entirely by a human actor. There is a distinction here.

  42. Breadth of scope of a claim is different than abstractness of a claim. I suppose this is why Kennedy also mentioned 102, 103 and 112. The Bilski decisiion perhaps allows method claims to be more abstract, but whether the claims are overly broad triggers something other than 101.

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