The Role of Patents in the Emerging Market for Venture Lending

by Dennis Crouch

A new article out from Yael Hochberg, Carlos Serrano, and Rosemarie Ham Ziedonis looks at how patents are increasingly being used as collateral for start-up ventures.  Generally, this area is being termed “venture lending.”  Article: Patent Collateral, Investor Commitment, and the Market for Venture Lending.

Conventional wisdom in the area has been that new ventures are typically too risky to allow for loans to finance research, development, and commercialization projects.  Bronwyn Hall and Josh Lerner (2010) and others have suggested that instead venture capital is the ‘more natural’ solution for financing entrepreneurship.  However, work by Alicia Robb & David Robinson and others have recently found that a substantial large percentage start-up companies also rely upon loans in order to finance their work.

Hochberg’s team looked to see the extent that patent rights are being used as collateral for these start-up companies.  A nice data feature here is that security interests in patents are normally recorded with the USPTO.  Using those records, the research team found that a substantial percentage (36%) of venture-backed startups in their study also relied upon loans for financing.  The sample here is fairly small (1,500 companies) and I suspect some potential selection bias, but still interesting results.

The authors also suggest that the market for patents is “thicker” and more liquid than many economists previously assumed.   That result is important because a more robust market for patents should mean that lenders are more willing to take patent rights as collateral.

If these intermediaries [such as Intellectual Ventures] increase the salability of patent assets, by increasing liquidity in the market, innovation-oriented companies could find it easier to borrow against their patents. This ex ante effect on innovation financing should be weighed, ideally with evidence from more companies and sectors, against the ex post distortions that may arise from patent trading and enforcement.

Although the article does not spell this out fully, one point that the authors are making here is that any study reporting on the cost/benefit of the patent system and transferability of patent rights should consider this financing benefit rather than simply the costs caused by enforcement.

The work here also builds upon Professor William Mann’s research that I previously highlighted here.


14 thoughts on “The Role of Patents in the Emerging Market for Venture Lending

  1. 6

    Why are you trying to bury any discussion about the serious economic issue related to patents that this article addresses?

  2. 5

    link to

    The case is interesting on a number of points:

    1. Citrix was found to have willfully infringed, in part, because its belief in invalidity of the patent was unreasonable. Citrix had invoked an ex-parte re-examination with respect to the same patents involved in the lawsuit, and the patentee there ultimately prevailed.

    The jury soundly rejected Citrix’s invalidity argument and non-infringement arguments. As noted above, the Takahashi reference does not disclose an applications level encryption program. Although not dispositive, the USPTO similarly found Citrix’s invalidity arguments unfruitful, despite the lower preponderance of the evidence standard. Further, we recognize that most of the limitations for the asserted claims of the ’011 Patent were uncontested. And we find that infringement of the only limitation raised on appeal of “encrypt files” was clearly supported by substantial evidence. Accordingly, we agree with the district court that SSL satisfied the objective prong.

    2. Citrix was found to have knowledge of the patent and of its potential infringement because of its relationship with V-One, who developed software covered by the ‘011 patent. The ‘011 patent was identified in the agreement between Citrix and V-One. That relationship broke up; and Citrix acquired the technology known as GoToMeeting from another party. V-One sold the ‘011 patent to SSL, who then sued Citrix.

    3. The Federal Circuit overruled the District Court and found SSL to be the prevailing party despite the fact that Citrix prevailed on a non-infringement basis respect to a second patent in suit, the ‘796 patent. The Federal Circuit implied that had Citrix prevailed by showing that one of the patents in suit was not valid, instead of not infringed, that the lawsuit would have been a draw.

  3. 4

    link to

    The Federal Circuit affirmed the finding that the two terms identified below in italics were indefinite because “device” was a nonce word implying no structure whatsoever, and the terms as used in the specification did not define any structure for the claimed devices, but only what the so-called devices did. They reached this conclusion by first determining the claims fell under §112(f), and then because there was no corresponding structure, just function, the claims were indefinite.

    1. An external diagnostic tester for motor vehicles,
    the motor vehicles having programmable control
    units with self-diagnostic means, wherein
    the control units can be connected to the external
    diagnostic tester via a diagnostic/test
    plug in the motor vehicle, the external diagnostic
    tester comprising,

    a program recognition and program loading device,
    wherein a program version contained in a
    connected control unit is queried and recognized
    by means of the program recognition device,
    and, if the program available in the
    motor vehicle and recognized via the diagnostic/
    test plug is not stored there in a latest and
    most current version, a respective most current
    version is loaded by the program loading
    into a program storage device of the
    pertinent control unit of the motor vehicle,
    wherein the external diagnostic tester automatically
    establishes communication with a
    central dat[a] base in order to check the program
    version and, if necessary, to obtain the
    current program version that applies for the
    control unit connected to the diagnostic tester
    and to store it there.

    1. 4.1

      It appears that italics are reversed in block quotes. “program recognition device” and “program loading device” are the terms in question.

    2. 4.3

      Query, if claim defines structure in terms of what it does, and so does the specification, according to this case, the claim does not define structure, but function, and the claim is indefinite.

      Just how then can any claim to a programmed machine not also be indefinite if the claim defines the software in terms of what it does and so does the specification?

      Litigators, cite this case. Ditto, PTO.

      1. 4.3.1

        The problem with this case is that they are not interpreting as one skilled in the art would. That is what they are doing, which has become the game of the activist, ignorant, anti-patent crowd.

        I have actually written patent application similar to this for chips. One skilled in the art immediately recognizes the structure. Again, this is the Fed. Cir. using that patent applications are supposed to contain what is new to sabotage claims and thus make patent applications cost more to file and include information that is not new.


  4. 3

    The comments here will sort out the people who actually practice with startups versus those who only claim to “support startups”.

  5. 2

    Anybody who actually PRACTICES in the patent law field could tell you this. But, we have a president who was a community organizer and academic, who listens to those who have the $$. Those who have the $$ want weak patents, so they can appropriate the fruits of other people’s labor cheaper and so that smart people will work for them instead of compete with them or disrupt them.

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