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

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  • Iain M. Cockburn
  • Megan J. MacGarvie

Abstract

"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." Copyright (c) 2009 Wiley Periodicals, Inc..

Suggested Citation

  • Iain M. Cockburn & Megan J. MacGarvie, 2009. "Patents, Thickets and the Financing of Early-Stage Firms: Evidence from the Software Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(3), pages 729-773, September.
  • Handle: RePEc:bla:jemstr:v:18:y:2009:i:3:p:729-773
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    References listed on IDEAS

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    1. Carl Shapiro, 2001. "Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting," NBER Chapters,in: Innovation Policy and the Economy, Volume 1, pages 119-150 National Bureau of Economic Research, Inc.
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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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