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Patents, Thickets and the Financing of Eastly-Stage Firms; Evidence from the Software Industry

In: Entrepreneurship: Strategy and Structure

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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.
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Suggested Citation

  • Iain M. Cockburn & Megan J. MacGarvie, 2007. "Patents, Thickets and the Financing of Eastly-Stage Firms; Evidence from the Software Industry," NBER Chapters, in: Entrepreneurship: Strategy and Structure, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:3045
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    More about this item

    JEL classification:

    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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