Patents and the Success of Venture‐Capital Backed Startups: UsingExaminer Assignment to Estimate Causal Effects

Abstract

I study whether patent protection has a causal effect on entrepreneurial firm outcomes using a measure of patent examiner leniency as an instrument for getting patents. The analysis is based on sample of 1,950 U.S. startups applying for patent protection in the two years following their first round of venture capital funding. I find a positive and large effect of patents on firm success but only for life science firms and more important inventions. I interpret these results as reflecting the importance of patents in appropriating returns to invention in the life science industry.

What Is a Patent Worth? Evidence from the U.S. Patent “Lottery”

“…Gaule (2018) uses a similar instrument to study the effect of patents on the likelihood of venture capital (VC)-backed startups going public or being acquired. In a similar spirit,Galasso and Schankerman (2015) exploit variation in the leniency of judges to study the effect of patent invalidation on follow-on innovation.3 Applications of marginal quality are likely to be the most affected by examiner leniency.…”

“…This mitigates endogeneity concerns arising from potential post-first-action activities by the firm or investors that may be correlated with both firm outcomes and final approval.17 Since art units are quite narrowly defined (they span 495 different technology fields in our sample), including these fixed effects allows us to control for time-varying demand and technological conditions at a very fine level and thus ensures that our findings are not confounded by unobserved industry-level shocks. Applications belonging to art-unit-by-year singletons do not contribute to identification and are excluded.18 In particular, seeCockburn, Kortum, and Stern (2002),Lichtman (2004),Sampat and Lemley (2010),Lemley and Sampat (2012),Gaule (2018), andSampat and Williams (2019).…”

How Do Patents Affect Research Investments?

“… 27 Note that this instrumental variables strategy has subsequently been re-applied in a number of other papers, including Gaule (2015) and Farre-Mensa, Ljungqvist and Hegde (2016). …”

Where is the entrepreneurship bang for the patenting buck? Utility versus design patents

“…In the context of patenting-entrepreneurship nexus, a number of studies have examined whether patenting facilitated the raising of finance for startups and affected the overall success of firms (see Audretsch, Bönte, & Mahagaonkar, 2012;Gaulé, 2018;Helmers & Rogers, 2011;Hsu & Ziedonis, 2013). Examining the role of foreign competition, Autor, Dorn, Hanson, Pisano, and Shu (2019) find that foreign competition curtailed U.S. patent production.…”