WASHINGTON D.C. - Patents can play an important role for new firms entering the software industry, explains University of Texas law professor Ronald J. Mann in "The Role of Patents in Venture-Backed Software Start-ups," a new paper released today by the Progress & Freedom Foundation’s Center for the Study of Intellectual Property (IPcentral.info). Through his analysis of new software firms, Mann concludes that serious debates on patents in the new technology sector must consider the role they play in the decentralized market structure. The author is a member of the Center's IP Academic Advisory Council.

In the paper, Mann analyzed data from venture capital backed start-up firms to determine if patent acquisition is related to the long term success of the company. To determine this, the author used five different metrics: the rounds of financing; the total financing amount; the status of the firm at the end of the data period (public, acquired, private, defunct), whether the firm reached a "late stage" of financing, and the longevity of the firm. Mann concludes "each of these five metrics indicates that firms with patents are more successful than firms without." While it cannot be determined by the data if venture capital funding allows firms to acquire patents or if patents allow firms to acquire more venture capital funding, Mann deduces that patents can "play a role of considerable importance."

The author also identifies how his research has implications for anti-patent arguments which focus on the dangers of large patent holdings by established software companies. "The first is the possibility that patents support young firms in their efforts to compete, thus helping to stabilize the relatively decentralized structure of the industry and forestall movement toward greater concentration and the market power that goes with it," he explains. "The second is the possibility that patents facilitate the intra-industry technology transfers upon which innovation depends in a realm of cumulative innovation." Previous studies, Mann states, suggest "the availability of patents will facilitate the entry of smaller firms contributing technology to products assembled by larger firms."

Mann urges those involved in the policy debate on software patents to consider their role in small firms, not just the larger players in the industry. He concludes that, "a serious debate about the propriety of patents in the software industry must account not only for the possibility that patents might impose substantial costs, but also for the possibility that they provide substantial benefits."

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.