Patent Protection and Software Firm Financing

Abstract

We study the relationship between patent protection and the success of new software firms. Our empirical approach exploits the U.S. Supreme Court's 2014 ruling in Alice Corp. v. CLS Bank Int'l, which significantly restricted firms' ability to patent certain types of software. To quantify Alice's impact on software startups, we construct measures of new firm performance derived from detailed data on financing rounds and exits. We then employ these measures in a difference-indifferences approach that assesses how firm outcomes changed following Alice among patenting startups that were substantially exposed to the decision's effects relative to those that were not. Our findings suggest that software startups with relatively large exposure to Alice performed no better or worse than software firms with less exposure.

Keywords: Venture capital, Startups, Software, Patents

JEL Classification: G24, L86, K40, M13, O30