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

45 Pages Posted: 13 Oct 2009

See all articles by Iain M. Cockburn

Iain M. Cockburn

Boston University Questrom School of Business; National Bureau of Economic Research (NBER)

Megan MacGarvie

Boston University School of Management; National Bureau of Economic Research (NBER)

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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.

Suggested Citation

Cockburn, Iain M. and MacGarvie, Megan, Patents, Thickets and the Financing of Early-Stage Firms: Evidence from the Software Industry. Journal of Economics & Management Strategy, Vol. 18, Issue 3, pp. 729-773, Fall 2009, Available at SSRN: https://ssrn.com/abstract=1486837 or http://dx.doi.org/10.1111/j.1530-9134.2009.00228.x

Iain M. Cockburn (Contact Author)

Boston University Questrom School of Business ( email )

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Boston, MA MA 02215
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National Bureau of Economic Research (NBER) ( email )

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Megan MacGarvie

Boston University School of Management ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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