Why Do Startups Use Trade Secrets?

Abstract

Empirical studies of the use of trade secrecy are scant, and those focusing on startups, non-existent. In this paper, we present the first set of data — drawn from the Berkeley Patent Survey — on the use of trade secrets by U.S. startup companies in the software, biotechnology, medical device, and hardware industries. Specifically, we report on the prevalence of trade secrecy usage among startups. Additionally, we assess the importance of trade secrets in relation to other forms of intellectual property protection and barriers to entry, such as patents, copyrights, first-mover advantage, and complementary assets. We segment these results by a variety of factors, including industry, company business model, overall revenue, patenting propensity, funding sources, innovation types, and licensing. From this segmentation, we implement a basic regression model and report on those factors showing a statistically significant relationship in the use of trade secrets by startups. Our results point to three major findings. First, trade secrecy serves other important aims aside from first-mover advantage. Second, trade secrets may act both as economic complements and substitutes to patenting. Third, trade secrets may serve as important strategic assets, functioning much in the same manner as patents in terms of licensing and setting the boundaries of the firm.

Keywords: trade secrets, startups, innovation, licensing, software, biotechnology, medical device, patents, intellectual property

JEL Classification: K3, L2, O3