Strategic Patenting in Venture
Capital Backed Firms
Ed Egan
BPP Student Seminar Presentation
Fall 2010
Three Reasons to Patent
• To appropriate economic value
(Nelson 1959, Arrow 1962, and so on…)
• For signaling reasons
(Spence 1970, Haeussler, Harhoff and
Muller 2009, etc)
• For strategic purposes
– TCE based strategic reasons
(Williamson 1971-1999, Cockburn and MacGarvie 2009,
etc)
– Other strategic reasons?
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Teece (1986)
• Preparadigmatic (IP is of less importance)
• Paradigmatic (IP may matter)
– Claim to Dominant Design: Need generalized assets
to commercialize, but have strong TCE bargaining
position (i.e. Holdup Immunity)
– Technology dependent on others: Cospecialized
Asset Problem, particularly a need to license
underlying technologies and a weak TCE bargaining
position
– Importance of IP depends on appropriability regime
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Ziedonis (2004)
• Patents are exclusionary rights
• Not a right to commercialize if underlying rights
are held by other parties
• Citations made are an indicator of underlying
rights
• Fragmented citations made indicate:
– Need to negotiate with many parties
– Each piece of IP must be evaluated separately, not as a
bundle
• Particularly a (TCE) problem without a “proud
stack”
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Data
• VentureXpert: 26,583 VC portfolio firms from 1980-2006
• GNI: 10,134 IPOs (essentially the population on Amex,
Nasdaq, NYSE) from 1980-2006 of which 1,376 (14%)VC
backed
• SDC M&A: 71,915 acquisitions from 1986-2006 of which
4,088 (6%) VC backed
• NBER Patent Data: 2,414,214 patents (i.e. the universe of
patents with valid assignees) from 1979-2006, with
20,063,230 forward citations.
– Our 82,049 firms filed 104,129 (4%) of all patents from founding to exit and
received about 6% of all forward citations.
– About a quarter of successful VC backed firms have at least one patent,
compared about 7% of non-VC backed firms. However, many non-VC backed
firms will be effectively discarded by the fixed effects.
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Descriptive Statistics (p16)
• Average number of patents
is low because most firms
have no patents
• Conditional on patenting,
patent counts are roughly
comparable across VC and
non-VC samples
• Without controls patenting
is comparable across
(successful) exit types
• VC backed firms take an
average of 5 years to
secure investment, and
then 4 to 5 years to exit.
Non-VC backed firms have
comparable mean age at
exit, but higher variance.
N
Full
Sample
Exit Value ($m)
No. of Patents
Age At Exit
Acquirer Public Status
Horizontal Acquisition
Vertical Acquisition
Conglomerate Acquisition
Conditional On
Patenting
Exit Value ($m)
No. of Patents
Citations Made
Citations Received
Cospecialized Asset Prob.
Holdup Immunity
Cites From Acquirer
Cites To Acquirer
Conditional On
VC (and Patenting)
Exit Value ($m)
No. Patents
Citations Recieved
No. of Rounds
Investment ($m)
Age at First Investment
Time To Exit
All Exits
μ(σ)
IPO
N
μ(σ)
N
Acquisitions
μ(σ)
33485
82049
7350
71915
71915
71915
71915
62.5 (218.5)
1.3 (55.7)
9.6 (13.4)
0.5 (0.5)
0.3 (0.5)
0.2 (0.4)
0.4 (0.5)
10134
10134
3913
-
81.2 (252)
2.4 (43.9)
11.4 (16.4)
-
23351
71915
3437
71915
71915
71915
71915
54.3 (201.7)
1.1 (57.2)
7.5 (8.3)
0.5 (0.5)
0.3 (0.5)
0.2 (0.4)
0.4 (0.5)
3405
6179
6179
6179
6179
6179
4641
4641
75.2 (267.7)
16.9 (202.5)
141.6 (1483.1)
201.2 (2136.5)
0.4 (0.4)
0.05 (0.2)
0.3 (3.7)
0.6 (4.7)
1538
1538
1538
1538
1538
1538
-
67.7 (322.7)
16.1 (111.7)
151.5 (583)
234.2 (960.1)
0.3 (0.4)
0.07 (0.2)
-
1867
4641
4641
4641
4641
4641
4641
4641
81.5 (211.9)
17.1 (224.6)
138.4 (1678.1)
190.2 (2402.5)
0.4 (0.4)
0.04 (0.2)
0.3 (3.7)
0.6 (4.7)
3236
1435
1435
5462
5259
3255
4727
73.6 (196.8)
20.3 (279.3)
292.3 (3150.7)
3.7 (2.8)
30.3 (61.2)
5.1 (8.3)
4.6 (3.6)
1374
510
510
1374
1327
899
1232
47.5 (73.1)
10.3 (14.4)
244.7 (491.6)
4.3 (3)
38.4 (75.3)
5.3 (7.9)
4.2 (3)
3236
925
925
4088
3932
2356
3495
73.6 (196.8)
25.8 (347.7)
318.6 (3907.8)
3.5 (2.7)
27.6 (55.3)
5 (8.5)
4.7 (3.8)
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
TCE Measures
• The Cospecialized Asset Problem variable is high when
the firm’s patent portfolio is made up of only a small
number of patents and the citations that the patents
make (to other firms) are highly fragmented:
• The Holdup Immunity variable is high when the firm’s
patent portfolio is made up of a large number of patents,
which are cited by a highly fragmented set of other firms:
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Determinants of M&A (p25)
• The “Cospecialized Asset
Problem” measure is
positive, meaningful and
highly statistically
significant.
• The “Immunity from Holdup Measure” is negative
and weakly statistically
significant
• VCs appear to solve the
cospecialized asset
problem!
• Immunity from holdup is
correlated with IPOs for
both VC and non-VC
Specification 1
-0.538
(-47.41***)
0.394
(3.61***)
-0.370
(-7.99***)
-0.029
(-0.76)
0.336
(3.17***)
-0.167
(-0.70)
Specification 2
Specification 3
Specification 4
-
-
-
0.365
(4.27***)
-0.455
(-12.60***)
-0.039
(-1.20)
0.209
(2.37**)
-0.433
(-2.29**)
VC Backed
-
-
VC * Log of No. Patents
-
-
VC * Log of Citations Made
-
-
VC * Log of Citations Rec'd
-
-
VC * Cospecialized Asset Problem
-
-
VC * Immunity From Holdup
-
-
0.412
(3.97***)
-0.443
(-10.25***)
-0.056
(-1.39)
0.060
(0.60)
-0.443
(-1.94*)
-1.156
(-22.27***)
-0.348
(-1.70*)
0.144
(1.74*)
0.115
(1.68*)
0.612
(2.92***)
-0.366
(-0.87)
Bust Period Indicator
-
-
-
VC * Bust
-
-
-
-
-
-
yes
yes
yes
-17.978
(0.00***)
0.2571283
31685
yes
yes
yes
-19.290
(0.00***)
0.1960595
80240
yes
yes
yes
-19.293
(-4.99***)
0.206224
80240
0.412
(3.96***)
-0.446
(-10.30***)
-0.054
(-1.33)
0.061
(0.60)
-0.443
(-1.94*)
-1.111
(-20.02***)
-0.346
(-1.69*)
0.160
(1.93*)
0.099
(1.45)
0.624
(2.83***)
-0.35
(-0.85)
22.370
(13.47***)
-0.307
(-2.61***)
-0.056
(-0.14)
yes
yes
yes
-18.107
(-9.87***)
0.2063626
80240
Log of Exit Value ($m)
Log of No. Patents
Log of Citations Made
Log of Citations Rec'd
Cospecialized Asset Problem
Immunity From Holdup
VC * Bust * Cospecialized Asset
Problem
State Fixed Effects
Year Fixed Effects
Industry Fixed Effects
Constant
R-Squared
No. Observations
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
A shock to the IPO market
This shock is used as an
(attempted) instrument for
the TCE strategy ‘choice’ by
venture capitalists.
• In terms of both volume
and counts, IPOs dropped
further than acquisitions
following the dot com
crash.
• VC backed IPOs were
particularly badly hit
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Instruments
• For the appropriability regimes:
– Could work at the industry or patent class level
– Long list of court cases that have shocked certain classes:
•
•
•
•
•
Diamond v Chakrabarty (1980) - Genetic organisms
Diamond v Diehr (1981) - Software
Texas Instruments (1985/6)
Kodak-Polaroid decision (1986)
State Street and AT&T vs. Excel decisions (1998) - Business methods
– Some policy shocks:
• Hatch-Waxman Act (1984) drug firms
• 1994 TRIPS agreement
• Cockburn and MacGarvie (2009) use various shocks to software in the mid
90’s
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Problems Distinguishing Hypotheses
• Example:
– Patents that cite or are cited by a future acquirer
might be valuable for:
• Economic value reasons: they may measure technological
“goodness of fit” and so economies of scale or scope
• Information asymmetry mitigation reasons (i.e. signaling):
The denote technologies that both parties are intimately
familiar with, and can accurately judge value
• Strategic reasons: The target can holdup the acquirer or vice
versa, suggesting value from vertical integration (first best
economizing)
• To distinguish between them, we need good instruments or
discriminating measures. These are hard to find (more later).
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Patenting by VC Backed Firms
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
VC Patenting by Round (p19)
• The tables show patent
incidence and
conditional patenting
rate.
• Successful exit goes up,
persists, then drops
below.
– IPO goes up and
stays above.
– M&A goes up then
drops below and
stays below.
• No exit drops and stays
below.
Panel 2A: Successfully Exited Firms and Firms without Exits
Successful Exit
Coefficient
Difference To
N
(Std Error)
Before VC
0.15
Patent Before VC
5462
(0.005***)
0.194
0.044
Patent After VC
5462
(0.005***)
(0.007***)
Patent After
0.128
-0.022
5462
Second Round
(0.005***)
(0.007***)
Patent After
0.078
-0.072
5462
Third Round
(0.004***)
(0.006***)
Log Rate
0.358
1186
Before VC
(0.016***)
Log Rate
0.546
0.188
1431
After VC
(0.017***)
(0.023***)
Log Rate After
0.401
0.043
1432
Second Round
(0.016***)
(0.023*)
Log Rate After
0.259
-0.099
1433
Third Round
(0.014***)
(0.022***)
Panel 2B: VC Backed Firms that had an IPO or Acquisition
IPO
Coefficient
Difference To
N
(Std Error)
Before VC
0.172
Patent Before VC
1374
(0.01***)
0.328
0.156
Patent After VC
1374
(0.013***)
(0.016***)
Patent After
0.241
0.069
1374
Second Round
(0.012***)
(0.015***)
Patent After
0.154
-0.017
1374
Third Round
(0.01***)
(0.014)
Log Rate
0.304
446
Before VC
(0.026***)
Log Rate
0.811
0.507
507
After VC
(0.03***)
(0.039***)
Log Rate After
0.659
0.355
508
Second Round
(0.033***)
(0.042***)
Log Rate After
0.448
0.144
510
Third Round
(0.031***)
(0.04***)
N
21155
21155
21155
21155
1557
1972
1972
1972
N
4088
4088
4088
4088
740
923
923
923
No Exit
Coefficient
(Std Error)
0.062
(0.002***)
0.056
(0.002***)
0.03
(0.001***)
0.018
(0.001***)
0.383
(0.013***)
0.258
(0.009***)
0.154
(0.008***)
0.093
(0.006***)
Difference To
Before VC
-0.006
(0.002***)
-0.032
(0.002***)
-0.044
(0.002***)
-0.125
(0.016***)
-0.229
(0.015***)
-0.29
(0.015***)
Acquisition
Coefficient
Difference To
(Std Error)
Before VC
0.142
(0.005***)
0.148
0.006
(0.006***)
(0.008)
0.09
-0.052
(0.004***)
(0.007***)
0.052
-0.09
(0.003***)
(0.006***)
0.391
(0.021***)
0.401
0.01
(0.018***)
(0.028)
0.259
-0.132
(0.016***)
(0.026***)
0.155
-0.236
(0.013***)
(0.025***)
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
VC and Non-VC Patenting
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
VC vs. Control – Patenting (p22)
• Dependent Variable:
Patenting Incidence
• VC backed firms are
associated with higher
incidence of patenting
• Difference between
IPO and M&A is
statistically significant
• Controls are loosely as
expected
• Age control is only
available for IPOs
(with good coverage)
VC Backed
Log of Exit Value ($m)
Bust Period Indicator
Acquisition Indicator
Acquirer Publicly Traded
Horizontal Acquisition
Vertical Acquisition
Age at IPO
State Fixed Effects
Year Fixed Effects
Industry Fixed Effects
Constant
R-Squared
No. Observations
All Exits
0.896
(17.47***)
0.000
(4.51***)
-0.139
(-0.54)
-0.693
(-14.23***)
Acquisitions
0.987
(14.16***)
0.000
(5.05***)
0.850
(3.44***)
IPOs
0.739
(7.71***)
0.000
(1.90*)
-0.73
(-0.92)
-
-
-0.091
(-1.46)
-0.24
(-3.57***)
0.183
(2.92***)
yes
yes
yes
-1.516
(-1.76*)
0.2227529
33480
yes
yes
yes
-3.964
(-3.15***)
0.1930302
23324
-
0.00
(0.94)
yes
yes
yes
2.357
(0.79)
0.2117171
3733
Z-scores in parenthesis
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
VC vs. Control – Patenting (p23)
VC Backed
Log of Exit Value ($m)
Bust Period Indicator
Acquisition Indicator
Acquirer Publicly Traded
Horizontal Acquisition
Vertical Acquisition
Age at IPO
State Fixed Effects
Year Fixed Effects
Industry Fixed Effects
Constant
R-Squared
No. Observations
Log of No. Patents
All Exits
Acquisition
IPOs
0.104
0.020
0.248
(2.96***)
(0.42)
(3.43***)
0.001
0.001
0.000
(4.65***)
(2.80***)
(0.13)
0.395
-0.051
0.361
(2.69***)
(-0.20)
(0.60)
-0.363
(-8.75***)
-0.019
(-0.37)
-0.134
(-2.30**)
-0.098
(-1.87*)
0.021
(4.80***)
yes
yes
yes
yes
yes
yes
yes
yes
yes
1.506
1.326
2.446
(4.67***)
(3.50***)
(4.64***)
0.1421577
0.1021286 0.2466433
3405
1867
890
Log of Forward Citations
All Exits
Acquisition
IPOs
0.375
0.200
0.550
(6.33***)
(2.37**)
(4.69***)
0.001
0.001
0.000
(4.29***)
(2.45**)
(0.45)
-0.595
-0.916
-1.261
(-2.15**)
(-2.89***)
(-1.48)
-0.435
(-6.67***)
0.080
(0.89)
-0.259
(-2.62***)
-0.114
(-1.25)
0.021
(3.57***)
yes
yes
yes
yes
yes
yes
yes
yes
yes
4.783
4.250
6.626
(10.41***)
(7.70***)
(7.53***)
0.1894638
0.1499375
0.2918729
3405
1867
890
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Citations to/from acquirers
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Citations to/from acquirer (p30)
VC Backed
No Rounds of VC
Log of No. Patents
Log of Citations Rec'd/Made
Acquirer Publicly Traded
Horizontal Acquisition
Vertical Acquisition
Bust Period Indicator
VC * Bust
State Fixed Effects
Year Fixed Effects
Industry Fixed Effects
Constant
R-Squared
No. Observations
Citations From Acquirer
0.082
0.077
(4.24***)
(3.60***)
0.012
(3.43***)
0.058
0.057
0.059
(5.12***)
(5.01***)
(5.12***)
0.008
0.009
0.008
(1.65*)
(1.84*)
(1.64)
0.042
0.043
0.042
(3.87***)
(3.97***)
(3.88***)
0.065
0.065
0.065
(4.12***)
(4.08***)
(4.13***)
0.043
0.042
0.043
(3.12***)
(3.07***)
(3.15***)
0.020
(0.93)
0.026
(0.53)
yes
yes
yes
yes
yes
yes
yes
yes
yes
-0.157
-0.155
-0.155
(-1.43)
(-1.40)
(-1.40)
0.0741383 0.0722683
0.074255
4641
4641
4641
Citations To Acquirer
0.080
0.015
(3.50***)
(2.80***)
0.014
(2.84***)
0.054
0.053
0.053
(3.86***)
(3.75***)
(3.98***)
0.031
0.032
0.016
(4.28***)
(4.27***)
(2.64***)
0.082
0.082
0.006
(5.89***)
(5.96***)
(6.88***)
0.070
0.069
0.006
(3.70***)
(3.68***)
(5.40***)
0.043
0.043
0.006
(2.37**)
(2.38**)
(4.08***)
-0.019
(-2.60***)
0.008
(0.71)
yes
yes
yes
yes
yes
yes
yes
yes
yes
0.778
0.782
0.029
(1.38)
(1.39)
(1.52)
0.094616
0.0947276
0.0865556
4641
4641
71915
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Citation timing (p30)
• On average the first patent with a citation to an acquirer is filed
about 1.5 years after the first round of VC
• Citations to futures acquirers continue up until the acquisition
N
Any Before VC
925
Any After VC
925
Any After
Second Round
Any After
Third Round
925
925
Count Before VC
112
Count After VC
112
Count After
Second Round
Count After
Third Round
112
112
Patents with Citations
To the Future Acquirer
Coefficient
Difference
(Std Error)
0.039
(0.006***)
0.057
0.018 (0.01*)
(0.008***)
0.04
0.001 (0.009)
(0.006***)
0.024
-0.015
(0.005***)
(0.008*)
0.184
(0.054***)
0.542
0.358
(0.101***)
(0.115***)
0.394
0.21 (0.104**)
(0.089***)
0.218
0.034 (0.079)
(0.058***)
N
925
925
925
925
73
73
73
73
Patents with Citations
From the Future Acquirer
Coefficient
Difference
(Std Error)
0.058
(0.008***)
0.079
0.021
(0.009***)
(0.012*)
0.049
-0.01 (0.01)
(0.007***)
0.03
-0.028
(0.006***)
(0.01***)
0.398
(0.105***)
0.691
0.293
(0.133***)
(0.169*)
0.494
0.096 (0.159)
(0.12***)
0.263
-0.135 (0.141)
(0.095***)
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation
Things to discuss
• Other Instruments (other than for the appropriability
regime)
– VC supply shocks (Prudent Man, CALPERS, SBIC program, Obama’s pledge)
– Information asymmetry measures (Brander & Egan 2008)
• Key assumptions:
– Granger causality and milestones
– No predetermined exit path
• Comparing VC sample with the control
–
–
–
–
Problems with the acquisition sample – robustness checks may help
Notional problems – were these firms really at risk of getting VC
Suitability for some tests and not others
Other objections?
Egan, Edward J. (2010), “Strategic Patenting in Venture Capital Backed Firms”, BPP Student Seminar Presentation