The Importance of Patents

Stephen DeAngelis

March 06, 2007

Patents have been in the news a lot lately. Microsoft, for example, just lost a big patent law case in San Diego. Patents are an important tool for protecting the intellectual property of inventors and companies. In the information age, intellectual property is one the most important assets a company can have. There have been criticisms of the patent system, however. Companies have patented genetic material they have harvested (not invented) and, as a result, we pay higher health costs. And people are increasingly trying to patent ridiculous ideas with little or no value. BusinessWeek reports:

“Conventional wisdom in the tech industry says the U.S. patent system has become a murky swamp, safe only for corporations with the deepest of pockets. Some experts, such as Stanford Law School professor Lawrence Lessig, even believe that patents are now a barrier to innovation.” [“Safety in Patents,” BW SmallBiz — Front Line, Summer 2005]

The article goes on to note that studies don’t confirm conventional wisdom.

“Ronald Mann, co-director of the Center for Law, Business & Economics at the University of Texas School of Law, draws on three years of interviews with entrepreneurs, financiers, and lawyers to come to a different conclusion. ‘There is no patent thicket in the software industry,’ says Mann. ‘The idea that there are so many patents in the software industry that small firms don’t have the freedom to innovate is wrong.’ His research … finds scant evidence that large companies are using claims of patent infringement to fend off competition from smaller ones. On the contrary, he says small businesses still believe they can use patents to their advantage, even in the software industry, which has seen an explosion of new patents in the past decade.
Mann advises small companies to figure out a patent strategy even before ringing up their first sale. His data show a significant correlation between the pursuit of patents and the later success of startups.”

Small companies need to be well funded to navigate the patent system, but the effort is worth it. “Mann found that startups with patents are four times as likely to go public than those without and only half as likely to fail.” Analysts have also found that companies with great patents, i.e., those cited by others in their patent applications, are likely to be a better investment than those holding patents that are never cited [“Follow the Patents,” BusinessWeek, 8 January 2007]. The article notes:

“Corporate accounting is fine for keeping track of inventories but not for valuing ideas. Reports on research and development spending are spotty and make no qualitative judgments. That’s why hedge fund gunslingers, private equity mavens, and other professional money managers are turning to patents for insight. ‘You want to own a company for the innovation embedded in its patents,’ says Keith Cardoza, managing director at Ocean Tomo, a Chicago merchant bank specializing in intellectual property. The U.S. Patent & Trademark Office awards patents on original ideas. Each patent application contains lots of information. Problem is, more than 4 million patents have been issued since 1983, according to Ocean Tomo, and some 4,000 new ones are accepted every week. Obviously, most patents won’t pay off. So which ones will? Scholars have learned that a powerful proxy for innovative expertise is how frequently a company’s existing patents are cited in patent applications. Indeed, one-quarter of all patents receive no citations, and a mere 0.01% earn more than 100 citations, according to Bronwyn Hall, an economist at the University of California at Berkeley. In a study by four economists covering seven industries that generate a large number of patents, researchers found that a patent mentioned 14 times by other patents is worth, on average, 100 times as much as a patent cited only 8 times. Another estimated that companies with widely cited patents and a track record of turning them into products outperformed the market by 1,000% over a 10-year period.”

Those are pretty impressive statistics. Discovering innovative companies is important for investors and for the overall economy. Innovative companies are the engine that keep the economy growing. In an article about innovative companies [“The World’s Most Innovative Companies,” 24 April 2006], BusinessWeek said this:

“Today, innovation is about much more than new products. It is about reinventing business processes and building entirely new markets that meet untapped customer needs. Most important, as the Internet and globalization widen the pool of new ideas, it’s about selecting and executing the right ideas and bringing them to market in record time. In the 1990s, innovation was about technology and control of quality and cost. Today, it’s about taking corporate organizations built for efficiency and rewiring them for creativity and growth.”

I have argued for some time that we sit on the cusp of a new era that requires an entirely new organizational framework. Technology is just maturing that will permit this organizational change to take place. I believe this new paradigm, which I established Enterra Solutions to help organizations achieve, will be a blending of technology, business logic, and cognition. That mixture will foster both the flexibility and adaptability needed by organizations in the future.