More VCs Recognizing The Problems Of Our Patent System

from the a-good-sign dept

Fri, Apr 14th 2006 1:23am — Mike Masnick

Back in December, it was great to see a VC, Greg Blonder, point out why he felt patents hurt innovation, while also taking his fellow VCs to task for their excessive interest in patents. Beyond the fact that Blonder had previously been a big patent supporter, this was big news for another reason: VCs, traditionally, love patents -- but for all the wrong reasons. When VCs are investing in companies they're always hoping for some sort of "sustainable competitive advantage" and too often they incorrectly believe (or, perhaps, they just want to believe) patents represent evidence of a sustainable competitive advantage. The fact of the matter, though, is that in a competitive market there is no such thing as a sustainable competitive advantage. It's a myth -- and a somewhat dangerous one for those who believe in it. Instead, the way to succeed isn't through sustainable competitive advantage, but through continuous innovation -- that is, through a series of fleeting competitive advantages. You don't need patents for that -- just a smart, motivated team and a market to serve. Unfortunately, too many VCs focused on patents as the main "competitive advantage" -- and to this day VCs are heard all the time bragging about the patents their portfolio firms have, rather than the product or the paying customers. This focus on patents means that a ton of effort and money gets wasted on patents, lawyers and litigation efforts. That's why it was so great to see a well known VC stand up and say that it was wrong. The good news is that this viewpoint may finally be permeating through more of the VC ranks. Both Brad Feld and Fred Wilson wrote this week about just how problematic software patents are -- and how they both believe they're problematic for innovation. Wilson goes much further to suggest that the entire concept of intellectual property is problematic (though, he also points out that, due to the way the patent system currently is, he tells his startups to file for as many patents as possible). Of course, it's not that surprising that these two particular VCs took this stance -- as both are seen as more "progressive" among VCs. However, it's good to see them state it so publicly and get a discussion going. A better recognition that patents are not the key element of a competitive strategy is important for getting the focus back on actual innovation in getting products to market, rather than wasteful and harmful battles over intellectual property.

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J, 14 Apr 2006 @ 4:58am

First comment
WOOT!!! First comment!!!
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Scott, 14 Apr 2006 @ 4:58am

If, as Blonder believes, patents dont provide a sustainable competitive advantage, then they are not stifling innovation. You can't have it both ways.

If they do provide such an advantage, then they might be stifling innovation. Then the existence of patents represents our choice that we favor some advantage to the innovator, at the expense of some innovation in the technical area of the innovation, but only for a set time period (the life of the patent). That may be the correct choice, or it may not, but that is the debate.

To deny that patents provide an advantage is to also assert that they are harmless to competitors. I don't think anyone is saying that and meaning it. The focus of the debate should be on whether the advantage provided by patents is offset by their inherently anti-competitive effect.
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- flamsmark, 14 Apr 2006 @ 5:07am
  
  Nope
  patents needn't provide a competatie advantage to stifle innovation. there is little benefit from a patent in a field, but, with the existence of patent hoarders who don't have products, but file patents in order to get money from actual innovation, there can be a disadvantage to innovation.
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  - dezurtrat, 14 Apr 2006 @ 9:27am
    
    Re: Nope
    Exactly. These companies are filing patens in hopes of cashing in on companies building a real product and doing all the real work! Products by the way they themselves never have any intention of developing!
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- Mike Shizzle, 14 Apr 2006 @ 6:31am
  
  Re:
  If they do provide such an advantage, then they might be stifling innovation. Then the existence of patents represents our choice that we favor some advantage to the innovator, at the expense of some innovation in the technical area of the innovation, but only for a set time period (the life of the patent). That may be the correct choice, or it may not, but that is the debate.
  
  You are assuming that patents cover innovation. 80% of the time in the tanigible market(motors, screws, chairs, etc) a patent actually serves a purpose and is based on an innovation. However, in the untangible market(business processes, software, IP, etc) these patents severely hinder the innovation of other companies.
  
  For instance, Amazon's one click patent. This wasn't a patent on code or anything really rigid. It basically just stated the idea of a one click purchase and payment. So something so simple and far reaching can't be used by other companies.
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Nata, 14 Apr 2006 @ 5:17am

eh?
the article neglects to mention what a VC is.
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- Anonymous Coward, 14 Apr 2006 @ 5:27am
  
  Re: eh?
  At first, I thought so too. But if you look at the section heading above the title you'll see it says "Venture Capital"... you can infer the rest. :)
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gsarnold, 14 Apr 2006 @ 5:21am

Patents prevent continuous innovation
Ok, I'll state the obvious -- in many cases, patents actually kill continuous innovation because the company holding them wants to keep its market centered on the products that require their patents. Innovating beyond a particuar patent means potentially developing the products to the point where the company's own patents are is no longer needed, or may even infringe on someone else's, thus devaluing their own IP portfolio.

It's a sort of a "Peter Principle" for IP.

Patents need to be overhauled so the companies who think like this won't be hogtied by their need for self-preservation.
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herb.herb, 14 Apr 2006 @ 8:36am

Although patents do hinder innovation in some aspects it also deters people from infringing on other patents, and therefore encourages innovation. VCs feel that patents are problematic because they are forced to spend time and money on getting them. Patents protect smaller companies from being wiped out by bigger companies. Smaller companies have to spend time and money on patents not necessarily because they want a competetive advantage, but because they need to protect themselves from larger companies. The biggest critic of the current patent system is Microsoft. They feel that patents discourage innovation. But, if the current systems is overhauled, Microsoft will rule the world because they have the resources to make anything and everything. The biggest supporters of the current system are the groups that "hoard" patents, mainly university's. These Universities don't hinder innovation because they are they ones that are coming up with the real ideas. They "hoard" patents because they come up with many "random" inventions, and they don't know which one will be profitable. When a good innovation comes along, they won't hoard the patent and not let anybody else use it. They'll sell it, mainly for money, but also because they feel it's a benefit to mankind. A company like Microsoft will not only hoard their patents, but also try to make as much money as possible off of it. They "think" they'll be helping mankind with their innovations, but in reality they'll just be screwing a lot of people over. Patents are a necessity for VCs, but I think the problem is about WHAT can be patented.
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Anonymous, 14 Apr 2006 @ 9:00am

VCs / Patents
Recently while attending a conference with panels of about 50 VCs last week, the point was reiterated that while patents are somewhat sexy and a "stamp of approval" that what you have is unique, they are basically "downside protection"... meaning that unless your play is to be aquired for the technology in the patent, a company that can execute in the market as opposed to dreaming up tech and patenting it is more valuable. A startup company that is spending time in court defending intellectual property is using resources that could otherwise be used gaining customers, generating revenue, and testing their products in the real world.
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anonymous coward, 14 Apr 2006 @ 9:26am

i can explain exactly how VCs feel about patents:

if they funded the company that holds the patent, patents are great. if they funded the company competing with the patentholder, they are bad.

VCs are really that simple minded.
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Andrew Fife, 14 Apr 2006 @ 9:45am

Non-
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Andrew Fife, 14 Apr 2006 @ 9:48am

Non-Patent Barriers
In my subjective experience VCs do care about barriers to entry, but patents are not seen as a strong barrier in software. Technology value really comes from the cost of immitation. Patents can raise that cost but generally they are a speed bump rather than a true barrier to entry. 100% of VCs that I've gotten to know realize this. I've written a little bit about non-patent barriers to entry here:

http://andrewbfife.blogspot.com/2006/04/barriers-to-entry-patents-non-patent.html
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