[Fsfe-ie] A venture capitalist's view on software patents

[teresahackett at eircom.net]

-------- Original Message --------

Joi Ito is a Japanese venture capitalist, technology maven, and prolific 
blogger: http://joi.ito.com
See also the comment thread following this post.
-Darius

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       One venture capitalist's view on software patents

July 08, 2005  08:48 JST
<http://joi.ito.com/archives/2005/07/08/one_venture_capitalists_view_on_software_patents.html> 

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I am glad that Europe has once again rejected software patents by voting
648 against and 14 for the ruling of the patent - software directive.

I hear that arguments have been made that software patents are helpful
for innovation and that venture businesses may in some way benefit from
software patents. I can of course imagine cases where software patents
might be helpful for startup companies, but from my personal experience,
they are generally more of a burden on innovation at the venture level
than a benefit.

Generally speaking, filing for patents is an expensive and time
consuming task. Most startup CEOs don't understand and can't afford a
patent strategy. I have done a number of calculations on the cost of
filing and maintaining software patents, and one estimate we did for a
company that I am working on was that it would cost about $750,000 to
file and maintain a single patent in the major markets over the lifetime
of the patent. Most companies I invest in raise only $1M or less their
first round. In addition, to properly protect a technology and
continuing developments around a technology, a portfolio of patents must
be filed or you can be "surrounded" by application patents and
derivatives filed by competitors. In away, filing a patent is
practically like putting up an ad balloon for people to see where you
are focusing.

Some startup companies I have looked at and worked with have in fact,
invested in a portfolio of patents, but from my experience, most of
these companies end up spending so much time on their patents that often
the products never make it to market. The patents just become fodder for
some large company when they are purchased in the bankruptcy fire-sale.

For companies who are working in a patent riddled space, I definitely do
a mental calculation of the added risk of litigation and subtract that
value from the valuation of the company or decide to not invest at all.
I've heard software patents referred to as land-mines in this context.
The problem is, big companies gobble up patent portfolios from bankrupt
startups and then have teams of lawyers who use these to go after
competition. There is a measurable chilling effect. (Note also that some
of the technology oriented anti-file-sharing bills that have been
proposed will have a similar effect.)

The only practical use of software patents that I have seen are
defensive. Many Internet companies that I have worked with have one or a
few broad software patents that they wield to threaten potential
assailants. Typically, these companies spend very little or no time
trying to extract license fees from competitors, but just use the patent
like some sort of legal scarecrow. Patents are supposed to be an
incentive to innovate and this defensive use really is just a cost and
does not serve to cause innovation.

I personally believe that software patents are primarily the tool of
large companies with portfolios of patents which they cross-license with
each other. Generally, it serve to keep competition out of the market
and allows those with patents to push those without patents around or
cut them out of markets entirely. A number of open source licenses are
now dealing with software patent issues by creating incentives for
participants not to litigate against each other. A focus on open
standards is also another important way to try to keep innovation
unencumbered by patents.

I am not against patents generally and I have worked in materials
science and manufacturing technology companies where patents serve as a
strong incentive for innovation and royalties provide a fair return for
the investments. I just believe that the notion that software patents
somehow help venture businesses is a red herring and that software
patents are primarily a tool for software monopolies to stay keep the
little guys out.

I am basing my opinion on personal experience. Your mileage may vary. I
would be interested in the opinion of any VCs who feel strongly that
software patents generally increase innovation and investment in venture
businesses.

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