External Capital Access and New Product Launch in Start-Up Firms with Uncertain Intellectual Property Rights

For innovative start-ups, an effective patent system is a crucial factor for success and survival. The importance of patents for start-ups is based on two features. First, patents grant temporary monopoly rights for the protected invention and thereby help start-up firms to appropriate returns from their R&D investments. Second, patents certify the new venture’s quality to outside investors. Attracting investors is essential but at the same time difficult for new ventures because there is uncertainty about their future success.

The desirable positive effects of patents for new ventures are based on the assumption that the patent system works efficiently. The European patent system has experienced the steep increase of patent pendencies in response to a surge in patent applications over the past decades. These delays create uncertainties about the patent grant and scope for patent applicants and investors.

This paper examines the impact of patent pendencies on a start-up company’s new product launch and its ability to attract external funds, specifically venture capital and bank financing. Product launch may be postponed if patents are pending because start-ups may be reluctant to engage in necessary follow-up investments for product development before being granted protection of the underlying intellectual property. Regarding external funds, we expect that risk-prone investors with a high involvement in the start-ups company like venture capitalists value pending patents. Cautious investors like banks might be reluctant to invest if a start-up’s patent are pending since these patent applications do not provide collateral.

For a large sample of German start-up companies across different industries, we find that patent pendencies significantly lower the likelihood of new product launches indicating that entrepreneurs postpone commercialization if they are confronted with uncertain intellectual property rights. With regards to ventures’ access to finance, we find that pending patent applications attract venture capital financing. Bank financing is not influenced by pending patents.

Heger, Diana and Katrin Hussinger (2013), External Capital Access and New Product Launch in Start-Up Firms with Uncertain Intellectual Property Rights, ZEW Discussion Paper No. 13-095, Mannheim.