Changes in U.S. Patent System Linked to Decrease in Venture Capital Funding 

Intellectual property rights are the backbone of innovative businesses that release breakthrough technologies allowing more people to live longer, happier, healthier lives. A key ingredient to many technological breakthroughs has been the role of venture capital funding that relies on intellectual property rights to leverage long-term investments that otherwise would be prohibitively risky. However,  changes to the U.S. patent system have effected how venture capitalists take on IP-intensive investments.

The Alliance of U.S. Startups and Inventors for Jobs (USIJ) is sounding the alarm stating that “changes to the patent system have come with at least one clear cost: A shift away from investment in industries that rely on patents. Among those businesses receiving a smaller proportion of investment are startups in the life sciences that bring life-saving treatments from labs to patients.”

Their investigation found that changes to patentability and the overall patent climate have caused investors and innovators to shift from IP-intensive startups and R&D focused industries such as life sciences, semiconductors, core wireless, medical technology, and other highly innovate industries towards social media, consumer finance, hospitality and other economic sectors with little dependence on R&D to creating innovative products.

USIJ found that venture capital funding received by the most-patent intensive economic sectors has dropped from over 50% in 2004 to about 28% in 2017. This staggering drop in investment in IP and patent reliant industries has put startups and innovation-focused industries at risk of obtaining funding for R&D in the future.

U.S. based, private, pharmaceutical companies have dominated the global life-science industry response to COVID-19. Of the nearly 700 vaccines, antivirals, and treatments in development, 361 originate from U.S. based companies. However, the development of the technology they are using is the result of patient, risky, investment made several years earlier.

Moderna, for instance, the first company to initiate a phase 3 clinical trial for a COVID-19 vaccine was founded ten years ago and if approved it will be their first product on the market. According to the study, the weakened patent environment has resulted in fewer startups like Moderna forming.

In fact, the report states venture capital investment in pharmaceuticals has gone down from 7% share of all investments in 2004 to 0.79% in 2017. The data also shows that there has been a 20% decline in the share of funding going to developing products in the pharmaceutical and biotech sectors. In the next crisis, we may not be as prepared if the right investments are not made today.

With more funding going to less patent-intensive sectors such as social networking, restaurants, leisure, and food and beverage sectors in recent years, there has been a shift in funding from highly patented sectors of the economy where R&D is critical. With this shift, it is now more important than ever to understand the significance of an effective and reliable patent system to bring investment and funding to critical technological sectors, especially biotech and pharmaceutical companies.

Describing the importance of patents in the innovation process, Peter O’Neill, Executive Director of Cleveland Clinic Innovations, testified before the Senate Judiciary Committee in 2019 saying “each step of the patent process takes time and resources that were made possible only by the promise of return on investment enabled by patent protections.”

In an interview with USIJ, Dr. Derrick Rossi a leading biomedical researcher, was more direct saying that “losing the ability to patent would be the end of this industry.”

Eb Bright of ExploraMed, referring to changes in the U.S. patent system, offered some clues as to what future innovations will suffer as a result, saying that “we are less likely to address issues such as cardiovascular disease and chronic diseases such as diabetes and kidney conditions” in the future if a shift in the patent process continues as it is going currently.

Since 2013, non-patent industries have attracted over 70% of venture capital. With venture capitalists’ investments determining the future shape of the economy, it is important to note that investment by venture capitalists in patent heavy and lifesaving industries will be lower, directly resulting in less medical innovation and technological advancement.

In order to ensure a brighter future for the next generation, that all people can continue to rely on science as a tool to solve humanities pressing issues, the U.S. needs to re-establish a reliable patent system. A system that investors and innovators can trust will guard their works, grant injunctive relief, and recognize novel inventions.

Photo Credits: Markus Winkler