Innovation

How Important is Intellectual Property for Innovation and Start-up Success?

How Important is Intellectual Property for Innovation and Start-up Success?

Too trivial to mention, if you would believe an analysis of over 3200 technology start-ups! [1]

No mention either in meta-analyses [2,3] of 233 product and 92 service innovation studies.

(Note: this post was first published in The South African Institute of Intellectual Property Law’s publication IP Briefs. Republished here with permission.)

The conventional model of product and service innovation is that intellectual property (IP) is at its core, and that start-ups are its key engine of commercialisation. If this model is correct, we should expect to see IP emerge as a key success or failure factor for innovation and start-up activity.

Innovation and new technology business creation are notoriously difficult. Even the historical leader in these areas, the USA, has a modest success rate. About 70% of US start-ups that have raised a round of seed funding die or become zombies (in other words, self-sustaining but not growing meaningfully) [4], and over 95% of US patents are never licensed or commercialised [5].

This knotty problem of how to innovate successfully has unsurprisingly attracted a lot of attention, resulting in several comprehensive studies in the past decade. This article summarises the conclusions from the largest and most authoritative studies [1,2,3,6,7,8,9,10,11] in 2 areas: product & service innovation and start-ups. (Note: product & service innovations can be commercialised via either start-ups or existing organisations.)

Surprisingly, none of the studies explicitly mention any form of intellectual property (IP) as either a major success or failure factor. Note that success and failure factors are not antonyms in the context of this article. Success factors are things that improve the probability of success. Failure factors are things that, if present, can lead to company failure, but if absent, does not necessarily impact on likelihood of success.

The only mention of IP in the studies comes from the Startup Genome Report Extra on Premature Scaling [1], which mentions that “…72% of founders find that their initial intellectual property is not a competitive advantage”.

Before reflecting on possible reasons why IP is so conspicuously absent, let’s first look at what the studies do identify as major success and failure factors.


For product & service innovation, 4 success factor themes emerge: Product, Market, Organisational design & capabilities and Team. Product and Market are closely linked through what is called product-market fit, which is a dominant success factor. This is perhaps best explained as follows:

If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning. – Andy Rachleff (famous Silicon Valley venture capitalist)


Key success & failure factors for start-ups

Start-ups have the same four themes (Product, Market, Organisational design & capabilities and Team) with two additional ones: Mission & goals and Resources & partnering. Product-market fit is again an overarching success factor.


Why is IP not explicitly mentioned as a key success or failure factor?

I can think of two possible reasons (you might think of others):

  1. 1. IP is necessary but not sufficient for success. It goes without saying (just like good cash flow management) and hence is not worth isolating as a success or failure factor. In Michael Porter’s competitive advantage framework, it is more operational effectiveness than strategic differentiation.
  2. IP permeates everything. In its broadest interpretation, IP is any product of the human (and soon artificial?!) intellect. All product and service innovation and all entrepreneurial activity such as technology start-up creation is then by definition IP-generating and concerns itself with managing IP as its central activity. Thus, IP stretches across all the success and failure factors.

The changing nature and importance of forms of IP

The increasing pace and shifting character of technological innovation are impacting on the value and relevance of different forms of IP, especially in the field of software. Since “software is eating the world” [12], virtually no industry is untouched.

Software has limited patentability in most territories, and copyright does not protect against copying functionality, user interface or almost any other aspect that the market cares about. The relentless rise of the open source movement has also changed how businesses compete.

For patents, fast development cycles, short product lifetimes, the cost & difficulty of enforcement (as well as the cost & effort of detecting infringement in the first place) have lessened their relevance in many industries. By the time a patent is granted, the product is obsolete.

Of course, there are some major exceptions where patents remain pivotal, such as:

  • New scientific breakthroughs or discoveries (for example the CRISPR technology);
  • Platform technologies with broad application areas;
  • Some industries, such as pharmaceuticals and biotechnology;
  • Competitive moats for larger companies;
  • As a defence against infringement suits and an enabler for cross-licensing.

Start-ups do not have the money to enforce, and thus tend to patent with an eye on increased value come acquisition time, and to tick boxes for venture capital due diligence.

The inexorable rise of data

Data has become the key asset of the most valuable businesses in the world, and its importance will only increase with the rise of artificial intelligence and the digitisation of every industry. When combined with network effects, it can create a competitive advantage that is extremely difficult to break. (Witness Google’s failure to create a rival social network to Facebook through Google+, despite its tremendous financial and human resources.)

Whilst copyright can provide limited protection of databases[13], data itself is mostly managed and protected as a trade secret. Thus, trade secrets and know-how have perhaps become the most valuable form of IP.

Whence then for IP in the innovation and start-up context?

Successful businesses are based on secrets. – Peter Thiel (co-founder of Paypal, billionaire investor)

My conclusion is that the importance of IP in its broadest sense has not diminished at all. If anything, it is growing at a rapid pace. We see companies leveraging their trade secrets in the form of data to gain outsized benefits and competitive advantage. The copyleft and open data movements are making access to data, information and creative outputs available at an unprecedented scale.

How we think about and manage IP might be changing, and we might even need to define new types of IP, but it remains part of the fabric of the innovation and start-up picture.


Note on methodology

The top 5 or 10 success and failure factors from each of the studies were extracted and then sorted into themes. The themes are a subjective selection and can be debated. The factors themselves are well-founded in research. Since studies have varying terminology and methodologies, clustering risks distorting the underlying conclusions. However, for a high-level comparison and qualitative analysis such as this article, only the overarching trends are of interest and so it should not detract from the discussion and conclusions.


References

[1] Marmer M et al. 2011. Startup Genome Report Extra on Premature Scaling. Website: http://innovationfootprints.com/wp-content/uploads/2015/07/startup-genome-report-extra-on-premature-scaling.pdf. Last accessed: 2019/04/11. (Analysis of 3 200 technology start-ups.)

[2] Evanschitzky A et al. 2012. Success Factors of Product Innovation: An Updated Meta-Analysis. J Prod Innov Manag 29(S1):21-37. (A meta-analysis of 233 product innovation studies.)

[3] Storey C et al. 2016. Success Factors for Service Innovation: A Meta-Analysis. J Prod Innov Manag  33(5):527-548. (A meta-analysis of 92 service innovations.)

[4] CB Insights. 2018. Venture Capital Funnel Shows Odds of Becoming a Unicorn are About 1%. Website: https://www.cbinsights.com/research/venture-capital-funnel-2/. Last accessed: 2019/04/11.

[5] Walker J. 2014. The Real Patent Crisis is Stifling Innovation. Website: https://www.forbes.com/sites/danielfisher/2014/06/18/13633/#7f48dcba6f1c. Last accessed: 2019/04/11.

[6] Henard A & Szymanski DM. 2001. Why Some New Products Are More Successful Than Others. Journal of Marketing Research 38(3):362-375. (A meta-analysis of 60 product innovation studies.)

[7] Own study – unpublished data from technologies at a large South African public R&D institution. (An analysis of 23 technologies.)

[8] Peter Cohan. 2013. 6 Things Super Successful Companies Have in Common. Website: https://www.inc.com/peter-cohan/6-things-super-successful-companies-have-in-common.html. Last accessed: 2019/04/11. (Based on interviews with 200 entrepreneurs.)

[9] CB Insights. 2018. The Top 20 Reasons Startups Fail. Website: https://www.cbinsights.com/research/startup-failure-reasons-top/. Last accessed: 2019/04/11. (An analysis of 101 failed start-ups.)

[10] Paul Graham. 2006. The 18 Mistakes that Kill Start-ups. Website: http://paulgraham.com/startupmistakes.html. Last accessed: 2019/04/11. (Paul Graham is a founder of Y-Combinator, a famous and successful start-up accelerator in the USA.)

[11] Berkus D. 2016. After 20 Years: Updating the Berkus Method of Valuation. Website: https://www.angelcapitalassociation.org/blog/after-20-years-updating-the-berkus-method-of-valuation/. Last accessed: 2019/04/11. (The Berkus Method is a well-known method for venture capital companies to value pre-revenue start-ups.)

[12] Andreessen M. Why Software is Eating the World. https://a16z.com/2011/08/20/why-software-is-eating-the-world/. Last accessed: 2019/04/13.

[13] Cornell University. Intellectual Property Rights in Data Management. Website: https://data.research.cornell.edu/content/intellectual-property. Last accessed: 2019/04/13.

Photo credits: Lightbulbs by Josh Boot on Unsplash. Zombies by Daniel Jensen on Unsplash.

Posted by Sean Moolman in Innovation, 0 comments