Patent disclosure and venture financing: The impact of the American Inventor's Protection Act on corporate venture capital investments

• DOI: http://doi.org/10.1002/sej.1366
• Date: 01 March 2021
• Author: Pooyan Khashabi,Ali Mohammadi
• Published date: 01 March 2021

RESEARCH ARTICLE

Patent disclosure and venture financing: The

impact of the American Inventor's Protection Act

on corporate venture capital investments

Ali Mohammadi

1

| Pooyan Khashabi

2,3

1

Department of Strategy and Innovation,

Copenhagen Business School, Frederiksberg

2

Institute for Strategy, Technology and

Organization, LMU Munich, Munich, Germany

3

Department of Management, ESSEC

Business School, Cergy Pontoise, France

Correspondence

Ali Mohammadi, Department of Strategy and

Innovation, Copenhagen Business School,

Kilevej 14a, 2000, Frederiksberg, Denmark.

Email: amo.si@cbs.dk

Abstract

Research Summary: We investigate the effects of patent

disclosure on corporate venture capital (CVC) investments

in technology startups. Toward this end, we focus on the

passage of the American Inventor's Protection Act (AIPA),

which mandated public disclosure of patent applications.

Theoretically, technology disclosure enables CVCs to better

evaluate startups and thus, could increase the likelihood of

investment relations. Conversely, such disclosure may

already satisfy the technology-acquisition objectives of

CVCs, reducing CVCs willingness to form an investment

relation after disclosure. Our empirical analysis finds that

patent disclosure through AIPA increased the likelihood of

receiving CVC investments for startups—specifically in

industries where patents have higher information signifi-

cance. We provide evidence that the observed pattern is

mainly driven by a reduction of information constraints

regarding startups with patent applications.

Managerial Summary: Receiving corporate venture capital

(CVC) funding is an important success factor for technology

startups. Would disclosure of a startup's innovation

increase or decrease its chance of receiving CVC funding?

On the one hand, disclosure by startups would reduce

uncertainty and search costs for CVC investors, which could

increase the chance of CVC funding. On the other hand,

Received: 28 March 2018 Revised: 14 June 2020 Accepted: 29 July 2020 Published on: 29 September 2020

DOI: 10.1002/sej.1366

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which permits use,

distribution and reproduction in any medium, provided the original work is properly cited and is not used for commercial purposes.

© 2020 The Authors. Strategic Entrepreneurship Journal published by John Wiley & Sons Ltd on behalf of Strategic Management

Society.

Strategic Entrepreneurship Journal. 2021;15:73–97. wileyonlinelibrary.com/journal/sej 73

such a disclosure would reveal the startups' technology to

the corporations, which would in turn reduce corporate

incentive to use funding as a window to the startup's technol-

ogy. Thus, disclosure could also reduce the chance of CVC

funding of startups. In this paper, we study the above issue

by examining the case of the American Inventor's Protec-

tion Act (AIPA), which mandated public disclosure of patent

applications. Our results suggest that innovation disclosure

significantly improves the likelihood of CVC funding of

startups.

KEYWORDS

American Inventor's Protection Act (AIPA), corporate venture

capital (CVC), disclosure, patent, startup

1|INTRODUCTION

After years of heated debate, in 1999, the US Congress enacted the American Inventor's Protection Act (hereafter

AIPA) as “one of the most fundamentally significant changes to the American patent system in this century”(Camp-

bell, 2002, p. 6). This legislative change accelerated the public disclosure of technologies featured in patent applica-

tions—to before the patent grant. Eventually, small and independent inventors—such as technology startups—

became the chief opponents of AIPA, arguing that the new law was harmful for them and largely favored large cor-

porations (see, e.g., Ergenzinger, 2006; Modigliani, 1999). Raising concerns about technology stealing and misappro-

priation, 26 Nobel laureates openly opposed the bill, arguing that AIPA would hurt American small inventors and

technology startups (Modigliani, 1999).

The debates around AIPA are part of a more general discussion about the impacts of innovation disclosure on

market outcomes (see Williams, 2017). A recent and growing body of literature has specifically focused on the disclo-

sure effects of AIPA on markets. This literature includes works investigating the effects of disclosure on markets for

technology (Hegde & Luo, 2017) and on capital markets (Beyhaghi, Khashabi, & Mohammadi, 2020; Kogan,

Papanikolaou, Seru, & Stoffman, 2017; Saidi & Žaldokas, 2020). Yet, the effect of AIPA—and patent disclosure in

general—on startups and their investment relationship with corporations has not yet been investigated. In this paper,

we focus on the venture financing market and examine how AIPA has influenced the likelihood of corporate venture

capital (CVC) investment in technology startups. The research question is relevant for several reasons. Many high-

tech startups are formed around intangible assets (Graham & Mowery, 2003), and thus intellectual property (IP) dis-

closure reforms are potentially significant events for these entities. In addition, misappropriation concerns—which

are aggravated by public disclosure—are key frictions in the venture financing market (Dushnitsky & Lenox, 2005,

2006; Katila, Rosenberger, & Eisenhardt, 2008). Given the special nature of AIPA—as a public pre-grant disclosure

shock—studying its effect on the formation of the CVC–startup investment relationship would generate novel

insights for market participants and policy makers.

Prior to AIPA, the United States Patent and Trademark Office (USPTO) published patent applications only

after the patent was successfully granted. AIPA harmonized the US patent system with the rest of the world and

required all patent applications to be laid open for public inspection 18 months after the initial application

date—regardless of the patent's grant situation. Given that the duration of the average patent review in the

USPTO was significantly longer than 18 months (Hegde & Luo, 2017), AIPA effectively disclosed key

74 MOHAMMADI AND KHASHABI