Newswise — A new study from the University of Iowa finds that entrepreneurs may want to wait awhile to seek a patent for that innovative new product they’ve developed.
The study found that early-stage ventures are often too quick to file for a patent, committing valuable time and money that could be better spent further developing their product and making sure there’s a market for it. Miranda Welbourne Eleazar, assistant professor of management in the Tippie College of Business, says the legal and filing costs of applying for a patent can be upwards of $60,000, which is a lot of money for a start-up to spend on something that likely won’t have an immediate payoff.
“Entrepreneurs sometimes treat patents like these amazing things that will solve their problems by protecting their intellectual property while signaling worth and legitimacy to investors, customers, and the world in general,” said Welbourne Eleazar.
She said this liability of patenting can cause lower revenues for the business at a time when revenues of any kind are precious. If a venture can’t obtain sufficient funds to survive in the short-term, she said it won’t be around for longer-term payoffs from their patents.
However, she said entrepreneurs can mitigate the costs of patenting if they maintain a market orientation, ensuring that their innovative product meets the needs of their customers.
In the study, researchers looked at more than 3,600 ventures from a database of firms that applied to be members of a business accelerator. Most were between 2 and 3 years old and had annual revenues of only about $50,000 to $70,000.
They found that early-stage companies that sought patents for their product saw lower revenues than those without patents. However, if a venture with patents also had a strong market focus, it saw significantly higher revenues than those that focused on just patenting or market focus.
“If a new venture exhibits strong market orientation early on, it can foster customer loyalty and retention by offering exceptional product value and developing products tailored to customer needs,” she said. Focusing on the market can also lead to a culture of experimentation in the firm and on continuous improvement, which pays dividends later on.
An early-stage venture’s decision to patent may also promote a narrow future focus, preventing it from pivoting to make essential changes to their product to increase its marketability.
Welbourne Eleazar’s co-authored paper, “Overcoming the liability of patenting in early-stage ventures with market orientation,” is published in the journal Industry and Innovation.
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