Investment Risks

Software patents pose multiple risks to investments in software development and in software companies: higher capital needs; dilution of shareholder value; potential of a complete loss.

The most profitable investments in software companies are attributable to copyright law, not patent law. Investors made fortunes with companies like Microsoft, SAP, Oracle and so many others at a time when there were no software patents. The best climate in which growth companies can thrive is a competitive market, not a market in which a cartel of patent superpowers can exclude competitors with the help of the patent system.

For high-tech investors, the patent system is too slow. Venture capitalists only want to hold an investment for a few years. If a company applies for a patent today, then it's doubtful that the patent office will even grant the patent before the venture capitalist has already exited from the investment. In some other fields, such as biotechnology, venture capitalists consider patents an indispensable requirement for making an investment at all. For software investments, that is not the case.

The beauty of software investments lies in the relatively low capital requirements. Software patents would add an unnecessary layer of incremental costs and risks. Even to a venture-funded start-up, the cost of a European patent (approximately 30,000 Euros) is very high, especially since it would need many such patents and not only one. Additional financial resources are required to fend off various patent infringement assertions that other players bring up. The cost of patent defense can, for a single case, easily be in the hundreds of thousands of Euros, if not millions.

Patent profiteers dilute shareholder value and therefore reduce the return expectations of investors. Every time a productless little racketeer or an IBM or Microsoft turns to a start-up and collects a percentage of revenues, the return on investment is diminished. It only takes a few such patent profiteers for an attractive investment opportunity to become an unattractive one.

The worst case scenario is that an investment in a software company can be lost in its entirety due to patent problems. All it takes is a single software patent to take an entire software company out of business. If the respective patent is very broad or just pertains to functionality that is at the very heart of a software product, then the net effect of the enforcement of the patent is that the product can't continue to be sold. If a start-up becomes entangled in a patent litigation that seriously questions its survival, then it quickly loses many of its partners and customers. Consequently, the investors lose their money.

Click here to read why software patents stifle innovation