MIT: Without patent trolls, VCs would have invested $8B more

A new paper from MIT’s Sloan Business school finds that hyperactive patent litigators robbed the tech industry of billions in investment dollars.

“[Venture capital] investment would have been at least $8.1 billion higher over the course of five years but for litigation brought by frequent patent litigators,” professor of marketing Catherine Tucker wrote in the paper [PDF]. While a little bit of litigation can indicate a strong innovation ecosystem, Tucker said, too many frivolous lawsuits scare VCs away.

Companies that make a living off suing startups over patents, otherwise known as “patent trolls,” have become a bi-partisan target for both Congress and President Obama. “They don’t actually produce anything themselves. They’re just trying to essentially leverage and hijack someone else’s idea to see if they can extort some money out of them,” said President Obama in a Google+ hangout last year.

Past surveys of venture capitalists have found that nearly all of them would have serious reservations about investing in a startup that had patent disputes. The fear is rational: 22% of startups end up settling over patent litigation even though they may win in court.

A costly court battle can cost fragile startups time and money, further decreasing the value of their company and, hence, investment.

The scope of patent troll lawsuits, which can completely blindside startup founders, is extraordinary. One famous patent troll, threatened to sue app developers who used a common “click to upgrade” functionality.

So there was initially strong political will to change the laws that protect patent trolls. Unfortunately, a Google-backed bill was shelved in the U.S. Senate last May due to lack of support. For the most part, Congress isn’t ready to pass anything in an election year.

In response to Congress’s inability to deal with the issue, President Obama issued an executive order making it easier to find patent trolls and narrow the scope of their lawsuits. But congressional action may be necessary for bolder solutions, such as the “loser pays” law. If trolls knew that startups could win in court, it could take some of the incentive out of mass suits.

Until then, more startups will fall prey to patent trolls and VCs will take their money elsewhere.