Patent eligibility uncertainty and the VC financing of novel technologies

Abstract Patents play an essential part in startups’ success, particularly those developing novel technologies. However, novel technologies face an evolving regulatory context that can raise questions about the eligibility and hence the validity of the granted rights (i.e. patent eligibility uncertainty). We study the effect of patent eligibility uncertainty on startups’ ability to attract venture capital (VC) financing using the context of genomic sequences. Since 1980, the United States Patents and Trademark Office (USPTO) has allowed patents on nucleotide sequences—the building blocks of the genome. This practice was disturbed in 2010 when the court system intervened in The Association for Molecular Pathology v. Myriad Genetics. Between 2010 and 2013, the lower courts issued a series of contradictory rulings based on inconsistent legal reasoning, creating uncertainty about the patent eligibility of thousands of granted patents on nucleotide sequences. We exploit this intervention to investigate the effects of patent eligibility uncertainty on VC investments in new biotech ventures. The court system’s intervention motivates a quasi-experimental approach that allows us to show the negative impact of patent eligibility uncertainty on VC investments in startups owning affected patents.