Search CFI Website

Orion Technical Associates

WBT Showcase


Become A Sponsor

Capital Ideas
Opinion and commentary on financing and nurturing the growth of entrepreneurial enterprises in the innovation economy.

Richard Meyer

The Venture Capital Fascination for Patents©

by Richard T. Meyer, Ph.D.
President, CIC Photonics, Inc.
President, Orion Technical Associates
Founding Board Member, National Association of Seed and Venture Funds

Albuquerque, NM

VCs are always asking new enterprises about how many patents the company has in its name!

Have you ever wondered about that fascination for patents; and why the number of patents held by your enterprise tends to enhance their interest in your company as a VC investment prospect; and why trade secrets hold considerably less value as intellectual property in the minds of the VCs?

The answer lies in part within the formal training, industry experience, and investment successes and failures of the VC.  While the collective knowledge of a set of VC partners can be extensive, the innovations to which they are exposed when they evaluate a new enterprise can challenge their capabilities and judgements extensively.  The challenge can be as great as one might experience from being trained to use canaries to detect methane in a coal mine and next being expected to operate a FTIR gas analyzer for CH4, C2H6, C3H8, etc. without any knowledge of spectroscopy and without an instruction manual.  The potential value of a patent on the gas analyzer in that case is that it would outline the principles of its operation and would cite applications of the analyzer likely with illustrations of spectral records and and absorption intensities as indicators of the presence or absence of species like CH4 (methane) as well as its concentration.

Put yourself in the place of the VC; would you not be better informed and more comfortable having the patent available on the FTIR gas analyzer!  The patent not only defines the technical components of the device but also provides the assurances of the U.S. Patent & Trademark Office that it is unique in certain respects and is differentiated substantively from other devices known to the patent office.

For the VC, that translates to a technology advantage and a potential market opportunity.  In many respects the patent confirms two key elements of the enterprise’s business plan and relieves the VC of some percentage of its due diligence obligation, that due diligence having been provided by the USPTO.

By contrast, trade secrets held by an enterprise are subject to employees walking away with them and/or reverse engineering by a competitor.  As a result, trade secrets are a risk factor for VCs; they are uneasy with them and are not scored high on the investment checklist.  The VC has no one, like the USPTO, to evaluate them for their value as investment security.  Their investment value is best verified by end-user testimonials of an entire product, not specifically the trade secret that is embedded in the product.

Trade secrets are difficult to quantify.  Yet trade secrets are the foundation of most manufacturing companies around the world!

One might conclude from this discussion that the real value of patents is that patents “add value” to the VC firms!  They increase the knowledge-base of the VC partners, they certify the uniqueness or novelty of the innovation, they indicate the possible existence of a market opportunity, and they reduce the risks that accompany the VC investment.  It is no wonder there are so may VC firms and so many MBAs that migrate to the VC industry; much of the investment analysis is being done for them by the combination of the new enterprise, its patents, and the USPTO!



·        Speak Up!  Record and publish your comments in audio at (214) 615-6505 ext 3532

·        LEARN MORE about Orion Technical Associates

Replies and rejoinders:
Dan Loague

Well thought out and informative!

R. Dan Loague
Capital Formation Institute
Amherst , NY 14228


Speak Up! audio responses
  Audio Playbar
Click: Arrow to listen -- Arrow with line to skip intro -- Box to stop -- Double line to pause - Slide scrollbar to advance the discussion

Become a CFI Sponsor Now!
Support CFI with your fully tax deductible donation. The Capital Formation Institute is a 501(c) (3) tax-exempt, nonprofit organization.

Capital Formation Institute, Inc.
a 501(c)(3) non-profit organization
Office of Science, Technology Transfer and Economic Outreach
University at Buffalo, 1576 Sweet Home Rd., Amherst, NY 14228

Contact us at

©2010 CFI
All information herein provided as a public service.
Privacy Policy
CFI does not collect any personal information about visitors to  However, CFI may ask for a limited amount of personal information that helps us respond to your specific requests.  These include regular mailings of announcements about articles, audio programs and new publications, participation in CFI's online and teleconference events, or  purchasing items from the CFI Bookstore.  CFI never shares personal information with third parties.  At any time, you can "opt-out" of receiving CFI's direct mail and marketing material by either contacting or by following "unsubscribe" instructions in any communication.