Why Tech Startups are Failing
By Paul Michel
For more than a century, startups have been critical to U.S. technological advancement. They could not exist today without venture-capital funding, which enables them to form and grow. So, it's alarming that venture fundraising is now at a nine-year low.
What is causing investors to stop putting money into venture capital?
A large part of the blame goes to political and legal developments that discourage venture-capital investing, in which individuals and financial institutions bet on promising new companies.
Would-be investors depend on enforceable patent rights to justify the risks inherent in developing new technologies. Most such efforts are expensive and time-consuming, and many fail. Even the successful ones yield consumer-ready products only slowly, after which they may finally start to generate profit.
While all patents are important, they provide the greatest premium to investors in advanced technologies like artificial intelligence, autonomous vehicles, robotics, clean energy, and genetic and personalized medicine. The costs, difficulties, and risks of developing new products in these cutting-edge fields are especially daunting -- which means that secure patents are an essential investment incentive. The fact that China is surging ahead in all these fields, in part by strengthening its own patent system, only underlines the imperative.
We're doing just the opposite.
Over roughly a decade, U.S. courts and Congress have gradually devalued patents and diminished their reliability. Diminishing the certainty and security of patents radically discourages venture capitalists from investing in startups -- especially in the highest-tech fields.
Investing is a profit-driven enterprise, not altruism. And it's the system we rely on to ensure large-scale investment in new technology. The federal government funds basic research at labs and universities. But we need private money to take those academic breakthroughs and turn them into usable products. Policymakers sometimes seem to forget this.
The repercussions of this blind spot affect not just U.S. businesses and the economy, but national security. Consider what happens when a domestic high-tech industry collapses: With the virtual disappearance of advanced semiconductor manufacturing in the United States, global supply-chain bottlenecks have already hobbled auto production. But this lack of access to advanced chips poses a much bigger risk, too, because modern weapons depend on them. Meanwhile, China is developing new generations of chips and artificial intelligence that will quickly transform many industries.
Our response must be to revitalize startup funding. Historically, startups created a disproportionate share of new technologies and achieved more breakthroughs than large companies, and this is still true today. That's why Big Tech, Big Pharma, and mega-corporations in other sectors buy up successful startups by the dozens.
Startups, in short, are a wellspring of economic and technological advancement. But we can only keep them going if we repair the law to make sure patents are strong and secure.
Paul Michel served on the United States Court of Appeals for the Federal Circuit from 1988 to his retirement in 2010, and as its chief judge from 2004 to 2010. He currently serves on the board of the Council for Innovation Promotion.
