Abstract
This paper empirically investigates the statistical relation between levels of patent litigation and venture capital (VC) investment in the U.S. We find that VC investment, a major funding source for entrepreneurial activity, initially increases with the number of litigated patents, but that there is a tipping point where further increases in the number of patents litigated are associated with decreased VC investment, which suggests an inverted U-shaped relation between patent litigation and VC investment. This appears strongest for technology patents, and negligible for products such as pharmaceuticals. There is some evidence of a similar inverted U-shaped relation between patent litigation and the creation of new small firms. Strikingly, we find evidence that litigation by frequent patent litigators, a proxy for PAE litigation, is directly associated with decreased VC investment with no positive effects initially.
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