New Study Pinpoints Startups' Vulnerabilities to Innovation Imitation

­There’s a Catch-22 to business inventions: endorsements lend credibility and boost market share for innovations, but that same attention leaves even patented products vulnerable to imitation. While it has long been accepted that smaller companies have greater risks associated with IP poaching, a new study published in the Strategic Management Journal suggests that competitors specifically target startups’ technologies over established companies’, and examines why.

Authors Francisco Polidoro Jr., of McCombs School of Business, and Charlotte Jacobs, of Louisiana State University, followed technological flow across the solar panel industry over forty years by tracking patent citations. Their data included over 15,000 citations to a total of 6,116 patents.

“We used the number of citations that a patent receives in subsequent patents by other companies to demonstrate how much an invention by one company influences innovation by others,” Polidoro said. “While startups account for 12.6% of the sample patents, their patents account for 22.3% of the citations.”

The authors directly compared established companies and startups by only looking at patents from the same application year, building on the same underlying technology, that had similar levels of a variety of attributes, and found the same result. Their study posits that startups have more knowledge transfer and examines two sources: startups intentionally exchange more information with other businesses through acquisitions, partnerships, etc. or startups unintentionally reveal more knowledge to the marketplace.

The findings did not show that reciprocal knowledge exchange with other companies creates a big vulnerability for startups. Citations did not increase when a startup engaged in alliances or acquisitions. Nor did startups have patented innovations on the market more often than established companies.  The biggest vulnerability appeared to be what they called ‘knowledge spillovers,’ where the marketplace captured a startup’s IP, and university endorsements contributed significantly to these knowledge spillovers.

“When the viability of an alternative technology is unclear, universities play an important role in endorsing the knowledge underlying corporate inventions,” Jacobs said. “In a nascent industry like solar panels that endorsement might draw even more attention to a startup’s innovation relative to a similar innovation of an established firm.”

Another source of knowledge spillover comes from when startups fail to build upon their own patents. Competitors soon leap to take advantage of underutilized startup patents, but the data shows exactly the opposite reaction to technologies from established companies. The authors posit that rivals believe established companies would take advantage of promising opportunities if they existed, while startups might be unable to. Similarly, while previous litigation deters competitors from infringing on established companies’ patents, startups have a harder time building a reputation for toughness.

“As startups often lack bargaining chips and deep pockets to sustain costly litigations, cases of patent infringement involving them can reveal the strength of the invention to competitors,” Polidoro said. “These cases draw other firms’ attention to technologies.”

The study seems to present a cautionary tale to entrepreneurs that patents offer little protection without a strong business strategy and the funding to pursue technological opportunities. Having increased influence over their industry’s technological advances could also have advantages for startups, however. Startup inventions may have a greater ability to dominate the market in a growing industry, as long as entrepreneurs can build upon their own ideas.

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