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?
While supply-chain problems, inflation fears, and similar headwinds are doubtless part of the answer, these general economic conditions don't tell the whole story. 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.
As the reality television show "Shark Tank" constantly reminds viewers, patents are crucial to potential investors. Rarely does a "shark" take a stake in a new business without confirming that the entrepreneur has secured patent rights to his or her creation.
Studies of VC investing uniformly demonstrate the same thing: 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.
But instead, we're doing just the opposite.
Over roughly a decade, U.S. courts and Congress have gradually devalued patents and diminished their reliability. Officials sought to improve the patent system with successive "reforms," in part to address the perceived problem of "patent trolls" and others thought to be gaming the system with frivolous lawsuits.
However, the reformers massively overstated the problem, as the U.S. patent system was highly robust to begin with. And the unintended consequences have been grave. Diminishing the certainty and security of patents radically discourages venture capitalists from investing in startups -- especially in the highest-tech fields.
Consider the position of money managers who invest a portion their clients' savings in venture capital funds. Why would they continue to make high-risk bets once it became clear that patent protection had been hollowed out?
They wouldn't, and increasingly, they don't. Hence the record low in VC funding for technology startups. The economic knock-on effects are substantial. Typically, the most successful startups graduate from VC funding to the stock market with an initial public offering. But as the Wall Street Journal has noted, we're also seeing fewer IPOs per year than in a decade.
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.
