Crowdfunding Disrupts Patents

Crowdfunding dramatically limits need for patents

The American patent system is broken. Patents were originally designed to foster innovation, but they arguably have the opposite effect today.

What if we abolished patents? Let’s examine the impact on inventors, investors, and most critically, innovation.

Patents don’t exist for art, music, and restaurants, yet people continue to innovate in those areas. While copyright and other intellectual property mechanisms offers protection from theft and misrepresentation, very little evidence suggests that the absence of patents reduces the number of people willing to create music, art, or restaurants. Passions, not patents, fuel these entrepreneurs.

Mobile apps, games in particular, illustrate the point. Without patents, developers cannot block others from producing similar apps, spawning the proliferation of clones and derivative games on iTunes and Google Play. The lack of patents may even draw more entrepreneurs to the field, increasing the surface area for creativity, because emulating hits provides a springboard into the industry while potentially generating cash to fund original development.

Users clearly don’t mind: copycats of the megahit game, Flappy Bird, once held four of the top 20 spots in iTunes. As with commodities like sugar, users sometimes care less about the company and more about the product. In other words, consumers sometimes care about “the what,” not “the who.”

The thread binding all these examples is capital efficiency. Passion may spring you out of bed, but it doesn’t pay for manufacturing time or union salaries. You still need capital to pursue your passion.

Which leads to the second constituency: investors. Capital-heavy sectors like hardware or pharmaceutical drugs demand non-trivial amounts of money, traditionally sourced by ROI-driven investors.

What if inventors could attract financing from people motivated not by ROI, but by the desire for a specific product or service? Indiegogo and Kickstarter are enabling this reality today. Customers, not investors, fund development.

Conceptually, crowdfunding spreads the risk. Under the conventional model, the financial risk is concentrated into a few parties, who often seek assets like patents to raise the odds of a profitable return. With crowdfunding, the financial risk is distributed across a broader pool of people willing to risk smaller amounts of money in exchange for the invention of some product. The product, not ROI, motivates the crowd. The crowd may not even care about the inventor. They just want someone to create the product. Again, they care about “the what” more than “the who.”

Of course, not all products lend themselves naturally to disruption by crowdfunding. The more capital intensive they are, the more products will rely on ROI investors. Pharmaceutical drugs, for example, seem among the least likely to get impacted by crowdfunding in the near future.

A litmus test for measuring the need for patents is to ask a simple question. In the absence of patents, would someone enter the market and create a product? If yes, patents are at best unnecessary and at worst harmful. If no, perhaps patents are required.

Abolishing the patent system is unwise until there is an alternative to fostering innovation in capital-intensive industries like pharmaceuticals, but crowdfunding certainly shrinks the need and market for patents.