Experimentation and appropriability in early-stage ventures: Evidence from the US software industry

Abstract

Research Summary: This study examines the tension between learning and appropriability that arises as early-stage ventures experiment in the market. When formal intellectual property protection is weak, the learning benefits of experimentation may be offset by the imitation risks. I test this argument on a hand-collected dataset of 1,203 US-based software ventures, using the software release life cycle terminology to measure experimentation and the 2014 US Supreme Court decision Alice Corp v CLS Bank International as a negative shock to patent protection. Following this ruling, treated ventures are less likely to engage in experimentation. This pattern is stronger for ventures facing low uncertainty or strong competition. Overall, the evidence suggests that ventures perceive the tension between learning and appropriability and adjust their strategy accordingly. Managerial Summary: The Lean Startup suggests that entrepreneurs should rely on experimentation in bringing their products to the market. However, the return to experimentation also depends on its costs. One potential cost is the risk of imitation. I study whether ventures perceive the trade-off between learning about the market and the risk of imitation. I hand-collect data on over 1,200 US-based software ventures. I analyze the effect of the US Supreme Court decision Alice Corp v CLS Bank International, which weakened patent protection for firms building financial software. I find that, once patent protection becomes more difficult, ventures conduct less experimentation in the market. Therefore, ventures appear to perceive this trade-off and take it into account in designing their strategy.