U.S. Defense Startups Face Funding Crunch as Patent Uncertainty Benefits China’s Standards Push

WASHINGTON — Venture capital flows into American defense technology startups are slowing as patent eligibility rulings and administrative challenges create unpredictable returns, even as China consolidates control over international technical standards that will govern next-generation military systems.

The disconnect has alarmed Pentagon officials and congressional staff who say the United States is effectively subsidizing Chinese standardization efforts while its own early-stage companies struggle to protect the intellectual property that attracts investment.

“We’re seeing term sheets pulled or renegotiated at the last minute because investors can’t model the patent risk,” said a senior staffer on the Senate Armed Services Committee who requested anonymity to discuss private conversations with venture firms. “The Supreme Court’s Alice decision and the PTAB process have made it impossible to value a portfolio.”

The 2014 Alice Corp. v. CLS Bank ruling deemed certain software-implemented inventions ineligible for patent protection. Subsequent Federal Circuit decisions have extended that logic to diagnostic methods and machine-learning models — categories central to the autonomous systems, quantum navigation, and hypersonic propulsion technologies now emerging from privately financed firms.

At the same time, the Patent Trial and Appeal Board, created by the 2011 America Invents Act, has become what startup executives describe as a weapon for incumbent contractors. PTAB allows any party to challenge a patent’s validity repeatedly, with no limit on the number of petitions. Data from the U.S. Patent and Trademark Office shows that in fiscal year 2023, patent owners prevailed in only 32% of instituted trials, and many face serial challenges from multiple petitioners.

“A large prime contractor can file five PTAB petitions against a startup’s core patent for the cost of one district court case,” said the founder of a Virginia-based autonomy company that recently settled a validity challenge rather than risk a second petition. “The economics force you to license on their terms.”

Meanwhile, China’s National Standardization Development Outline, updated in 2021 and running through 2035, directs state-owned enterprises and private firms to occupy leadership roles in the International Telecommunication Union, the International Organization for Standardization, and the International Electrotechnical Commission. Chinese nationals now chair or hold secretariats in more than 300 technical committees and subcommittees across those bodies, according to a 2023 analysis by the National Institute of Standards and Technology.

That representation matters. Standards-essential patents — those necessary to implement a technical standard — generate licensing revenue and, critically, shape which technologies become commercially viable. A 2024 study by the Information Technology and Innovation Foundation, cited in recent House Foreign Affairs Committee testimony, found China leads in declared standards-essential patents for 5G, 6G research, and several AI governance frameworks.

The same study, drawing on Australian Strategic Policy Institute data, reported China leads the United States in 66 of 74 “strategically vital” technology categories, including advanced aircraft engines, quantum sensors, and machine learning — the very domains where American startups are attempting to commercialize defense applications.

Three bills pending in Congress aim to reverse the patent-eligibility narrowing, curb serial PTAB challenges, and restore the presumption of injunctive relief for patent owners. The Patent Eligibility Restoration Act, sponsored by Sens. Chris Coons (D-Del.) and Thom Tillis (R-N.C.), would legislatively overturn Alice and its progeny. The PREVAIL Act, from Sens. John Cornyn (R-Texas) and Patrick Leahy (D-Vt.), would bar duplicative PTAB petitions and impose a heightened burden for institution. The RESTORE Patent Rights Act, in the House, would codify a rebuttable presumption of irreparable harm — effectively restoring the pre-2006 eBay v. MercExchange injunction standard.

All three face opposition from a coalition of large technology companies and retail trade associations that argue stronger patents increase litigation costs and enable “patent troll” business models. The Computer & Communications Industry Association, whose members include Amazon, Google, and Meta, has lobbied against each measure, calling them “a solution in search of a problem.”

Pentagon acquisition officials have begun briefing lawmakers on the operational impact. In a closed-door session with the House Armed Services Subcommittee on Cyber, Information Technologies, and Innovation last month, the Defense Innovation Unit presented data showing that 41% of its portfolio companies reported at least one PTAB challenge or patent-eligibility rejection since 2020, and 17% cited IP uncertainty as a factor in a failed or down-round financing.

“The department is buying capability from companies that investors are afraid to fund,” said a DIU official who spoke on condition of anonymity. “That’s a supply chain vulnerability.”

The Senate Judiciary Committee has scheduled a markup on the Patent Eligibility Restoration Act for next week. The PREVAIL Act awaits a hearing date. Neither has a clear path to floor time before the August recess.