Charles River VC, a $300M Investor in Intellectual Ventures, Says Patents Are Huge Market, Not a “Dirty World”

5/4/11Follow @gthuang

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“invention investment fund,” which totaled $500 million at the time. (The fund has since grown to several billion, Armony says.)

The sheer size of the deal made it look more like private equity than VC, but Charles River must have seen something special in this opportunity. Armony, for one, says he had been thinking about new ways to apply “market-based mechanisms to valuing patents, trading patents—all the things that happened in real estate or the stock market—and innovating on the business front. So CRV went all in. “My partners were generous with me,” Armony says. “They gave me a lot of rope to hang myself.”

The focus of that part of Intellectual Ventures’ business is on buying and licensing patents—at a huge scale. The company’s IP portfolio now totals more than 30,000 patents, the great majority of which were bought. (Others came out of the fruits of the investment science fund.) And that’s where most of the controversy comes in. Critics say Intellectual Ventures is a “patent troll” that buys up intellectual property and squashes innovation by forcing companies to license patents or buy IP protection—all without developing many of its own inventions.

Intellectual Ventures would say it is getting companies to pay a fair price for patents, and that it tries to avoid litigation—which it would say is its last recourse. “Some companies that have not joined are concerned IV will sue them,” Armony admits. “IV is asking for very large amounts of money for its vast portfolio. It can be hard to swallow. Those are boardroom-level sales.” He adds that Myhrvold has earned the “respect and fear” of the big companies in tech. Indeed, Intellectual Ventures filed its first set of patent-infringement lawsuits last December, against McAfee, Symantec, and seven other firms.

The bottom line is that the business has been lucrative, and it seems to be gaining steam. Intellectual Ventures says it made $700 million in patent licensing revenue in 2010, and a total of about $2 billion to date. Licensing makes up some 90 percent of the firm’s business. “More and more corporations are recognizing the value. The quality of the IP they buy is good. They go into areas that are happening right now, but the inventions happened 10 years ago. And companies weren’t worrying about that then,” Armony says. “2011 will be the biggest year.”

And as Armony sees it, Intellectual Ventures plays a key role in providing liquidity for inventions. The firm has paid about $350 million to universities and inventors since its inception. In terms of providing IP rights to companies, he says, the approach is to “do away with middlemen and litigation costs.”

So why haven’t many other VCs gone into the sector yet? A big part of it might be perception. “Others have the idea that IP is a dirty world controlled by lawyers,” Armony says. “But those VCs, when they become directors of large companies—companies who grew their revenue much faster than their own IP—they may have to pay a tax on litigation. People prefer to do business in inefficient ways, … Next Page »

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com. Follow @gthuang

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