Nathan Myhrvold Shares Plan to Create Invention Capital Industry, but Skeptics Abound

2/18/10Follow @gthuang

Intellectual Ventures has been making a lot of waves lately. Today the Bellevue, WA-based firm, focused on the business of invention and patents, laid out its arguments for creating a new industry of “invention capital,” in a Harvard Business Review article penned by CEO and co-founder, Nathan Myhrvold. In a separate piece, the New York Times’ Steve Lohr addresses some longstanding questions from Myhrvold’s detractors, who call him a patent troll (more on this below).

In the HBR article, Myhrvold, who is coming off his talk at the TED conference in Long Beach, CA, presents the thinking behind his firm’s efforts to establish a separate marketplace for inventions, loosely following the models of venture capital and private equity. He also gives a status update on where Intellectual Ventures stands, and the formidable challenges it faces.

Invention capital is really the big vision of the company—with patent acquisitions as part of its overall strategy—and it’s fascinating to see how much things have progressed since the summer of 2008, when Myhrvold first spoke with me about it. Back then, the discussion was heavy on the historical context and the need for a new system to nurture inventions and inventors. In terms of results, it was largely wait and see. Now, it’s clear the company’s efforts worldwide are starting to pay off.

Myhrvold writes that Intellectual Ventures has 30,000-plus patents in its portfolios, most of them purchased. To critics who would say the company doesn’t invent anything itself, he notes that its 30 staff inventors and 100-plus consultants applied for 450 in-house patents in 2009, placing it in the world’s top 50 filers (ahead of Boeing, Johnson & Johnson, 3M, Mitsubishi, and Toyota); and that its wider network of 1,000-plus inventors in seven countries applied for more than 1,000 patents last year.

On the technology licensing and patent acquisitions front, he writes that Intellectual Ventures has made deals with more than a hundred Fortune 500 companies and their international equivalents, and that the firm’s “licensing activity has so far earned more than $1 billion.” To put that figure in perspective, Intellectual Ventures has raised some $5 billion from mostly undisclosed large investors (Microsoft is one).

In the Times piece, Lohr quotes critics who call Myhrvold’s outfit “Intellectual Vultures” and say the company uses its huge patent trove as leverage to extract hefty licensing fees. These critics also question Myhrvold’s penchant for setting up hundreds of shell companies and affiliated entities; by masking who actually owns Intellectual Ventures’ patents, this strategy reportedly makes it more difficult for other companies to know where they stand in negotiations with Myhrvold’s firm. Myhrvold is unapologetic about these tactics in the Times article, saying he’ll give up secrecy as soon as everybody else does.

But regardless of what his critics say, Myhrvold has clearly thought a lot about the hurdles that must be overcome in order for new markets ruled by inventors to take off. Here are three of his main ones:

Managing risk. Myhrvold points out that insurance companies, pension funds, and mutual funds have figured out strategies to deal with this, and that the money it takes is comparable to VC and private equity funds. “A single invention is typically very risky. However, if you build (as my company has) a diversified portfolio of tens of thousands of inventions that span a wide range of technologies, the aggregate risk becomes quite manageable,” he writes. “Even if only one patent in a portfolio of, say, 2,000 patents is really successful, it could generate $1 billion in revenues, returning many times the cost of the entire portfolio.”

He uses the examples of Hewlett-Packard, Lucent, Texas Instruments, MPEG-LA, and IBM to argue that licensing inventions can net a company $100 million to more than $1 billion annually. Still, it might conceivably take a long time—20 to 25 years—for an invention fund to pay off its investors.

Overcoming cultural issues of IP protection. “In affluent nations, product companies too often see inventors and other patent holders as adversaries, and vice versa,” he writes. “But product companies should see inventors as wellsprings of innovation and should trust them—and invention capitalists—enough to tell them what new technology the companies actually need. Inventors, for their part, should see manufacturers and invention capitalists as customers and should trust them to pay fair prices for the ideas they use. We aspire to be a trustworthy matchmaker that helps make this happen.”

He acknowledges that the challenge is different in other parts of the world, like Asia. But the main thing it sounds like he’s running into is that “some large tech-hardware companies treat patents as a defensive weapon to be used mainly in retaliation against any competitors that sue them for infringement,” he writes. “This strategy of mutually assured destruction usually resolves itself in cross-licensing or a stalemate, but the effect is not benign: It breeds a disdain for inventors. And because universities and individual inventors don’t have the power to play this game, some companies just flat out stiff them. All in all, such behavior tends to dissuade inventors from working in these areas and to impoverish our system of invention…When I’m attacked as a patent troll, it’s usually by people from these special interest groups, who don’t feel they have to respect others’ patents.”

He also notes, “We have never sued anybody to defend our intellectual property rights. While I don’t rule it out, I see it as a highly undesirable recourse for several reasons: It’s expensive, it’s unpredictable, and it takes years.”

Myhrvold’s arguments are probably most speculative when he asserts there is evidence that invention capital will be seen as a positive force in the economy. (I think it’s too early to say.) But he does point out that some big companies like General Electric, Procter & Gamble, 3M, DuPont, and Caterpillar “rely on patents as fundamental business assets” and so are sympathetic to strengthening IP rights.

Building an invention capital ecosystem. There’s no denying that a professional industry, and critical mass, needs to build up before any new marketplace emerges. Myhrvold writes, “Our purchases of patents have already fueled a noticeable increase in the number of patent brokers in the market. In time, new companies will spring up to fill the many niches of the invention ecosystem. We will see a more intricate and efficient invention industry populated by professional patent finders and packagers, appraisers and underwriters, financiers and sales agents—and other roles not yet conceived.”

To establish an efficient invention market with viable exit strategies, Myhrvold says the company is doing strategic things like packaging patents together (amassing large portfolios in areas like wireless technology and memory microchips), creating new startup companies (like TerraPower, its nuclear energy spinoff), and creating patent-backed securities.

Myhrvold concludes: “A functioning invention capital market and industry can enable inventors around the globe to create hundreds of thousands more inventions each year than are being made today. Sure, some of those inventions will be silly or useless. But what matters is the top 1% that will make our lives vastly richer and better. Create an invention capital market, nurture an invention capital industry, and the resulting virtuous cycle will surely transform the world.”

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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  • http://www.inventionpartner.com inventionpartner

    This is a fascinating concept that bears more attention and scrutiny. If you read the Harvard Business Review article about this concept http://hbr.org/2010/03/the-big-idea-funding-eureka/ar/pr you will find that Myhrvold addresses his critics and lays out a plan to create an entirely new industry.

    “the US with its combination of research talent, openness to financial innovation, and a culture of inventiveness, is perfectly positioned to be the nexus of this new industry.” I agree with Myhrvold’s conclusions and hope that he is successful.

  • light

    There is no ‘innovation’ or ‘invention’ here – just patent trolling. Intellectual Vultures is gaming the patent system by having 40 people who sit around and think up ideas, followed up by 300 lawyers who try to monopolize that IP. No product or working designs are created.

    The shallowness of their business model is confirmed by their use of over 1000 shell companies to hide the nature of what they are doing.

    If this is the future of Seattle’s tech industry, we are in for a rude surprise. The only potential upside is that abuses like Intellectual Vultures will simply hasten massive reform of the patent system and reduce the ability of ‘non practicing entities’ (aka trolls) to extort others.

    And yes, I’ve had personal experience with this sort of company before, having experienced at first hand an extortion for $50,000 by a troll with a 1980′s era patent of the concept of having a “web site”.

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