Healthcare deals are going one way, tech deals another. That’s my read from the past week in the Northwest, where we’ve seen some of the biggest biotech deals around, even as a prominent Seattle tech venture firm (and software financings in general) head south.

—Bothell, WA-based Alder Biopharmaceuticals scored one of the biggest biotech partnerships of the year, as Luke reported today. The company has formed a collaboration with Bristol-Myers Squibb (NYSE: BMY) to develop Alder’s experimental rheumatoid arthritis drug, ALD518, and the deal could be worth more than $1 billion. In exchange for granting Bristol a worldwide exclusive license to develop ALD518 for all uses except cancer, Alder will get $85 million upfront, as much as $764 million in development and regulatory milestone payments, sales-related milestone payments that could exceed $200 million, and royalties on product sales.

—I took a look at the venture and debt financings for Washington companies last month (and the previous two months), and concluded that large investments in software startups aren’t coming back anytime soon. The data, courtesy of New York-based ChubbyBrain, shows most of the money is in healthcare and life sciences.

—Kirkland, WA-based Clearwire has secured an additional investment of $1.5 billion from Sprint, Comcast, Time Warner Cable, and Intel, as first reported by the Wall Street Journal. Google, a previous investor, is not participating in the round. The money will support Clearwire’s (NASDAQ: CLWR) deployment of its WiMax broadband network.

—Verathon, a Bothell, WA-based maker of ultrasound technology, has been acquired by Sarasota, FL-based Roper Industries (NYSE: ROP) as part of a pair of transactions worth a combined $356 million, as Luke reported. The price of Verathon’s sale by itself was not announced. The company develops a 3-D diagnostic imaging tool that helps doctors diagnose bladder disorders.

—One of Seattle’s most prominent tech VC firms will not be raising another fund or making new investments. Len Jordan of Frazier Technology Ventures confirmed the news as he announced he’s moving to Madrona Venture Group at the beginning of next year.

—Bellevue, WA-based Light Sciences Oncology has lined up $35 million in follow-up financing to develop its drug-device treatment for cancer, as Luke reported. The investors weren’t disclosed, but the deal gives Light Sciences the right to access a $23.3 million line of credit, and $11.8 million more if investors choose to exercise warrants. The company raised $40 million from undisclosed VCs last year.

—Seattle startup Movaya Wireless has been acquired by Digby, a mobile commerce firm based in Austin, TX, for an undisclosed price. Movaya was founded in 2006 by Phil Yerkes and Stanley Wang, and focuses on making digital goods storefront applications for the iPhone, Android, and mobile Web platforms. The company’s development team in China will serve as the basis for Digby’s operations in Asia.

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Seattle-based Movaya Wireless, a mobile software startup, has been acquired by Digby, a mobile commerce firm based in Austin, TX. Financial terms were not announced. Movaya was founded in 2006 by Phil Yerkes and Stanley Wang, and recently has been focused on making digital goods storefront applications for the iPhone, Android, and other mobile Web platforms. The company has a development team in China that will serve as the basis for Digby’s operations in Asia.

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I can’t do justice to a comprehensive review of yesterday’s FiReGlobal (West Coast) conference at the Four Seasons Hotel in Seattle. Instead, I’ll just give a few of my key takeaways. The all-day event, organized by Strategic News Service, focused on how to solve some of the most pressing problems in technology, business, and society—in areas as diverse as broadband access, entrepreneurship, education, sustainability and the environment, political discourse, human health, and mobile devices.

The sweeping conference had the tagline, “Global technology driving local solutions.” Interesting, as that’s sort of the reverse of Xconomy’s mantra, which is reporting about local stories with global impact. But I think they’re two sides of the same innovation coin.

So, in “ESPN plays of the day” style, here’s my top 10 list from the conference (if only I had the video to go with it):

10. Setting up entrepreneurial zones. A panel led by Ty Carlson of Microsoft proposed denoting special “R&D zones” from Oregon to British Columbia geared toward supporting startups in fields like renewable energy, sustainable farming, and biotech. The idea would be to offer tax credits and other incentives to create a more entrepreneurial culture in the Northwest, especially in rural areas.

9. What government should and shouldn’t do. Investor and entrepreneur Martin Tobias of Seattle-based Kashless said, “Startups and investors can’t make a 10-year bet when you have a two-year tax credit.” Those conditions freeze out small companies, especially in costly ventures like energy. So government should create open markets and set minimum market sizes for new technologies, Tobias said. But it shouldn’t pick the technology winners themselves.

8. Northwest tech startups do the Olympics. Tom Guthrie, CEO of Seattle-based Twisted Pair Solutions, said his company has helped numerous agencies on the Olympic Peninsula inter-operate their radios—a key problem in disaster response and other scenarios. Twisted Pair, which is backed by Ignition Partners and other investors, is also working on a laser system to deliver broadband signals. Meanwhile, Paul Manson, CEO of Vancouver, BC-based Sea Breeze, talked about his company’s project to build a high-voltage, direct-current undersea cable between Victoria, BC, and Port Angeles, WA. This would be a fast, controllable power transmission component of a smart grid; it should be under construction by mid-2010, he said.

7. The world according to Dell. In a chat with Mark Anderson of Strategic News Service, Michael Dell said he is excited about China and the rest of Asia as fast-growing economies. He anticipates a U.S. recovery from the recession, but says, “I don’t think you’ll see an immediate snap-back.” And he likes South America as an emerging market (Dell does sales of more than $1 billion in Brazil alone). But Europe, not so much—he sees a lot of uncertainty in the workforce there.

6. Get ready for Dell smartphones. “Mobility is absolutely the theme,” Dell said. He was talking about the relative importance of desktop computers, laptops, netbooks, and mobile devices to …Next Page »

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In the past week, the Northwest has seen its share of debt financings in medical devices and bio-IT, small funding deals and partnerships in Internet software, and mounting interest in an impending IPO.

—Amazon (NASDAQ: AMZN) rolled out a new mobile payments service that lets applications developers and distributors tap into the e-commerce giant’s one-click checkout system on mobile devices. As part of the rollout, Amazon has formed partnerships with mobile content distributors like Kansas City, MO-based Handmark, which sells games, apps, ringtones, and the like. Financial terms were not given.

—Seattle’s Theraclone Sciences formed a partnership with Tokyo-based Zenyaku Kogyo, worth up to $18 million over time, to discover antibodies that could protect millions of people in a flu pandemic, as Luke reported. Under the deal’s terms, Theraclone has given Zenyaku an option for exclusive rights to new flu antibodies in certain Asia-Pacific countries, while Theraclone gets an undisclosed amount of upfront cash and royalties on future product sales in Zenyaku’s territories.

—Seattle-based Omeros, the developer of anti-inflammatory treatments and other biotech therapies, is on the docket to go public this week and raise more than $80 million, as Luke reported. The company is also defending itself against accusations from its former chief financial officer that it filed false records with the National Institutes of Health and then wrongfully terminated him after he reported it to the board’s audit committee under the company’s whistleblower policy.

—Seattle-based Teranode raised $900,000 in debt financing, as Luke reported. The investors weren’t disclosed, although Bellevue, WA-based Ignition Partners has invested in the past. Teranode, a maker of software to organize life sciences labs, was founded in 2002 out of the University of Washington.

—Seattle-based Founder’s Co-op, a seed-stage investment organization, has backed two local Internet startups, Nearlyweds and BigDoor Media. Financial details of the deals were not announced, but Founder’s Co-op says it typically invests $250,000 or less in its portfolio companies.

—Redmond, WA-based Spiration raised $7 million in debt financing out of a $10 million offering, as Luke reported. The financing came from the company’s partner in Europe and Japan, Olympus Medical Systems. Spiration, which makes an implantable device to treat deadly lung diseases like emphysema and chronic bronchitis, has raised about $97 million since its founding in 1999.

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In one of the Seattle area’s biggest tech financings this year, Bellevue, WA-based Smith & Tinker has raised a total of $29 million in venture funding to deliver and market a hybrid game for kids that bridges the online and offline worlds. The latest funding round was led by new investor DCM, based in Silicon Valley, with existing investors Vulcan Capital, Foundry Group, Alsop Louie Partners, and Leo Capital Holdings also participating. The amount of new funding, which closed in July, was not announced—the $29 million also includes seed and first-round funding raised by the company since its inception in 2007.

Earlier this month, Smith & Tinker launched its flagship game, Nanovor—sort of a cross between a collectible card game (like the original Pokemon) and a massively multiplayer online game, only different. I recently visited co-founders Jordan Weisman and Joe Lawandus at company headquarters (pictured above), to see the Nanovor game up-close and to talk about the 50-person company’s intriguing strategy for marketing it in the U.S. and abroad.

“This is billed originally as a hybrid, across two $21 billion industries,” says Weisman, Smith & Tinker’s CEO. “It’s targeted for ages 6-12. The idea is to merge their online lives with their face-to-face lives.”

The industries he’s referring to are video games and traditional toys—and their respective market sizes in the U.S. If anyone can penetrate and bridge those ultra-competitive worlds, it’s probably Smith & Tinker. Weisman is a renowned entrepreneur in gaming, with a long record of founding successful companies including FASA, Virtual World Entertainment, WizKids, and 42 Entertainment. He came to Seattle when Microsoft bought FASA Interactive in 1999. Lawandus, for his part, was a former executive with Cranium, Disney, and Hasbro, so he knows a thing or two about product management, sales, and marketing for toys and games. Together, they seem to have their real and virtual bases covered.

“Our vision is something that takes the best of both of those worlds,” says Lawandus, Smith & Tinker’s president. “We’re reinventing play for the connected generation. We believe there’s nothing as cool to a kid as another kid in the room.”

It’s a noble concept, at a time when kids—and adults alike—seem to spend more time looking at screens than each other. Here’s how it works, in a nutshell: On a website, you choose and create …Next Page »

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Seattle-based MOD Systems, a maker of digital media delivery technologies for retailers, announced today it has opened a subsidiary in Tokyo. MOD Systems Japan will work with the company’s strategic investors, Toshiba and NCR, to drive business development in Japan. MOD raised $35 million from its investors in September, in a deal that has come under scrutiny in an ongoing lawsuit against MOD and its top executives.

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Why can’t big companies invent? How should inventors handle their intellectual property? And what are countries around the world doing on these fronts? I recently stopped by Intellectual Ventures in Bellevue, WA, to get the scoop from Patrick Ennis, IV’s global head of technology. Ennis was a venture capitalist with Arch Venture Partners in Seattle for 10 years before taking his current post in early 2008. (Between jobs, he took some time off and, among other things, chopped wood full-time for a week.)

Back in October, Xconomy reported that Ennis is heading up Intellectual Ventures’ expansion in China, Japan, Korea, India, and Singapore. The invention company, which is led by founders Nathan Myhrvold and Edward Jung, currently has some $5 billion under management, 450-plus employees, and 160 university partnerships around the world. I wanted to get a deeper sense of Ennis’s philosophies on invention and intellectual property on a global scale.

Ennis organized his thoughts loosely around a talk he gave last month at the Ready To Commercialize 2008 conference, run by the Office of Technology Commercialization at the University of Texas (which happened to be IV’s 100th university partner). In Austin, he spoke on game-changing approaches to commercializing inventions. The conversation we had over lunch in Bellevue was free-flowing and touched on everything from anatomy and antibiotics to Sumerian culture and the Renaissance.

I was particularly intrigued by Ennis’s take on the current state of global competition and its historical context. “It’s a complicated world,” he said. “Leonardo da Vinci could do what he did because the world was not as complicated. Leonardo could not be a Renaissance person today—there’s too much to know.”

A few more highlights from Ennis, in his own words:

—On doing business at Intellectual Ventures: “We want to create a market for invention. We want to reward inventors, perfect the process of invention, and make invention respectable…We don’t ask for exclusive deal sourcing agreements, we like to earn our business a deal at a time, the old-fashioned way. All organizations, if they succeed, have to fight the hubris thing. You see that with all big companies. IBM had it, Microsoft had it, and Google, quicker than any other startup, got it. It’s amazing how the hubris seeped into Google real quick. And the backlash is coming—you see it in the EU and, to a certain extent, in the States.”

“We’re a collection of individuals, and business is always done personally, one on one, whether you work for a 10-person company, or 450, or 4,000,” Ennis says. “That’s when companies lose their way, …Next Page »

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Today’s news that Bellevue, WA-based software firm Bsquare (NASDAQ: BSQR) is buying Minneapolis, MN-based TestQuest for $2.2 million has sparked some lively discussion. Bsquare founder and former CEO Bill Baxter, who left the company in 2004, wrote in to say “the investment is not a huge thing for the company” and that “they might benefit marginally,” as long as “they can contain the costs.”

Brian Crowley, Bsquare’s president and chief executive since 2003, has a different take, and called me to make sure he got his point across. “I’m really pretty excited about the deal,” he says.

Some quick background: Bsquare’s strategy since the 1990s was to grow its software services and products together, says Crowley. It peaked with $63 million in revenue in 2001, but that declined to $37 million the following year. “My mandate from the board was ‘Hey, let’s turn this thing around,’” Crowley says. “Let’s do what we do best, which is services, and offer our own products along with it. That’s been our mission for five years since I’ve been CEO.” Last year, Bsquare generated just under $60 million in revenue, with $2.8 million in net income. Through the first nine months of this year, it has reported $48.6 million in revenue and $2.6 million in net income.

Bsquare’s broad strategic goal, as Crowley outlines it, is to bring its products and services to bear on smart devices and help businesses take products to market faster with better quality. “The issue is the increasing complexity of these devices,” he says, meaning getting software to work across different platforms and operating systems, for instance. “We’ve been growing our services practices.”

So what TestQuest brings to the table is “a full, automated test framework,” says Crowley. “You can connect to any kind of device using any kind of operating system. You can verify that the experience the user is having is what you intended. It’s a great fit for Bsquare.”

More specifically, he points to three reasons why the acquisition is a big deal for his company:

1. It could potentially double product sales. Most of Bsquare’s revenues come from the resell of third-party software, Crowley says. Its smallest revenue line is products. Last year it sold about $4.2 million of products. TestQuest also did $4.2 million in sales of its own products, which could be a significant addition to Bsquare’s top-line sales, and bottom line profit.

2. Geographic expansion. “We’re heavily focused in North America,” says Crowley, adding that it’s where 95 percent of Bsquare’s current business is. (Bsquare also sells in Taiwan and Japan.) But TestQuest has “really good, established people and relationships” with customers in China, Korea, Japan, and Europe, he says.

3. Big new customers. “We’ve been super-strong at selling services to OEMs [original equipment manufacturers]. But TestQuest sells to wireless carriers,” Crowley says, including Verizon and Virgin Mobile. Other prominent customers are the U.S. Postal Service and FedEx (for testing field automation applications on devices).

Crowley says the acquisition brings Bsquare’s total workforce to just under 300 people (22 TestQuest workers are joining). “Combining our own capability with TestQuest, it’s a really nice solution for enterprises who want to test devices. Strategically, it’s really important.”

And finally, on the issue of the cost of maintaining the Minnesota office, Crowley says, “We’re pretty low overhead. It’s not a big deal having remote offices.”

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Last month, Xconomy reported on a visit to China by five Seattle-area tech companies as part of a mobile-telecom mission organized by the Washington Technology Industry Association (WTIA). The goal of the trip was to open up business opportunities for the companies by setting up meetings with potential partners, investors, and customers. On Friday, I sat down for a one-on-one with Ken Myer, the president and CEO of the WTIA (and an Xconomist), to talk about the trip and what he learned about the Chinese mobile market.

Myer led the delegation, together with the Washington State Community, Trade and Economic Development office, and representatives from the local tech companies Formotus, McObject, Mobile Semiconductor, RealNetworks, and Zoodango. The trip included stops in Beijing, Shanghai, and Shenzhen, extensive meetings with dozens of companies and local government officials, and an excursion to the Great Wall—Myer’s first trip there, though he’s been to China several times.

Their experience struck me as useful stuff for anyone thinking globally about the impact of their company or organization, particularly in the mobile sector. So, here are Myer’s top five take-aways after observing the China mobile market up close:

1. It’s even bigger than you think. With more than 700 million handsets out there (100 million were sold in the first half of this year alone), the Chinese market size is truly impressive. “Embedded software around improving performance or cost of a device is an early adopter opportunity,” Myer says.

2. Mobile behaviors of consumers are very different compared with the U.S. Hardly anyone leaves a voice message, there’s lots of texting, and much less use of data applications—the mobile market is something like 90 percent voice and 10 percent data (versus 69 percent voice and 31 percent data in the U.S.), according to Myer.

3. Think regionally. Domestic growth is key to the Chinese mobile industry. And a lot of that growth is in rural areas, where there are cheap “mountain plans” for wireless service. “There’s no single application for all of the country,” says Myer. “Pick a province, and focus on one arm of a carrier that’s amenable to working with you.”

4. Mobile business applications are in early days. “It’s a good time to get in,” says Myer, though there are long sales cycles and adoption times at this point. And mobile gaming is even further behind.

5. As for intellectual property, go in with your eyes wide open. Keep in mind Web services are probably easier to protect than a technology that involves a disk or file that can be copied.

Myer also stressed the importance of building personal and business relationships. Each day on the trip was filled with formal business meetings, followed by a lavish banquet. (Myer cited steamed fish, seafood, and duck as his favorite dishes.) “Meals are really where the relationship is established. You talk to people one-on-one, and you cement the personal relationship…It’s important to think of these efforts as long-term,” he says. At the same time, “we want to get business and revenues flowing for our members.” To that end, Myer says he plans to return to China early next year, in part to visit more companies and formalize a trade cooperation agreement with Chinese officials.

Lastly, Myer had an unrelated (and much more Washington-centric) public service announcement: Get your applications in this week for the annual Industry Achievement Awards, which will be given out at the WTIA’s 25th anniversary bash on the evening of March 25, 2009, at the Paramount Theater in downtown Seattle. The deadline for all entries is this Friday, November 21. The award categories include technology innovator of the year, consumer product or service of the year, and a new one, breakthrough startup of the year.

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‘Tis the season for grand tours of Asia. Last week, we covered life on the road with Intellectual Ventures, as the Bellevue, WA-based invention firm launched offices in five Asian countries, including China. This week, it’s the Washington Technology Industry Association’s turn. Together with the Washington State Community, Trade and Economic Development office, the WTIA is coordinating a three-city visit to China for five Seattle-area tech companies: RealNetworks, Formotus, Mobile Semiconductor, Zoodango, and McObject.

It’s the third WTIA-organized trip to China in the past year, and the first dedicated to a specific tech industry—mobile telecommunications. The trip’s focus “is on understanding the opportunity and dynamics of the China mobile market and setting up one-on-one business matchmaking meetings with the participants,” says Ken Myer, CEO of the WTIA (and an Xconomist). “Our goal with this mission is to open up business opportunities for our members who are seeking to enter or expand their presence in China.”

The business opportunity is a no-brainer, given the size and growth of China’s mobile market (600 million subscribers and counting). This week’s agenda includes stops in Beijing, Shanghai, and Shenzhen, and meetings with more than 20 prominent companies, including Microsoft, Huawei, China Mobile, Hurray!, Sina.com, and Tencent. Myer says his team will also visit the WTIA’s office in the Longgang district of Shenzhen and its local host, Pacific Prestige, along with Chinese government officials there, including the Shenzhen vice mayor, Xu Qin.

All in all, it sounds like a fun and productive tour—one designed to build long-term relationships in the area. I had a chance to talk with a couple of the Seattle-area companies about their expectations for the trip. Joe Verschueren, co-founder and CEO of Formotus, a Bellevue-based maker of mobile software for businesses, says his goal is “to meet with potential strategic investors and go-to-market partners. Our partner candidates include carriers, device manufacturers, device distributors, industrial handheld computer manufacturers, distribution partners, potential joint venture partners and other companies involved in the cellular mobile industry.” Verschueren adds that he sees “tremendous opportunity for Formotus in China. We believe Formotus is favorably positioned to become an important partner to IT and Telco companies in China.”

Cameron Fisher, co-founder and CEO of Mobile Semiconductor, a Seattle-based maker of memory technologies for mobile handsets, emphasized the importance of really connecting with the local companies he’s meeting. “We hope to first understand the market and what these companies see as important differentiators,” Fisher says. “Our memory technology can enable new applications, especially data-intensive applications such as video sharing, mobile database access, or simply large file system access. As we understand their needs, we can help them to design better cell phones, mobile gaming devices, etc. Next we would like to partner on a next-gen handset design, and license our technology,” he says. “I expect to spend one or two years developing a few key partnerships. That would most likely include our retaining some local representation.”

There’s also a local celebrity among the WTIA contingent. James Sun, founder and CEO of Seattle-based Zoodango, a business-networking site, was the runner-up on ABC’s “The Apprentice 6″ last year. It will be interesting to see what, if anything, Sun’s experience with the Donald buys him in China.

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It’s 10:15 pm, and Patrick Ennis is in a taxi bound for the airport in Delhi, India. He’s getting ready for a 1:00 am flight to Beijing. The streets of India are legendary for displaying 2,000 years of transportation history in one place—animals, pedestrians, carts, bikes, cars, buses, trucks—and it sounds like tonight is no different. “I learned to drive in New York, but this is much harder,” says Ennis. Though it’s late at night, he adds, “It’s still 10 times as much traffic as Seattle.”

Ennis is the global head of technology for Intellectual Ventures, the Bellevue, WA-based firm focused on invention. He joined about six months ago; before that, he was a managing director at Seattle-based Arch Venture Partners, where he funded and built technology startups, many coming out of universities and national labs. And before that, he held senior positions in technology and business at Lucent Technologies, AT&T, and Bell Labs. He did his Ph.D. in physics at Yale, and did scientific research for about eight years before joining Bell Labs.

As we reported last week, Ennis is currently part of a high-powered traveling team that includes Intellectual Ventures co-founders Nathan Myhrvold and Edward Jung. They are on a three-week, five-country tour of Asia to meet with the local communities and launch new offices there. I hope to sit down with Ennis for a more comprehensive discussion after he returns, but in the meantime here are some thoughts he provided by phone—through a dicey wireless connection in Delhi. He touched on some details from the tour, his impressions of the various Asian cities (including the food), and how the VC industry compares with the invention industry.

Ennis said he’d been in Tokyo, Singapore, and Delhi so far, spending three to four days in each city. Next up: Beijing and Seoul. “We’re in the middle of our tour,” he says. “It’s going very well. Our focus on invention is being well-received here, it’s truly a global world now.” Ennis says that in each city, they’ve been putting on events where they have a reception and invite local inventors, university professors, and administrators of research institutions. They’ve also been meeting with local university officials privately. “We have an inventor network we’re building in Asia…We want to get to know the whole ecosystem…and we do presentations. It’s like in Silicon Valley, you invite people who are interested in what you’re doing, to mingle and network.”

Ennis is no stranger to Asia. In the mid-to-late ’90s, he worked in optical networking and sold a lot of products to Asian national carriers like Korea Telecom. And when he was at Arch Venture Partners, several of the firm’s portfolio companies had partners in Asia. So Ennis has worked in places like Taipei, Tokyo, Shanghai, Beijing, and Singapore. “A trend you see more is VCs, even if they don’t have formal offices or deals in Asia, spend more time there,” he says.

He didn’t give details of his meetings this week, but he provided some general impressions. “Asia is so dynamic in terms of growth, innovation, and optimism,” Ennis says. “The energy here is palpable, it’s similar to the energy that exists in places like Seattle and Silicon Valley, both in the technology …Next Page »

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When I visited Nathan Myhrvold in the summertime, he lamented that he wasn’t able to attend the Olympics in Beijing (though he did provide some insight into the physics of ping-pong matches). But this week and next, Myhrvold is taking a grander tour of Asia, as his Bellevue, WA-based invention company, Intellectual Ventures, opens a series of new offices in the region. It is the firm’s first major foray into the global market, with the goal being to amplify its focus on investing in technological invention as a key commodity and driver of innovation.

To that end, Myhrvold (an Xconomist) and Edward Jung, the founders of Intellectual Ventures, are in the midst of hosting office launches and events this month in five Asian countries. The company’s new regional headquarters is in Singapore, with additional offices located in Tokyo, Japan; Bangalore, India; Beijing, China; and Seoul, South Korea. Each office will be staffed by roughly seven to 10 people. “I am struck by the gap between Asia’s collective, innovative talent and the lack of resources for Asia’s greatest inventors. IV is working to fill this gap,” said Jung in a statement.

So what exactly will Intellectual Ventures be doing there? As Myhrvold told me previously, “Most inventing organizations like universities and nonprofits have a tech transfer office or a technology licensing office. Most institutions in Asia don’t.” Intellectual Ventures, he said, wants to “be an outsourced tech transfer agent for inventing institutions that don’t have one. We can provide the same functionality that you’d get from a technology licensing office. We evaluate ideas, we pay for them to be patented, we provide a little bit of funding for them, and then we license them. There’s no reason that smart people in Asia shouldn’t be able to get the same traction that Stanford provides.”

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Yesterday, we ran the first half of a sit-down interview with Nathan Myhrvold, cofounder and CEO of Intellectual Ventures, the Bellevue, WA-based invention laboratory and investment firm. Myhrvold, the former CTO of Microsoft (and an Xconomist), placed his current company’s goals in the context of venture capital and private equity, arguing that there is a real need to create what he calls an “invention capital” industry.

In what follows, Myhrvold talks about the lessons he learned in forming Microsoft Research, the differences between research and invention, some ambitious and far-out projects from Intellectual Ventures (e.g., invisibility, geo-engineering), and the motivation behind his firm’s upcoming expansion into five Asian countries.

Xconomy: Before we get into specific projects and inventions, what all did you learn from Microsoft Research that’s applicable to Intellectual Ventures?

Nathan Myhrvold: I have a theory that R&D is a great investment, a fundamentally good business. Using the human mind to go from nothing to something is a hell of a trick. And there’s nothing fair about it. A guy like Einstein can come up with all these things, but so can people who aren’t actually all that smart! There are people dumber than Einstein who’ve made amazing contributions.

So I believe you can make money with research, or invention. But you need a certain scale factor. Let’s say I have this idea called life insurance. If I just insured your life, it wouldn’t be worth it to either one of us. Insurance is fundamentally a risky bet, and to make it reasonable, what you’re buying and selling is variance. You need to have a large end limit to shrink the variance down. With Microsoft Research, I came to the conclusion that research could have been enormously profitable for Bell Labs, IBM, and others. It was profitable, but it could have been even more profitable. Xerox PARC could have made Xerox one of the most valuable companies on Earth. But most people screwed it up.

And after screwing it up, the lesson was mislearned that it’s impossible to be successful in this way. Most of Silicon Valley turned away from the notion of trying to do anything new. The implicit attitude was, hey, that’s why Stanford exists, somehow they’ll come up with new ideas. We’ll wait until that occurs. And then when companies got bigger, the size of Oracle or Sun or Apple, they said, “Well, keep doing that. Screw it, we’re not actually going to do anything really exciting.” And I thought, no that’s the wrong thing to do. If you have the scale at which you can afford to wait 5 to 10 years for a result, that was the key thing. If I say, invent something or do valuable research tomorrow, that’s an impossible task. But if I say, support 100 really smart people working really hard for 5 years, something great will come of it.

X: That’s what you had at Microsoft, because of its size.

NM: At Microsoft, we had the resources to do that. So I talked Bill [Gates] into starting Microsoft Research. It’s been hugely successful; they would say it’s one of the best investments they ever made, enormous customer value and shareholder value…To sum up, Microsoft Research is based on a similar idea [as Intellectual Ventures], with one twist. There, all I had to do was convince one man, and we could go ahead. After I retired from Microsoft, I wanted to keep going. I no longer had the one man to convince to do the whole thing. If you think about how to replicate the model, even if I’d gotten Bill to give me more money to do something else, that wouldn’t be the replicable model. So that’s where I came back and said OK, how could you do this on an even broader scale?

It turns out the way the world does this on a broad scale isn’t by saying this will be done by a government agency or by Bell Labs, a research lab funded by a monopoly business. In fact, the modern way to do it is to create one of these marketplaces where large investors are willing to put a small fraction of their income towards really risky things. And so …Next Page »

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This time last week, Nathan Myhrvold was sitting down with Bill Gates. Gates had just returned from the Olympics, where he had watched some high-profile ping-pong matches—a very hot ticket in China. The two former Microsoft colleagues were catching up, and their discussion turned to racquet sports, and the various technical differences between them.

“Bill was telling me that badminton is also insanely popular there,” says Myhrvold. “So then I asked him to compare, ‘OK, you’ve got three implementations of what’s fundamentally the same game—tennis, badminton, and ping-pong. How do they differ?’ So we started discussing the parameters of it.” They made a list of important factors: serve speed, number of shots per rally, average rally time, size of the court, and so forth. “A naïve guy like me watching these expert ping-pong guys,” Myhrvold goes on, “there’s this blur of the white ball, but man the rally’s lasting forever! Versus tennis, I’ve watched a few times, the guy goes ka-whap with his blinding serve, and that’s it. If you can break his serve, you’re there. Bill says badminton is kind of in the middle.”

And why is that? “I bet you could figure that out,” Myhrvold says. “I bet it’s part physics, and part rules. With badminton, you can’t do anything like those serves, because the thing, the shuttlecock, resists going fast. Probably there’s a Reynolds number effect that’s the same thing in ping pong—although it goes fast, the coverage of the table is such that it’d be like tennis if either the ball was really slow or you could run really fast, because you can actually move your paddle—I’ve only played it a couple times in my life—but it’s only this far that you’re moving it. So it’s probably something like the ratio of the ball speed to lining up on it, and then, if that’s true, you’d expect that doubles might be different because each player has a more limited field, so you’ve cut their angle down, so something can come cross-wise in ways you wouldn’t otherwise be able to do. But that’s just a guess…It’d be fun to see if someone has looked into this. You’d like to get some stats, like from the Olympics.”

Welcome to Myhrvold’s world. Given the rules of any game, you can figure out the underlying mechanisms and make predictions—and then start testing them with different scenarios and real-world data. It’s the way Myhrvold has always been—intensely curious and analytical—from his years working on quantum cosmology with Stephen Hawking through his time as Microsoft CTO and founder of Microsoft Research. And it’s no different at his current home, Intellectual Ventures, the private company he co-founded in 2000, which has been described by some as an “invention factory.” Its goal is to create a new marketplace for inventions—both by developing its own patents and buying up those of others around the world. Intellectual Ventures is tight-lipped about its funding, but it is rumored to have raised—or be in the process of raising—several billion dollars from big companies and investors.

I had a chance to visit with Myhrvold (he’s an Xconomist) last week at the Intellectual Ventures laboratory, a recent addition to the company located in an unmarked industrial building in Bellevue, WA. First, I got a tour of the lab from Geoff Deane, VP of engineering (see photo; he’s on the right talking with Myhrvold), who was tapped to run the facility five months ago. It is a giant work in progress—17,000 square feet—that started up 14 months ago, and has about 30 people working there so far.

The most striking thing about the lab is how much equipment is scattered throughout. And how many different types of scientific instruments there are. To explain the look of the lab, Deane quotes Thomas Edison: “To invent, you need a good imagination and a pile of junk.” He says the approach is to buy old equipment “for pennies” and then restore it, or mix and match parts to make high-quality working instruments: oscilloscopes, spectrometers, lathes, mills, lasers, a water-jet cutter, you name it. These tools of the invention trade are distributed amongst an almost comically wide variety of lab stations: a kitchen lab full of Willy-Wonka-like contraptions (Myhrvold is working on a cooking-science textbook), a full-service machine shop, an electronics shop, a photonics lab, even a mosquito-growing chamber to study malaria interventions. And that’s just what they chose to show me. I half-expected to see Morgan Freeman and the Batmobile hiding behind a screen.

Regarding the role of the lab in Intellectual Ventures’ business, Deane makes an analogy that he admits is simplified, but gets the point across. “Imagine a swimming pool that’s infinitely long and wide, but only an inch deep,” says Deane. The idea is to be able to dip a toe into any spot in the pool, he says, and see if the water’s promising there. If it is, they can get the further tools and resources to investigate whether an invention can come of it. But first they have to be able to do basic experiments across a very wide range of technical fields.

Which is a good lead-in to what Intellectual Ventures is all about. I sat down with Myhrvold for a far-ranging interview that began with the topic of theoretical physics—and could easily have stayed there for hours. (With next month’s opening of the Large Hadron Collider, the most eagerly anticipated particle accelerator in history, Myhrvold was full of ideas on what they might or might not discover there. He also thinks there’s been nothing revolutionary in physics since Einstein, is unimpressed by string theory, and notes that, for all the efforts to find top talent around the world, “there’s never been an Einstein from America!”)

But I also found out that the lab isn’t the only new facility brewing at Intellectual Ventures. The company will be rolling out new offices in five Asian countries this fall—part of a new strategy to provide tech transfer services around the world, and also to partner with existing technology licensing organizations at universities and research institutions in those nations.

I didn’t even get a chance to ask about Myhrvold’s almost-legendary “outside” exploits in cooking, photography, or paleontology. But his answers, starting today and concluding tomorrow and covering ideas from inventing a new type of nuclear reactor to stopping hurricanes, give a pretty complete picture of what Intellectual Ventures is really trying to do—and its current progress in supporting what he sees as the most precious of commodities: inventions.

Xconomy: Before we talk about Intellectual Ventures, can you say a few words about the Seattle area as an innovation cluster?

Nathan Myhrvold: This is a very innovative area. Seven or eight years ago, I wrote for National Geographic Traveler about the city. I wrote that, all of a sudden, Seattle in the 1990s became a center of cultural innovation in almost every way you could imagine. Starbucks Coffee is here, Microsoft is here, strangely Nintendo is here. Even more strangely …Next Page »

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Steve Leonard’s schedule for the next two weeks or so goes like this: Seoul, Tokyo, Hong Kong, Singapore, Mumbai, Bangalore, Singapore, London, Paris, London, Singapore, Australia. And for him, that’s not even that unusual—Leonard logs about 30,000 miles a month on airplanes, sleeping on a plane once or twice a week. “That’s part of being in APJ,” he explains with a smile.

“APJ” is shorthand for Asia Pacific and Japan. And Leonard ought to know something about the region. As an executive for EDS, Veritas, Symantec, and, now, EMC, he’s lived there for some nine years. In his eyes, there’s nowhere else to be than what he calls the most exciting, fastest-growing region on earth. As he puts it, “Where else can you be where you’re watching the evolution of, or the transformation of, a country?”

Leonard was named president of Hopkinton, MA-based EMC’s (NYSE:EMC) Asia Pacific & Japan operations two years ago, because, he says, “Joe [CEO Joe Tucci] and the executive leadership team said we’d like to change our trajectory in Asia.” And so far, so good. Last year, EMC’s APJ operations—which span some 17 nations, from India to The Philippines, Korea to New Zealand—enjoyed 24 percent growth over 2006—after just a 6 percent rise the year before that—accounting for about $1.5 billion in business, about 11 percent of the company’s total revenues. “We were the fastest growing part of EMC,” Leonard says. “We came from being the slowest growing part of EMC.” And things didn’t stop there. The first quarter of this year saw another 18 percent surge in revenues over the same period a year earlier, and, says Leonard, “you’ll be reading about Q2.” (The numbers aren’t due until late July, and he can’t talk about them now).

So how did it happen, and what’s in store for the region going forward? I asked these very questions when I sat down with Leonard in a corner of Cafe Fleuri when he was in Boston last Friday—before he embarked on the whirlwind itinerary outlined above.

Not surprisingly, the first question Leonard asked when he took the reins was, “What is the team?” “Some companies say it [APJ] would be a good place for Johnny to go get some experience, which would be the wrong approach,” he says. “Asia is the most complicated and difficult set of markets of anywhere in the world.” It’s a place, he adds, for people who already have lots of experience—the ones, he says, “with the most scars on their back.”

Leonard says his prime goal was to put in place key managers who …Next Page »

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