Intellectual Ventures: White Hat or Black Hat?

“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said"

   -- Alan Greenspan

The New York Times published the latest installment of feature pieces on Intellectual Ventures and the aspirations of Nathan Myhrvold.  While the article does not contain anything new about IV, it does bring us up-to-date on the company's recent activities and performance:

- founded in 2000, began operating in 2003;

- currently has 650 employees, estimated total value of IV = $5 billion;

- patent portfolio now over 30,000 patents;

- returned $1 billion to investors and collected more than $1 billion in license fees to date; most of the revenue has apparently come from 16 so-called strategic investors — big companies that pay to license patent rights and get a stake in an Intellectual Ventures fund;

- more than 100 deals have been done with Fortune 500 companies and their international equivalents;

- IV is allegedly linked to approximately 1,110 shell companies and affiliated entities;

- IV paid $315 million to individual inventors to date for their inventions;

- spent $1 million lobbying Congress in 2009 on patent reform; and

- in the 3 most recent election cycles, IV contributed more than $1 million to Democratic and Republican candidates and committees.

You can read the NYT article in its entirety here ("Turning Patents Into ‘Invention Capital’")(link)

What is more interesting is that the NYT article comes hot on the heels of an article that Myhrvold recently published in the Harvard Business Review, titled "The Big Idea: Funding Eureka!".  In the article, Myhrvold defends his business by arguing that the inventive process is a deeply misunderstood concept that is being (mostly) mismanaged by technology companies:

Outside the pharmaceutical and biotech industries, few companies consider inventing, or producing patented intellectual property, to be their primary mission. Corporate R&D has become mostly “D”: the development of products. Hardly any large corporations have “inventing” as a job category—even though it requires a different mind-set, has different goals, and must be managed differently than research and development positions.


[I]nvention’s stepchild status is reflected in the way it’s typically funded, which I call the charity model. The entities that provide the vast majority of research funding to U.S. universities—mostly government agencies like the National Science Foundation, the National Institutes of Health, and the Department of Defense, along with private donors—do so without any expectation of a financial return. In other words, research grants are gifts, not investments.

The shrinking handful of corporations that still fund long-range research have the same mind-set. Their leaders rarely run research as a business in its own right; instead, they fund it as an act of faith that the ideas produced will somehow create value as they percolate through the product organization.


The result of the charity mind-set is a dearth of private sector investment and an overdependence on government funding. This is undesirable on many levels. It allows federal priorities, rather than the potential market for new inventions, to determine how much funding particular areas receive. For example, the share of federal funding devoted to basic health and bioscience has steadily grown since the 1950s to about half of the total, whereas the share allocated to areas that produce a greater proportion of fruitful inventions—such as the physical and information sciences—has shrunk.

Myhrvold goes on to argue that the only way to fix this mentality is to make applied research a profitable activity that attracts vastly more private investment than it does today so that the number of inventions generated soars.  In other words, create a capital market for inventions akin to the venture capital market that supports start-ups and the private equity market that revitalizes inefficient companies:

There are always organizations and people who feel threatened by change and loudly oppose it with fearmongering and false predictions of doom. We’ve seen it before. Once upon a time, venture capitalists were called “vulture capitalists” for taking companies away from founding entrepreneurs. Early private equity firms were tarred as “barbarians” and “predators” for threatening the cozy world of inefficient corporate management. Over time both groups came to be seen as positive forces in the economy—and so will invention capitalists.
 

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Invention is too important to leave it to charity, and I don’t see why we have to. Kleiner Perkins, Benchmark, Sequoia, and the other top venture capital firms don’t have to go to Congress and beg for a little bit more money for the small company sector. Research in areas like astronomy and fundamental physics that is very long range and has diffuse benefits for society should be funded by the government. But funding the invention of useful technology that can make money in a relatively short period of time—say, 10 years—shouldn’t be the government’s job. It’s the private sector’s job. And the U.S., 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.
 
What will it take for the invention capital market to come into its own? A group of companies—not just Intellectual Ventures—has to prove the concept. We have to get more people to accept our inventions. We have to vastly expand the number of companies that license our patents. And two or three invention funds need to produce great returns.
 
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.

To read the article in its entirety, click here (link)