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To Patent or Not to Patent (and Mutual Assured Destruction)
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In October, I attended the Ocean Tomo Patent Auction in NYC. I was surprised to see that I was one of three venture capitalists in attendance reviewing the inventory of patents changing hands. What? No Web 2.0 discussions or golf? Why bother? The market’s reaction to recent patent disputes underscores the importance of IP for technology companies. Research In Motion (Blackberry) forked out over $600 million to settle a patent dispute with NTP. More recently, IBM filed patent infringement lawsuits against Amazon targeting various issues including advertising, hyperlink technology, electronic catalogs, customer recommendations and Web site navigation. Why is this patent auction of interest to our startup portfolio companies? The answer can be found when they frequently ask, “Why bother prosecuting a patent when we know they won’t be issued in 2-4 years in any event (assuming they will be at all)?” While I am a Jimi Hendrix fan, I was not at the Ocean Tomo Auction to bid on his song library. I was at the patent auction on behalf of our portfolio companies. Our team reviewed 14 patents with our portfolio companies and we were hoping to increase shareholder value by acquiring already issued patents to help bolster their IP positions. The average life of a portfolio company is 5.6 years and that hardly leaves enough time to get through the patent prosecution process and have a patent issued. So to extend the IP of our companies, we often look at what IP is available when we are acquiring assets or businesses to combine with our fledgling portfolio companies. We have acquired 22 companies during the life of this current portfolio to extend the product set, customer set, revenue base and hopefully solidify the position of the IP for our companies. This is all valuable, and not as a basis for being a litigant as in the RIM case. Instead, it is to assure that the acquirers can continue to enter new markets. In our routine discussions with all of the acquisitive technology acquirers — such as Cisco, IBM, EMC, HP, Yahoo!, Google, Microsoft, Symantec or Business Objects – these companies all stress the importance of the value of substantiated IP when making acquisition decisions. They want to reinforce the notion that messing with the big boys, when they are holding a strong deck of IP cards, will surely lead to Mutual Assured Destruction!
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November 13th, 2006 at 4:58 pm
Charley:
If I may be a bit nosy, how much? As a analogy, getting start-ups to fork over $10-$25k for D&O insurance is tough, as the value proposition isn’t truly compelling at the seed stage. IP, I would suspect, is far more compelling a value proposition, but I’m not sure what the metrics are. Perhaps you can give us an example (price, type of patent coverage).
There was proposed patent reform in 2005 - an attempt, in part, to conform more to patent practices outside of the US. (e.g. US was “First to Invent”, vs. outside US “First to File” - quite a significant proposed change with respect to innovation - why invent when you can FILE?) Anyway, this was quite a firestorm - the most controversial point was the proposed limitation on injunctions. Good news to techies, very, VERY bad news to life science companies.
(Why? “Software and information technology companies generally support limiting injunctions, because their products often involve hundreds or thousands of patents, and a dispute over any of them can result in an injunction that halts production on the entire item. Biotechnology and pharmaceutical companies, on the other hand, generally oppose limiting injunctions, because the items they manufacture are easily analyzed and reproduced and generally involve only one or two patents.” http://en.wikipedia.org/wiki/Patent_Reform_Act_of_2005)
What is my point? Well, back to my insurance analogy. Patents are, to some degree, insurance - similar to having a gated property. They don’t prevent everything bad from happening, but they certainly keep all but the most diligent attacks from likely darkening your doorway.
So, I’m a bean counter. What price do you associate with “and hopefully solidify the position of the IP for our companies.” Is it more a metric of buying up a basket of business assets, with IP thrown in (I like that, it’s like getting a baker’s dozen), or is the IP, on it’s own, the value of the purchase?
And… How much?
And… How do I get the CEO/Board to better recognize the value (i.e., how does one argue emphatically about a somewhat nebulous concept of solidifying a position?)
I like the thoughtfulness of your posting and I’m impressed that you went to the auction. I really would like to hear a bit more.
Thanks,
Alexis
[p.s., if your business model is all about acquiring and then defending patents, then you make money on winning lawsuits, not solidifying your IP. If you work the IP auction circuit enough, Charley, you might have yet another business to start! Only one of three VCs in attendance, competition is scarce! Kidding. :>]