Eyeing Patent Reform, Influential VCs Test Their Power

Thanks to astute deal-making, a strong point of view, and a long and savvy relationship with social media, Fred Wilson of Union Square Ventures [USV] is widely recognized as one of the most influential venture capitalists in the country.

His influence is about to be tested. On Tuesday, Twitter announced plans to curb its right to use patents for offensive litigation. Yesterday, Wilson noted in his popular blog that “[s]pecifically Twitter has said that they will only used these assigned patent rights defensively to protect themselves against hostile actions. And further that any company that acquires these patent rights from Twitter will need the inventor’s consent to use them in an offensive action.”

It’s an exciting development to Wilson, whose firm was among Twitter’s earliest investors. In fact, USV is now “instructing the startup lawyers we work with to insert the patent hack language in our standard forms” and “reaching out to our friends in the startup world including other VCs, accelerator programs, and the startup lawyer universe to suggest that they insert the patent hack into their standard forms,” he blogged.

A number of Wilson’s popular peers are already on board. Late yesterday, David Cohen, CEO of the accelerator program TechStars, announced that TechStars “intends to insert these patent hack provisions into our standard formation documents and encourage all of our companies to adopt the patent hack.”

Investor Brad Feld, who cofounded TechStars, told me in a separate email that his venture firm, Foundry Group, will also “actively engage in getting the language optimized and encourage the companies we invest in to use the optimized language,” though “the companies get to make their own decision as to what they do.”

Mark Suster of the venture firm GRP Partners applauds the initiative, too. While he says he isn’t “yet at a point where I want to put [new] language in my term sheets” he isn’t taking Twitter’s patent moves lightly.

“I think you have to have people like [Twitter CEO] Dick [Costolo] and Fred [Wilson] and Brad [Feld] and guys like me who are willing to stand up and say the right things and try to change the culture in a positive way that will benefit innovation in this country,” says Suster. “There will always be some big companies that use their patent portfolios to bully smaller companies, but as an industry, it’s in our interest to change norms and make outcasts of companies like Yahoo [that employ their patent portfolios in offensive ways ].”

Still, Twitter’s prominent stance on this issue is odd, particularly for a consumer Web company of its size. Some see its announcement as a ploy to recruit top engineering talent, while others observe that the agreement, in its current form, leaves plenty of room for legal interpretation.

The standing of venture capitalists isn’t clear, either.

“I just don’t think the Twitter thing makes a heck of a lot of sense,” says Greg Gretsch, a managing director at Sigma Partners, arguing that it is against startups’ interest to sign away their rights to use their patents offensively given the vicious patent battles that now litter the startup ecosystem. “If everyone else is walking around with a loaded gun, and you say, ‘Gee, that’s bad, so we’re going to stop it by ensuring our own gun isn’t loaded,’ you aren’t doing yourself a favor.”

While Gretsch says a pact wouldn’t keep him from funding a company, he observes that many startups generate positive exits through acquirers “for whom patents are a very real part of what they are buying.” A small startup that vows never to use its patents in an offensive way has essentially “tied a leg up” before it has begun the race, he says.

Venky Ganesan, a managing director at Globespan Capital Partners, is more sympathetic to Twitter’s patent position, but in his view, preaching change to young startups won’t solve the problem. In fact, it would “be an issue” if a startup seeking funding from Globespan had already signed away its rights to use patents offensively, he says.

“Regardless of your political beliefs, fundamentally, VCs have a fiduciary duty to our investors, and this structure does not enhance shareholder value,” says Ganesan. In the end, he adds, “My LPs don’t fund me to create change; they fund me to create returns.”

Still others argue that there are powerful cultural reasons why this patent reform initiative can’t simply be dismissed. “This newer generation of VCs has a much more progressive agenda,” notes economist-investor Paul Kedrosky. “Whereas other VCs take a more orthodox asset management view, which is: ‘These are the dials I have to turn to maximize value,’ [people like Wilson] think you can build a healthier ecosystem for the future.’”

Indeed, Peter Yared, an entrepreneur, investor, and the CTO of CBS Interactive, tells me that just “two small changes” to Twitter’s proposal  — allowing all companies adopting its “patent hack”  to use each other’s patents defensively, and making the patents defensive perpetually —  would provide startups an “immediate benefit, as they [would] have access to everyone’s else patents to protect themselves.”

“Twitter is taking a first crack at it,” says Feld. “They are doing it in a very open way and embracing anyone who is interested in helping address this.” There’s a “ton of stuff to work out,” he acknowledges. But “this is the first time a major technology company has said, ‘Enough is enough – let’s try to fix this.’ And that’s awesome.”

Even Kedrosky, a self-described “curmudgeon,” thinks VCs should know that “this isn’t bullsh*t.” As he puts it, “There is a rogue virus in the startup ecology, and it needs to be killed or controlled. And there’s a real argument that this could make life better for all of us.”

Photo: Patent print courtesy of Shutterstock.