Category: Business Models
Gametime IP and IPWatchdog have recently written excellent articles on IPXI. However, I still see a problem with IPXI’s model. Namely – are the number of ULR limited? If so then they will become all used up. Now imagine launching a new product that is going to need a license. Yes, I can buy a number of ULRs, but I don’t know how many I will need. If the product is highly successful, I might need more ULRs than are ever offered. I doubt many business is going to take that risk. Alternatively, if the number of ULRs are not limited how do I know that IPXI will not flood the market? If they can issue additional ULRs for the same patent, I am going to have a very difficult time determining what price I should pay for them.
There are two broad exchange models out there. One is the stock market and the other is the commodities market. Because Mr. Gerard Pannekoek, CEO of IPXI, comes from the commodities side of the world, it appears that IPXI is trying to model there exchange on a commodity exchange. A commodity exchange has a consumable item it is exchanging and the ULR is an attempt to create a similar consumable item. With a commodity additional units can be produced. With a patent the number of ULRs to the patent could also be increased, but they do not have to be produced in any sense of the word. You can rationally price a future contract for a commodity because the amount of production is limited. For instance, only so much land is devoted to corn production. It takes a certain amount of time for the corn to be produced. The amount of corn in storage can be determined. In addition, the need for the corn is likely to be fairly well defined. None of this is true of ULRs. If you are designing a new product that requires a ULR, then you have no idea what the sales of the product will be in ten years. You have no idea if the underlying technology will still be important in ten years. Finally, you have no idea how many ULRs will exist. So you neither can predict the demand or the supply for a ULR – unless it is only dealing with products and technologies that have been in the marketplace for awhile. You cannot rationally price a ULR (assuming more can be issued for the same patent) because there are no constraints on the issuing of more ULRs.
A stock exchange model would be more complex, but I believe a more viable model. Each patent or a portfolio of patents could be seen as a company. IPXI could issue shares in the patent groups and the shareholders would receive a percentage of the earnings. These securities would look a lot like oil and gas leases, in that they have a finite life. The value of the patent security would be based not only on the value of the underlying patent(s) but in the ability of the management group to increase revenues. Most economic models show that the biggest return for a patent is to non-exclusively and widely license the technology. Since the patent company would not be a producer, their interest would be consistent with a widely licensed technology. They would also have an incentive to provide technical expertise on how to use the technology and a disincentive for frivolous litigation. They could offer standardized licensing contracts that would also eliminate the high cost of bilateral negotiations. The money from the initial offering would be used to create the management team and promote the patented technology. Investors would have the knowledge of sales and earnings that they have for a company or oil/gas lease. These companies would probably exist today but for Sarbanes Oxley and other related securities laws that make it too expensive to go public in the USA.
I believe there is a lot of confusion regarding the difference between invention and innovation. This confusion is the result of erroneous definitions and the purposeful intent of some to increase their importance by belittling the contributions of others.
I believe that most of this mischief started with the great economist Joseph Schumpter. According to Wikipedia:
Following Schumpeter (1934), contributors to the scholarly literature on innovation typically distinguish between invention, an idea made manifest, and innovation, ideas applied successfully in practice
There is nothing inherently wrong with the distinction above, but the way it is applied blurs together a number of different skills. Blurring skills together shows a misunderstanding of the process of innovating. Broadly speaking, innovation can be broken into two distinct sets of skills: creation and dissemination. By creation I mean creating something new, not production – creating something old.
A subset of creation is invention. An invention is a creation with an objective repeatable result. A creation that is not an invention has a subjective result, such as the effect of a painting on a viewer, or the effect of a book on a reader. Many activities combine both a subjective creation and an invention, such as architecture. However, we can separate out the invention from the other creative elements and this helps our understanding of the process.
Dissemination may include a number of processes, such as education (marketing, sales), manufacturing, finance, and management. This is not to say that marketing cannot be creative, it clearly often is very creative. However, the creative part of marketing can be separated out from the dissemination or execution part of marketing. The same is true of manufacturing, which can definitely include inventing. But an invention related to manufacturing is part of the creation step not part of the dissemination step.
Finance can also have inventions. For instance, the invention of a fractional reserve ratio bank is clearly an invention. It has the objective result of securitizing assets and turning them into loans and currency. A fractional reserve bank will securitize land and turn into a loan and currency. Despite this, it is important to understand that the first person to develop the fractional reserve bank is inventing and the person operating the fractional reserve bank is disseminating.
All real per capita economic progress is the result of inventing. This is not to say that it is unnecessary to disseminate inventions, but if there were no new inventions there would not be any economic progress. We would be stuck in static world once all the inventions had been completely disseminated. Of course, if we stop all dissemination activities we will quickly starve to death.
It is my belief that business and economic professors have focused on “innovation” instead of “invention” because they have no idea how to invent or how the process of how inventing works. They concentrate on what they know, i.e. business and economic practices. As a result, the focus is dissemination, under-appreciating the importance of inventing. In addition, it results in misleading business theories, such as:
- Management teams are more important than the quality of the invention.
- Execution is everything; patents and other IP do not matter.
- Get Big Fast.
The truth-test of these theories is directly related to the strength of the patent laws at the time the company is created. When patent laws are weak, these theories are more true and when patent laws are strong, these theories are less true. Unfortunately, when patent laws are weak these theories do not overcome the disincentive to invest in risky new technologies. Management teams do not build revolutionary or disruptive technologies, they just disseminate these technologies. These sorts of teams are like large companies and generally can produce a return with less risk by NOT developing high-risk technologies. They tend to focus on incremental technologies or on stealing someone else’s technology. While this may be good business advice in a period of weak patents, it is bad for our country’s competitiveness and our standard of living.
Technological progress (i.e., inventing), in the long run, is the only competitive business advantage. The best management team in the world selling buggy whips at the turn of the century could not overcome the technological advance of the automobile and stay a buggy whip company. The best management team in the world selling vacuum tubes in the 1940s, could not overcome the advance of transistors and semiconductors and stay a vacuum tube company. This country is littered with companies that had great management teams that were overwhelmed by changes in technology. For instance, Digital Computers had a great management team, but they could not overcome the advance of the personal computer. Digital Computers failed to invent fast enough to overcome the onslaught of small inexpensive computers. US steel was not able to overcome the onslaught of mini-mills, aluminum, and plastics. This was not because they did not have a good management team, it was because the management team under- prioritized invention and over-prioritized execution or dissemination skills. Ford & GM have not become walking zombies because they did not have strong management teams, but because they have not invented. As a result, they have antiquated production systems and weak technology in their products. 86% of the companies in the Fortune 500 in 1959 are no longer there. Some of these companies disappeared because of bad management, but most companies disappeared because they did not keep up with changing technology. In other words, they did not invent.
Inventions or advances in technology are the ONLY WAY to increase real per capita incomes and the only long term business advantage. Business school theories that do not prioritize invention, are bad business and bad for our country.
This book is a well laid out, logical book on how to ensure that your company continues to innovate. This is not a touchy feely book or a feel good cheerleader book like so many business books. If you want practical advice from a person who has been there then this is the book for you. As the book subtitle states this book is “A 10-Step Program for Corporate Survival.”
Robert F. Brands, the author, headed the highly successful company Airspray. Airspray makes consumer products, particularly the highly successful instant foam dispensers. These dispensers foam soap products without an aerosol and are found almost everywhere today.
The book has a number of metrics to determine if your company is truly innovating or only giving inventing lip service. He suggests that companies should track new product sales. New products are generally defined as those introduced in the last five years, however this depends on your industry. If new product sales are less than 15% of total sales then your company is at risk of becoming extinct. Note line extensions are not new products. In Chapter 3 the book describes a complete innovation audit to determine if your company is truly committed being a technology leader. He points out that most companies make the fatal mistake of cutting R&D and new product development budgets when time are tough. If you want your company to survive, this should be the last budget item cut.
Creating successful new products is not enough to survive in the marketplace. Your company must protect its new products with strong IP particularly patents to have sustainable advantage. In addition, you company must understand the patent landscape of your marketplace. “It is proven that those companies with a strong patent portfolio creates much more value to their stakeholders than companies without. Airspray, the case study focused on in the book (the company that brought instant foaming dispensers like hand soap to market) was sold at 15 times EBIT, which proves the point.” This 15 EBIT was twice the going EBIT for similar companies and the main reason for this high valuation was Airspray’s patent portfolio protecting its innovative products.
Robert’s Rules of Innovation is a must read for anyone who wants practical, real world advice on how to ensure that their company does not go the way of the dinosaurs.
The importance and influence of unions has declined dramatically over the last thirty years. While more than one-third of employed people belonged to unions in 1945, union membership fell to 24.1 percent of the U.S. work force in 1979 and to 13.9 percent in 1998. Is there a way that unions, especially blue collar traditional unions, can increase their membership, align themselves with the knowledge economy, and help the U.S. become more competitive?
Unions are often perceived as lining their own pockets at the expense of non-union workers, the companies they work for, and the country’s interests. Perhaps the greatest accomplishment of American unions was the AFL-CIO support for Poland’s Solidarity Union in the 1980s. This support was a significant reason why the Iron Curtain fell. This support for Solidarity shows that American unions are not Marxist. I believe that it is possible for Unions to reorient their focus while still protecting their traditional role of protecting worker’s rights. America’s shift to a corporatist society since 2000 is providing unions with a historic chance to revive their importance and help their country.
How can unions seize this opportunity? They need to focus their efforts on the most important asset in a knowledge economy, intellectual property. Unions have generally opposed the patent reform bills being proposed by Congress because they believe the bills will hurt America’s competitiveness and therefore the availability and quality of work for their members. Now they need to become agents for inventors and refocus their lobbying efforts on strengthening our patent laws and demanding the other countries provide strong intellectual property laws. Forcing other countries to respect our patent laws and strengthen their patent laws will keep quality jobs in the US and also help these countries to develop a culture of innovation rather than a culture of imitation and theft and long term poverty.
How can unions become agents for inventors and serve their traditional members? Unions have the advantage of a large number of members with strong mechanical skills that have numerous potential inventions. Unions should nurture the inventive interests of their members by providing education about patents and the invention process. They should also provide funding for their member’s inventions and act as agents for these inventions. In return, the unions would receive a portion of any royalties. Unions have an inherent advantage over their members taking these projects on themselves. One advantage they have is a large installed base for the inventions of their members. They already have a mechanism for communicating with their members including training classes. This significantly reduces the risk of bringing an invention to market that would be used by their members. In addition, unions have a ready source of funds for development. The retirement funds of unions need to be invested. A very small slice of these retirement funds could be used to fund the invention program. From start-up funding experiences we know that most of these inventions will fail or only be moderately profitable, however a few will be spectacularly successful. By spreading the risk over numerous inventions, the union can obtain above average returns with less risk than their members attempting to commercialize their inventions directly.
Besides the direct financial return from any inventions the union decides to pursue, an invention development program would increase their membership. If just one union member becomes moderately wealthy because of an invention their union decided to represent, the news would spread like wild fire and result in flood of new union members. In addition, the union can use their member’s inventions as a bargaining chip in contract negotiations. For instance, an invention on a better, cheaper, or faster way of installing electrical wiring could be used as a bargaining chip with the automakers or building contractors. The union could provide a bid using or not using the invention. If the company chose not to select the union’s bid with the invention, then the union could deny the company from using the invention. If the union won the contract a portion of the payment would be for royalties for using the invention.
I would suggest that unions focus their initial inventing efforts on tools that their members are likely to use. These tools could be branded and sold to the general public as well as to union members or the companies that they work for. This would be the least risky inventions to pursue. I would not suggest that union’s make the tools themselves as this would result in a conflict between representing their members and being a manufacturer. However, they could use these invention to negotiate employment contracts in the companies that they select to make the licensed product.
If the unions adopt an invention agent model as part of their portfolio of services they provide for members it would:
* Increase their membership; provide a return on the knowledge of their members
* Increase the productivity and quality of the products made by the companies that work with the unions
* Improve the image of unions in the mind of the public
* Provide a counterbalance to the corporatism that is infecting the US
* Keep quality jobs in the US.
For more information on creating an invention company see The Next Big Thing http://hallingblog.com/2010/02/19/the-next-big-thing/ and Jump Starting a Secondary Market for Patents http://hallingblog.com/2009/11/16/jump-starting-a-secondary-market-for-patents/
An article in IAM (Intellectual Asset Management), reports (please read the full article) on a study on the relationship between the success of venture backed companies and their intellectual property portfolio. The study states
Success in the venture capital industry is an exit: an acquisition of, or an initial public offering (IPO) by, a portfolio company. Analysis shows that across all sectors a significantly higher percentage of venture capital backed winners (companies that have been acquired or have gone public) have patent portfolios as opposed to losers (companies that are out of business).
Winners are many times more likely to hold intellectual property than losers. Although the presence of intellectual property portfolios is not perfectly correlated to success or failure, this indication alone should support executive and investor focus on the role of intellectual property in their decisions and actions.
While having intellectual property increases the probability of success, those who manage intellectual property will have an even higher probability of success. In certain sectors, such as healthcare, data demonstrates the value of higher quality portfolios. In other sectors, such as telecommunications or information technology, the effect is less prominent – although still clearly and demonstrably present.
IAM summarizes it this way:
In fact, according to the metrics applied by IP Vision, 86% of the VC-backed winners (ie, companies that are acquired or go to an IPO) they identified had strong as opposed to typical intellectual property assessments. In other words, while a healthy IP position may not guarantee that a start-up technology company is going to be successful, it is going to find it a whole lot harder to succeed if it does not have one. And ,crucially, it is not just ownership of IP that is important, it is understanding the IP that is key.
The article also explains
[A] healthy IP position may not guarantee that a start-up technology company is going to be successful, it is going to find it a whole lot harder to succeed if it does not have one. And,crucially, it is not just ownership of IP that is important, it is understanding the IP that is key.
If you want to learn how to create strong intellectual property portfolio see my post IP Strategy Document That Amazes Investors .
According to Nathan Myhrvold, invention is set to become the next software. Nathan Myhrvold is the head of Intellectual Ventures, an invention capital firm. Myhrvold states:
I believe that invention is set to become the next software: a high-value asset that will serve as the foundation for new business models, liquid markets, and investment strategies. The surprising success Intellectual Ventures has had over the past 10 years convinces me that, like software, the business of invention would function better if it were separated from manufacturing and developed on its own by a strong capital market that funded and monetized inventions.
He believes that we significantly under invest in inventions. Inventions are generally funded under a charity model according to Myhrvold.
Rather than relying on the charity model and its overdependence on government-sponsored research, we should be looking for ways to harness the tremendous financial power of the private sector to fund invention. Consider this: Inflation-adjusted federal spending on academic research rose by 60% from 1983 to 2007. Meanwhile, investments in the business sector by the U.S. venture capital and private equity industries soared by 1,140% and 1,940%, respectively. The total $1.6 trillion (in 2008 dollars) invested by venture capital and private equity firms in this period is three times the $537 billion that the U.S. government spent on academic research.
In his article in the Harvard Business Review, he states that patents are not given the respect they deserve. For instance,
In affluent nations, product companies too often see inventors and other patent holders as adversaries, and vice versa. 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.
Interestingly, Intellectual Ventures obtains a significant number of patents from individual inventors.
One significant source of patents is the archetypal solo inventor. Many such inventors have no interest in writing a business plan or building a company; they prefer to just hand off their invention to a licensee and move on to the next great idea. Investment firms like ours spare them the work of tracking down and negotiating with lots of potential licensees separately, and we can almost always give them a fairer deal. We’ve paid about $315 million so far to individual inventors, making us one of their largest sources of new capital.
This is additional evidence that Congress needs to make sure that our patent laws are friendly to individual inventors. Congress is considering changing our patent laws so that they are less friendly to individual inventors, by converting our patent system from a first to invent system to a first to file system, weakening the penalties associated with stealing other people’s patented technology, and requiring all patent applications to be published at 18 months.
As the US moves from a manufacturing economy to a knowledge economy more people will be involved in the business of inventing. We need strong patent laws and an efficient Patent Office to facilitate this transition. We also need entrepreneurs, like Mr. Myhrvold, to create an efficient market in patents. Many people do not remember that before title companies, buying real property required expensive title searches and determining the boundaries of your land was expensive and uncertain. In the 1800s lawsuits over title and land boundaries were extremely common. No one suggested that we should not have real property rights in the 1800s because of these problems. The same evolution will occur with respect to patents, if we allow the market to work and maintain strong patent laws.
This book explores the business strategies of patents in the context of Microsoft’s attempt to remake its image this decade. The authors of the book are Marshall Phelps, the architect of IBM’s successful patent licensing program, and David Kline, the author of Rembrandts in the Attic – the standard against which all books on patent business strategy are measured.
The book describes how Microsoft used its patent portfolio to build relationships with its customers, like Toshiba. The vehicle for it to accomplish this goal was patent cross licensing deals. However, before Microsoft could make any progress in these deals they had to drop their non-assertion of patents clause. Microsoft had invented this clause in order to compensate for their weak patent portfolio in the 90s.
There have been numerous articles and blog posts on the death of the venture capital model. Only six companies that were venture capital backed went public in 2008, the lowest number since 1970. There were also very few acquisitions of venture backed companies. As a result, many venture capital firms are likely to disappear in the next couple of years.
Historically, venture capital funds have invested in a limited number of companies and taken an active part in the oversight of the companies. Sarbanes Oxley and the likelihood of more financial regulation threaten the ability of start-up companies to go public. Without a robust IPO market, it is unlikely that M&A activity will result in strong valuations. Additionally, many IT start-up companies have low capital requirements and can forego traditional venture capital investments.
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