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.

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.

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/

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 .

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.

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.

Microsoft also used its patent portfolio to repair its image with the Venture Capital industry. This required opening up Microsoft’s patent portfolio for licensing by start-ups, something it had been unwilling to do. Patents and the associated technology that were not being actively used were could now be licensed by start-up companies. This initiative became Microsoft’s de facto venture arm. The book explores numerous ways to use a patent portfolio beyond the standard, license for revenue or as a barrier to entry.

Beyond this the book explores the importance of patents to both companies and countries. The book states,

In every country studies-whether rich or poor-economists have found that it is not capital resources or infrastructure or education, but rather the strength of a country’s intellectual property system, that is the primary spur to technological development and economic growth.

Unfortunately, Washington does not seem to be listening. Politicians and many economists are either proposing spending to pursue consumption or strengthening our banking system to spur capital formation. No one is proposing strengthening our patent system which has been severely weakened in the last decade. For more information see Intellectual Property Socialism.

There have been numerous articles and blog posts on the death of the venture capital model.[1] 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.[2] 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.

In order for venture capital to survive it needs new models.  The VC community has generally considered intellectual property an important part of good management, but has generally not considered it key to a company’s value proposition.  Generally, the attitude of VCs has been that first mover advantage is more important than the company’s patent portfolio – the most important part of a start-ups intellectual property.  One of the most startling examples illustrating the fallacy of the first mover advantage is Xerox.  Xerox spent millions of dollars and over a decade to perfect the plain paper copier.  They held numerous patents on the technology that made plain paper copiers possible.  In 1975 when Xerox agreed to the FTC antitrust consent decree to license their patents to all comers for a pittance, they had almost a 100% market share in plain paper copiers – a huge first mover advantage.  Just four years later, their market share was down to 14%.

The “so-called” patent trolls were built on the patent portfolios of failed venture capital companies.  NTP (New Technologies Products) is a patent holding company that was built on the patent portfolio of Telefind.  Telefind was paging company founded in 1986 and held a number of patents on transmitting wireless messages.  NTP continued developing patents and technology related to wireless messages and in 2006 received $600 million award from RIM for violating its patents.

Then there is the case of Mostek.  Mostek was founded in 1969 by former Texas Instruments engineers and had 85% of the Dynamic Random Access memory market in the late 1980’s.  SGS-Thompson bought out a struggling Mostek in 1985 for $71 Million. By 1992, Thompson had received over $450 million in licensing royalties from Mostek’s patent portfolio.

These examples vividly illustrate the value of intellectual property that has not generally been recognized by the venture capital industry.  This neglect has included not placing enough resources and emphasis on developing client companies’ patent portfolios.  Based on this it is likely that there is substantially more value to be gleaned from the patent portfolios of start-up companies.

A venture capital fund or IP merchant bank focused exclusively on funding and creating patent portfolios for seed stage companies could obtain superior returns.  In order to spread out the risk this IPVC fund would invest in as many as 100 companies.  The fund would focus on a narrow range of technologies in order to build up a portfolio of patents.

An investment would include the funding to analyze the patent market space the company competes in and helping the company develop a superior patent portfolio.  For more information on the specifics of this service see IP Strategy That Amazes Investors. (http://hallingblog.com/2009/10/05/ip-strategy-document-that-amazes-investors/)  Companies funded by an IPVC would significantly increase their chances of receiving follow on funding.

The IPVC fund would receive a security interest in the patents, certain licensing rights in the patents and convertible debt.  The secured interest would ensure that the IPVC could exploit the patent portfolio of any company that failed.  The licensing rights would allow the IPVC to license any issued patents to non-competing entities.  The IPVC would receive a potion of the licensing revenue.  The convertible debt would be convertible upon an IPO or merger and would extinguish the security interest in the patents of the company.

An IPVC firm as outlined above would need expertise in licensing in order to fulfill its promise.  It is my estimate that 70% of the returns for such a fund would be based on licensing revenue and 30% of the returns would be the result of normal exit strategies.  By investing in a narrow range of technologies the firm can increase the size and quality of it portfolio.

A variation of the present idea is to allow limited cross licensing among portfolio companies.  The client companies must pay fair market value for the licenses, but outright blocking of another client company would not be allowed.  This would increase the value of being a client company for both the technology creator and the technology leasing companies.

This model would be a particularly good fit for Universities.  An IPVC firm associated with several Universities would increase technology transfer and increase licensing revenue.

Finally, an investment firm along the lines outlined above is consistent with modern economic theory.  Schumpter, Solow, Romer and other economists have shown that innovation is the only way in which per capita income growth is possible.  Having legal title to innovation is the only method to capitalize or collateralize  innovation.  The hunter gather age was followed by agricultural age, which was followed by the manufacturing age.  The future is the information age.  An IPVC (merchant bank, private equity fund, etc) is on the side of economics and history.