Should secondaries be the primary comparison?

In the last couple of months there have been some marvelous IPOs and acquisitions happening in the technology space. Facebook’s likely IPO is the elephant in the room but in the meantime there have been some shockwaves with, for example; LinkedIn and Skype.

Secondaries surging !

This has lead to a surge in the secondary trade (i.e. non-public trade between shareholders) of Groupon, Zynga and Facebook equity. Directly this has lead to discussions of regulations and complaints about “opaque markets”, overvaluation etc. I was also lucky enough to attend a number of talks in London over the last weeks, with VCs discussing these and similar issues. One thing I really embraced was the notion of how scarce this type of equity is and thus might merit a higher price.

So what has this got to do with IP? Well to me the same reasoning rings very true for IP and especially investing in IP. Valuation of IP receives a lot of complaints from many people (accountants and academia to mention some) and is seen as something opaque and in need of regulation. There have been many ( more or less unsuccessful) attempts at making the market transparent (e.g. Ocean Tomo, , IP-X, IPXI, Yet2) but nothing has become a de facto standard.

IP Secondaries surging !?

Regardless of this, a large number of IP transactions take place every year (for example Apple/Freescale, Microsoft/Novell, HTC/ADC or of course the never ending Nortel)showing that even without a primary market, the secondary market will give plenty of exit opportunities. The key, however, is that the assets must be of good quality and/or strategic – just as with the equity mentioned above (or have a missed a surge in secondary trading of Lunarstorm or Friendster?)

Then there’s also a constantly growing number of venture/PE backed IP vechicles being set up (how many of you have heard of Juridica, Digitude, IPGest, ?). And of course also some very large vechicles attracting large sums of venture money like Round Rock and RPX. And if that’s not enough, you should really take a look at IV’s investors , if that’s not the cream of the crop, then I don’t know what is and somehow they were able to be convinced to invest without public prospectuses.

So I guess my point is that comparing IP with something transparent and established like the stock market with extremely liquid trading and instant pricing models might not do IP justice. But instead comparing it to the “mysterious” market of secondary investment, where exits are fewer and larger as well as investments being not for everyone but instead for the seasoned players understanding the market.

Based on this I’m actually very interested in two upcoming workshops at CIP Forum next week, where large portfolio transactions and the possibility of a European IP market will be debated. Maybe they will prove me wrong..

Marcus Malek

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Stimulus Package IP: Health IT part 1 - the new standard wars?

In the ever debated and updated stimulus plan there is a fair chunk (or equivalent to 27 % of AIG quarterly loss) of 17 billion USD for Health-IT. Read a great summary of the Helth IT implications here and find more info from initiatives here and here. Health IT in a broad sense is using IT to provide better and cheaper healthcare. In this sense it is focused on electronic medical records (EMR), earmarking 17 million in payments for hospitals and practitioners who implement it and also 2 billion for infrastrucure, admin and standardization. Timeframe is also of the essence, standards shall be set by the end of this year and payments will start in 2011.

I intend this to be a series I come back to as I find it interesting for many reasons, here are a few:
1) In my mind it is a great initiative - just imagine having all that data and using algorithms to compare MD's thoughts
2) Interesting to see how governement handles standard setting in just 9 months.
3) There is a provision that an open source initiative must be investigated.
4) Two very interesting and in many ways opposite players, Google and Microsoft, have already started working on this
5) It is a hot topic as it is very much intertwined with ethics, data protection and privacy

Before starting of, I wish to say that I am no expert in EMRs so comments are very welcome and I look forward to learning from them AND updating the series with good thoughts / ideas. I honestly think this is one of the most intertwined tech/legal/business/ethics/IP/standards issues of today.

Part 1 - The new standard wars?
The first thing that brought my attention was the fact that standardization plays such a crucial role in this and also that the government is the one pulling the strings. As this is no new field there is lot of IP already out there and also lot of unconnected systems. This leave to rather large questions regarding standards: "what" and "how". At time of writing I have yet not heard of a czar or some concrete measures being done, but I see endless possibilities for how this can be solved - let me share som toughts on scenarios.

How to set the standard:
* Patent pool with free access
Governmental control of IP through acquisition of key patents related to largest / fastest / best system and then labellig that as the standard and through monetary incentives make it the prevailing one. Could (should) grant free access to the patents and also has funds to do so. Likely subject to heavy lobbying activity prior to choice and thus could suffer critique and in worst case low market penetration.
* Standards Organization
There is nothing ruling out the formation of an "ordinary" standards agency like in many other fields. Relying on market powers, corproate negotiations and wealth redistribution to settle the issues. Risks are of course royalty stacking and an immediate 17 bililion dollar mark-up on total revenues generated until end of stimulus package

What to standardize:
* The whole nine yards
Just choosing one EMR option and then once again using monetary incentives to make in prevail. In theory (as always) this is easy, but in practice some MDs want one kind, some the other, some want voice control, some touch screen interfaces etc. etc. This could be full of criticism as the penalties for not adopting the systems are likely not as high as the pain and frustration for practitioners to us a system they dislike.
*Software
Scalable and quick model, but with less IP possibilities. I would draw the analogy to having all EMR's report in one certain file type so that all data would be imported in one large database (n.b. I'm no computer scientist). I'm also assuming that with software only, there are many privacy issues to consider.
* Interface
Safe but expensive, time consuming and full of interoperability problems. In my mind, given a longer time frame, it could be a safe way to develop a new interface only for EMRs, but in todays wireless world and it's encumberances that could be a monumental task.

Another interesting thought would be if whatever system is chosen then turns into a lawsuit (patent or copyright), which also needs some careful thought. Would the government be ready to tackle trolls or are they more keen on just developing an SOP and suddenly having the EMR market boom only to realize it is totally encumbered.
One final thought, with the blu-ray wars in mind, meaning that blu-ray community was so keen on winning just to make sure. their hardware would be in everyone's home with an ethernet port once we all start downloading movies. One could hope that whoever makes these decisions also thinks one step ahead and try to figure out what long term effects there are of digitising healthcare and having that data, not only focusing on choosing the short term solution best fitting the public opinion.

Marcus Malek
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A tax we want? - the success of trolls, trolls 2.0 and why we perhaps want to keep it this way.

Recently Fred Wilson twittered and blogged, at his always interesting VC blog, about his opinion on patent trolls. He said: "Just in case you didn't know how I feel: patent trolls are a tax on innovation and are evil of the highest order"

After that there was a wonderful set of comments on the same blogpost (I encourage to read them) and two linked post found here, and here. The latter by the CEO of the Fred's portfolio companies that were infringed. Fred's expression, comments on his blog/twitterfeed among other things inspired me to write this post (which in hinsight is quite lenghty). I think that looking at NPE litigation as a tax could be a proper and viable way and actually one we should embrace. However there are many open ended issues to such a statement, so I'll try to elaborate on some of them and encourage people to contribute their view on this subject which has so many approaches and, as far as I know, no one correct answer.

A game in three arenas
In order to clearly describe what I think about this I want to look at the innovation processes as part of three arenas. The first being technology, which is all about research and free from patents and money (other than funding the research) and focuses on delivering new inventions, with a die hard race to be claimed as the first inventor. Then there is the second arena, which is the legal arena. In this arena inventors or corporations choose if and how to protect the invention, which is much more complex then binary patent/no patent. Think in terms of patent type, claim type, portfolio strategy, geography, aim of patent (e.g. standard, x-license, ensure free use) and this arena becomes just as complex as thinking of 100 researchers sequencing genes. Thirdly there is the commercialization arena, where corporations exploit these innovations and/or patents for profit through means of products, licensing schemes, services, litigation etc.

It's only business !?
NPE litigation is, in my mind, mainly in the commercial arena, which is also why it attracts so much attention and critique from people. I believe companies/managers get more upset that they might lose money (i.e. make less) rather than actually not being the rightful inventors of a technology. Along those lines I could see NPE litigation as a tax on commercialization, but not on innovation.

My maths would say that if there was a player that would purchase all garage inventors and "few-man" companies' patents - they would churn out much more patents. As this is, in small scale, what some NPE's are doing - one could argue they are creating more innovation (which is also often IV's main claim when interviewed). Naturally this logic has its' flaws as it equals more patents with more innovation and takes no consideration of innovative leap etc. One could also see companies responding and saying that the money spent on litigation would in fact be reinvested in R&D, which is really hard to judge.

My personal opinion is that for large corporations this is much more determined by other factors, in smaller companies (e.g. like Fred's example which spent 10% of VC round on litigation) it could actually be the case. However, statistics show that almost 40% of all NPE litigation 2004-2008 was with only 20 companies (accounting for 534 cases). Without double-checking I would bet a lot on all of them being Fortune 100 companies. The point I want to make is that the first and foremost targets are non-surprisingly large corporations.

Then how about innovation and all the effort put in there?
I am pro innovation in all forms and want nothing more than for new and exciting start-ups to grow and change the way we see the world. But I think we must draw the line between innovation, products and patents ( a brilliant and frequently re-tweeted example is given by Jackie Hutter, here). In the world we live in today, it is very hard to really be sure that you are the first to invent something and unfortunately a patent is no proof of that. Statistics show us that since 2000, 15 patents have made up for 1375 lawsuits with over 16000 possible parties involved. Interestingly the top 8 litigated patents only have 3 different titles and are all within telecom. Now these lawsuits are not NPE lawsuits, but all patent lawsuits since 2000.a
The point I want to make is that statistics show us the difficulty and very contextual and interpretation based nature of patents, especially in a litigation setting.

Tying things together - with an "arbitrage opporunity"
What I want to show is that it is very hard to judge the outcome of a lawsuit but also to know whether a product actually reads on a patent- bearing in mind those 97 lawsuits for a single patent. Out of this there has rissen a large amount of companies that see this as an arbitrage opportunity by acquiring patents and then finding products that read on patents and settling for an amount equaling costs of a lawsuit with the defendant. The most litiguous actor, Acacia, has filed approximately 250 lawsuits since 2003, this equals 42 lawsuits per year. In contrast, they signed 60 new licensing agreements in the first 9 months of 2008, in 2007 that same amount was 69 (source: EDGAR). Without further research it gives an estimate of their success rate, which accounted for $30 million $40 milion respectively those years.

Just taking a guess, I would say a majority are settlements. I think this could take place based on certain criteria. Firstly, Acacias patent portfolio (493 as of 1/1 2009) consists of patents that are either key inventions (success in techniological arena) or written in a way that suits litigation, e.g. broad (success in legal arena - for this purpose). Secondly and in relation to Acacias patents, the defendants have products which might read on said patents. The key here is the word might. Because, this would never be sure until proven in court (which also can be appealed) and it could also be the case that regardless of commercial success, user friendliness or anything like that, the companies product and surrounding patents perhaps just are not the same thing (similar to Jackie Hutter's example mentioned above). All in all, the companies are not willing to pay to prove that they have adequate patents, neither do the want to go to court and lose and perhaps be senteced to damages or even willful infringement. This usually results in settlements where companies agree to an Acacia license and perhaps also a down payment. Which then would lower the defendants margins on the affected product.

Trolls 2.0 - firing the legal guns
With NPE settlements being mainly in the commercial arena, I would like to attract some attention to another way of litigating - invalidating patents. Now this would be something that I, as a manager or c-level executive, would be really afraid of. Just as there are very many patents out there, there are also almost always two or three companies delivering the same type of product service, i.e. there is competition. While an action from a troll is all about getting paid a share of product revenues by the defendant, we could well se a surge in action by competitiors being all about taking all of the defendants customers. Just as it is possible for NPEs to track down profitable companies, target products and map portfolios based on public data, it's also possible to use the power of crowdsourcing to find relevant prior art. Three recent example of that are Article One Partners , the USPTO' peer-to-patent and the recent "save red hat movement".
Imagine receving notice that your competitor claims your patent(s) to be invalid and has 20 scientific articles to prove it. Now you could potentially risk much more than paying up to a troll. Imagine popular companies with a dedicated fan-base starting to use this, especially in the overcrowded telecom, hardware and software space, and just to save the company they like or a product they use often 10 000 savvy people would spend 2 hours each trying to find prior art and all of a sudden you have the workload equivalent of 10 full time employees working one year done in almost an instant.

2.0 Lawsuits - adding another 0 to the costs
Just as a reference one could think of all those extremely costly lawsuits we have seen. RIM with their $600 million, Medtronic with their $1.35 billion. Well I don't the how reasonable such figures are, but they occur. And as soon as the other party uses the legal and perhaps even technical arena to fight you - you will pay big if you lose. There is a big new initiative started by MAPP where they try to get president Obama engaged in capping damages in patent lawsuits.

Ending thoughts - maybe people should embrace the tax?
What I wanted to show with this blogpost was that the patent system is overloaded and there are so many patents out there in certain fields that they are litigated over and over. Tying that together with the cost of litigation, the NPE licensing deal has become a proven model, with acacias succes as one example.
With all the uncertainty in the patent system I honestly believe that some NPEs actually are rightful owners of some technologies that their licensees incorporate in products.
What I also wanted to say that based on this uncertainty and the new movements of crowdsourcing to reach invalidation, corporations should perhaps look at trolls as tax on commercialization, purely in business terms. And instead be afraid of their new and improved competitors - using the legal and technical arena to put them entirely out of business or if challanged ending up in multi million dollar lawsuits with a very fierce and savvy (based on all crowsourcing) competitor that perhaps could make you wish it would only have been the "good old troll 1.o"

Marcus Malek

The IP Store?

During the recent weeks there has been heavy posting in the blogosphere regarding new breeds of IP companies, where RPX (covered here and here) perhaps have gotten most attention, with their interesting business model of being an anti-NPE. Also seeing much attention is two even more interesting breeds; Article One Partners ( covered here) and its open source cousin Open Invention Network (again covered by Securing Innovaton, here).
There is however more commotion in related fields like patent valuation, where the search for the golden standards still goes on (e.g. here ) and another conceptual thought on the subject here.
Yet another interesting new breed of service is launched by Stanford (discussed here) where IP related data will be public. Last but not least, the FTC hearings some time ago, both parties (Intellectual Ventures vs. "rest of the world") agreed that more data is something they all would like to see.
These recent postings have lead me into thinking what an IP marketplace could look like.

What is an efficient IP market?
I would believe that many people want to look at the IP market the way we have looked at every other marketplace the last half century or so. Now pursuing a thesis within Patent Valuation I can also conclude that academics sometime try and fit a square peg in a round hole with applying classical financial theories to an IP setting. The most striking being that not even all authors are clear on what a patent actually is and many also dive head into the logic of patents=products. Whether you are pro or con NPEs they at least crush that myth with their business model. Looking at a (IP) market with the view that it is a means of generating revenue elsewhere (i.e. products or services), then it is not difficult to see how people are working hard to closing the NPEs "loophole".

This has me thinking, how would this be handled, would you have to be a producing company to be able to litigate or perhaps wider use of cross licenses as damages or perhaps just less damages could be solutions. Anyhow - these are all complex and strive towards "fixing" an existing loophole. Arguments are often that litigation intensity and cost have people running away from patents and keeping things secret instead. I sometimes wonder if perhaps more effort should be put into building a new marketplace suited for IP rather than trying to jam IP into the existing product market.

What if all would change and instead of buying and selling patents, companies get more savvy and leverage licensing schemes instead and remaining the owner of the patent, thus not giving NPEs enforcement options. Now I know there are inherent flaws with this, where the biggest perhaps is the difficulties to match two parties. This is why I am so glad that the "big fish" seem united in thinking that more data is needed and I am also really exited about the new Stanford service. A part from those progresses I still believe that much can be done by just trying to build such a (or any other) marketplace from scratch and having legislators set the norms proactively rather than obtaining a large backlog and reacting to whatever loopholes people find. Just look at the way Apple constantly set the norms by setting up marketplaces like Itunesstore and Appstore.
So question is - is there a Steve Jobs in any PTO?

RE: Abbreviated Pathways to drug development

I would just like to add some thoughts, on the money side of things, regarding Tobias' interesting thougts. As pharma is a huge ecosystem changes wont come suddenly and definately not without a noticable fight! Below I put down my thoughts on the situation, although perhaps not entirely correlated.

Sharing is caring - also in pharma ?
Almost everyone is writing about pharma collaborations with academia and how that will generate openness, speed and lower costs. Just having researchers work together and streamlining NDA's and disclosure policies lowers transaction costs for development. My question is if (when?) some BigPharmas will take it one step further and come togehter and own entire universities, paying for tuition in exhange for all research results.

I'm envisioning special purpose, e.g. gastrointestinal, (PhD) universities. These would paid for entirely by e.g. 4 bigPharma companies and would give scholars a PhD degree and the companies lots of input. My idea is that BigPharmas would focusing on getting more brainpower rather than the a selected few. Also that they would start sharing the most valuable substances that are discovered. Simple maths show that a blockbuster is needed to make up R&D costs of all non-profitable drugs, especially now when "only" the western world is buying drugs.
But what if the hit/miss ratio of drugs get's improved, by sharing knowledge and goals in the universities I envision, maybe sharing expense/income on blockbusters would be enough. And also - costs need to be cut when India and China catch on.
The natural concern for this would be on the competition-law side, as I can envision a good 'ol gentlemans agreement when dividing the markets.

Generica deteriorating Pharma innovation ?
A recent ruling in California (well commented here and here) basically says that Pharma companies are liable for side effects etc. caused by generica using the same substance.
To me the situation becomes quite perverse as generica companies would operate on a totally risk free basis if they would also be excluded from litigation. In relation to Tobias' post even shorter times before generica becomes available could turn into an interesting pricing situation.
Firstly - shorter times mean shorter times for ROI on drugs. As R&D costs likely won't drop substantially, by all laws of finance a price increase is to be expected.
Secondly - if big Pharma are liable for damages caused by the substance as such rather than the drug, this would either result in an increase of litigation costs or large insurance policies (if someone is willing to write one in these days). It would likely impose a cost on BigPharma.

Bottom line - costs go up for patients/consumers. That could create a very interesting marketplace for drugs. The high price means makes it analogous to drilling for oil in remote locations. If the price is high enough it would mean that more players could find the market feasible. I see that this could have any of the following implicatons:

1) A surge in pharma R&D as a blockbuster with the new high price could mean even higher revenues. Perhaps smaller VC-funded labs could be the way to go as splitting that large revenue could be enough to see ear-marked VC funding for drugs.
2) A more dismal scenario would be a standstill in the innovation and patenting pipeline as fewer actors would see the financial benefit.
3) Forum shopping for lower R&D costs, i.e. pharma development follows the path of heavy industry and moves production and research to remote locations.

The big question is really - when will pharma markets as we know them change?

Marcus Malek

Thoughts on building an IP marketplace

In light of recent Ocean Tomo success and the ever growing interest in IP and intangibles (especially as it makes out 80 percent of market cap.. or what did Pat say ;) ) there are many ideas floating around and lot of effort put into thinking about an IP-marketplace. This will be a first post of hopefully many as I will try to focus on the financial / transactional side of IA / IP.

One could go on in eternity regarding the contextual nature of IP valuation and whether accounting principles are up to date - but that is not my intent. In this post I'm thinking about the actual markets. In light of CDOs I won't debate the future existance of securitzed IP to generate leverage - that is bound to happen. What I am interested in is governance, transparancy and liquidity.

First of all I would like to tip my hat to Ocean Tomo - true pioneers and deserve all appraisal. But what if (or when?) success (i.e. hight returns) leads to competition (as market theory has shown) and we all of a sudden have multiple OT's where some only take 8% of the cut and others 7% etc. Where would the buyers and sellers want to be?

How would markets attract both buyers and sellers if they require physical presence?
Would it be entirely online-based with a search function for all markets?
Would biotech complexity always be handled at high end 10% marketplaces with nice prospectuses?
Will we see an overall "garage sale effect"? (i.e. steep fall in percentage of lots sold as companies would try to sell all kinds of "crap" IP - perhaps to boost liquidity in light of the turmoil).

I personally trust market forces on this one out. But wait a minute - there might be a regulatory issue overruling it all as Ocean Tomo have some interesting pending applications.
As interesting they are on their own I see the following two key issues:
1) How will the infamous Bilski ruling affect these applications
2) If granted - will OT go open (á lá DNA), closed or somewhere in between?

Interestingly, they are not alone in this field. Wonder how Bilski influences this one?

Finally, some food for thought. It could be an interesting system if:
1) All corporations understand the potential in leveraging IP (i.e. not only as a legal necessity)
2) IP markets start growing
But the markets and securitization are privately owned (and governed ?) and you have to pay a royalty for calculating a value on IP you want to acquire.

Please share your thoughts on where the "IP market" ship is heading.
All aboard !?

Marcus Malek