Writer - Gastautor - Gast Schrijver
About IP Investment Strategy in Nanotechnology
of VC funds, such as Nanotech Capital LLC, have implemented
an intellectual property (IP) investment strategy recently
for nanotechnology. A typical IP investment strategy is
buying up IP or patent or licensing rights to some well
known university or even some lesser known university. Often
it is done in a carpet-bombing approach where a whole slew
of IP is included in the portfolio being purchased without
regard to what it is. This is not all that different than
the carpet-bomb approach of some VC’s trying to invest in
the nanotech space because they don’t understand it.
Firms are throwing millions of dollars at university IP
portfolios without regard to what is actually in the portfolio.
Are we seeing another lemming investment strategy that will
take us to another nanotech bubble bursting because they
are ill-informed and believe nanotech is still so far off
for ROI that only IP is available? The average person still
believes that nanotech only exists as IP and not product.
There is plenty of evidence in the commercial markets that
counters that. The internet is a very valuable research
tool for nanotech information if someone wants to take the
time to do their due diligence.
How many of these patents will actually be so tightly written
and reap such rewards that claiming a piece of the profits
from it will be worth it? Is this piece of the action going
to generate the returns necessary to make those millions
spent worthwhile? What type of IP are they investing in?
How many successful IP investment strategies have happened
before that makes this a proven strategy?
Patents are a defensive tactic to protect and defend yourself
from those who want to steal your valuable idea, valuable
meaning making money. In the past, patent infringement cases
usually revolve around a specific technology or process
already making money being copied by another company. It
is not supposed to be used in an offensive strategy.
However, IP is certainly valuable. In certain situations,
an entrepreneur can secure financing using their IP as asset
collateral. In most cases, that IP has to have proven to
generate revenues. Of course, if that is the case, you can
also get financing backed by the collateral of your purchase
orders (PO’s). IP is important but it is not the driver
for making money. Product is what actually sells and brings
in revenues, not IP. IP supports the product. Not all IP
will or should end up in product but should IP be the product?
Unless it’s a process that is already producing money, that
IP may very well be worth little.
Do the VC’s who are investing in IP actually know what’s
in the portfolio? Would they know it well enough to know
when there is a new technology that has infringed upon a
patent? Blanket buying of university IP portfolios is like
going to a garage sale and buying all its contents in the
house because you don’t have time to pick through all the
stuff but you like the previous owners. You thought they
were great people so they must have great stuff, right?
Well, then you find that along with the nice stuff, you
bought all the useless stuff hidden in the attic as well
and you have no idea what it all is.
In a Feb 2003 article in Small Times, Edward K. Moran, Director
of Product Innovation for Deloitte & Touche’s technology
consulting practice and leader of its nanotechnology practice,
is quoted as saying "Whenever I run into a entrepreneur
or company that's overfascinated with intellectual property
(IP), it kind of raises the red flag for me."… "And
if someone is saying, 'I've got a couple of pieces of IP
that give me a competitive advantage or lock up some important
competitive advantage,' that's what I call 'Islands of IP'."
In that same article, “In most cases, unless a deep-pocketed
development, manufacturing or venture capital partner is
willing to put the time and money into turning that IP into
a real product that exhibits demonstrable, mass-production-friendly
manufacturing processes, the long-term prospects for most
of these companies are not very good,” said James Tully,
Gartner's chief analyst specializing in IP issues for the
company's Semiconductor Group. “This doesn't mean these
companies will necessarily fail outright, but dreams of
small tech glory and riches may one day be replaced by a
licensing deal or buyout to pay off creditors” said Tully…
“Based on the lessons of startup history, this is where
most companies will end up.” I must agree here.
However, in an April 2004 article in Chemical and Engineering
News, Ed Moran is quoted as saying “Those buying nanotechnology
IP have an opportunity not unlike getting into electricity
or the automobile industry early and locking up patents”…“there’s
going to be unimaginable innovation [based on] these early
discoveries. If you can claim a piece of that action going
forward, that’s good from an IP standpoint.” He is also
quoted here as saying “A lot of nanotechnology companies
are going out and locking up these little islands of intellectual
property,”…“They grab a couple of promising but limited
patents in a given area, and then they figure that they
are ready to take in financing. Unfortunately, nanotech
is so new and evolving so quickly that it is very difficult
to lay bets on whether a little sliver of technology is
ever going to turn into a commercial product.”
These quotes are confusing and somewhat contradictory in
their position on IP. I am still not exactly sure what “Islands
of IP” are and if it’s a good or bad thing unless they happen
to be the “right islands of IP” are but I expect Deloitte
& Touche offers IP consulting services. Note also, there
are a lot of people offering IP services in that article.
Ed Moran says, “But for now, companies seem to want to avoid
fighting over patent turf even though they might have grounds
to do so.”…”There’s not a lot of litigation going on yet
in nanotechnology, which is curious, because it’s not difficult
to find examples of one company’s IP bleeding into another’s.”
There are some answers provided in that article as to why
no one is litigating now but it is actually not so complicated
and quite simple. Why should they litigate now? It’s expensive
to sue. The reason someone sues someone is to recoup damages
and make some money from someone who has money. Why spend
time litigating things that are not making money yet? It
is akin to suing someone who has no money yet. What an awful
waste of time and resources.
This is obviously a very long term investment strategy because
you have to wait until a patent actually makes a significant
amount of money, then someone sues someone else to reap
the benefits from it and you have to wait until it goes
through the court system for a decision and the money comes
in. And in the court system, the decision typically rests
with people who do not understand the technology and must
depend on interpreting the wording in the patent.
Patenting IP is expensive and the potential for return is
unclear. Often you also have to pay for international patents
to be well covered. For a startup company bootstrapping
their operations, this may or may not be a good use for
scarce resources at the moment. It might be more useful
to wait until success is looking more promising before investing
in the patents. At least they would have a better idea of
what looks like is going to succeed.
Getting around a patent is not that difficult. How to word
a patent is extremely important. If a technology is only
slightly different, that could negate the applicability
and validity of the patent. They are hard and expensive
to defend because it often comes down to interpretation
of the patent. How the patents are written becomes critical
to an IP strategy.
Perhaps it is easier to just keeping your technology a secret
versus risking reverse engineering or stolen by being in
the public domain. Coca Cola does it. They don’t have to
worry about patents expiring or international companies
or countries who don’t honor the international patent laws
coming in to steal their secrets. I don’t think anyone is
going to say Coca Cola doesn’t know what they’re doing.
However, you have to know how to keep a secret.
In the meantime, it is a great way for universities to sell
off what’s in their IP attic and generate income from sunk
costs and position some university tech transfer guy for
a promotion. What is to stop a university from only offering
the stuff in the attic and keeping the more promising IP
for itself? Some IP investment strategies try to overcome
this problem by buying rights to IP from a whole university
department such as Chemistry. However, nanotechnology is
so broad, there may be more than one department one can
classify a certain patent. What about a patent that can
be categorized under both Chemistry and Electrical Engineering?
This is not as far-fetched as some may think as it is already
I would caution against investing mainly in IP. An IP portfolio
investment strategy can sound a lot more complicated in
implementation than it sounds. An IP investment strategy
is certainly very creative and sounds very simple to begin
with but very high risk and very long term. There may be
more interesting stuff coming down the pipeline and if you’ve
tied up your investment capital on some long shots, it’s
probably time to diversify your nanotech investment portfolio
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