Intellectual Ventures: A massive patent pyramid scheme?

Techdirt goes into depth on ex-Microsoft executive Nathan Myhrvold's Intellectual Ventures, adding a slew of new reasons to consider the patent-hoarding company the ultimate in creepiness. Intellectual Ventures is out on the fund-raising trail (again - it just raised $1 billion in late 2007), despite the fact that it appears to have demonstrated little ability to generate cash for anyone other than Myhrvold, even despite his amassed 20,000 patents.

I'm not a fan of any patent troll, but the manner in which Intellectual Ventures spends and raises money takes the practice to new lows. Indeed, the Seattle Post-Intelligencer says it's not unreasonable to label Intellectual Ventures as a "giant pyramid scheme and a protection racket". Techdirt explains:

Another oddity is the vast amount of secrecy surrounding Intellectual Ventures. Anyone who sells a patent to the company or who licenses patents from the company are required to sign extensive non-disclosure agreements. When asked why, Myhrvold skirts the question by claiming many companies don't want to reveal what they're doing with IV. If that's true, though, why do they need NDAs in the first place? The company also uses an array of secret shell companies to go around buying patents, again raising questions about what it's doing. If the company is really so proud of its business model and doesn't think it's shameful, why is it hiding behind shell companies like garden variety patent hoarders. But, as we've learned, patent hoarders very much rely on secrecy to convince others to pay up.

Cisco and others have coughed up hundreds of millions of dollars to Intellectual Ventures, and have taken some steps to try to combat the company and its ilk. It's a nice gesture, but Myhrvold and his investors apparently bring too much cash to the table, earning Intellectual Ventures the dubious distinction of being the world's largest patent troll.

Myhrvold, of course, begs to differ, claiming that he's all about getting a fair return on innovation. Whatever. Most companies that innovate sell products. Intellectual Ventures sells the fear that one's home-grown products may earn a lawsuit.

Myhrvold? Well, according to the Wall Street Journal, his primary argument seems to be "everyone is doing it." I don't find this argument persuasive when my kids use it. I'd find it even less so if I discovered they were organizing protection rackets on the playground. It's shameful.

[daverosenberg]

IV also has multiple early stage funds that are geared toward research. That article was a little bit biased (even for me.)

[Matt Asay]

Dave, I can't believe you're defending IV! I can't think of a worse blight on the industry. He buys patents. He then sells access to them, relying on the same FUD that smaller patent trolls do.

[daverosenberg]

Apologies--I meant to say that the WSJ article was a bit biased, not you!

IntVent may be evil but they do fund other non-patent things.

[BBNW]

This article really shows an ignorance of this type of business. The companies are paying because they get cheap access to technologies from a single source. They would otherwise have to negotiate thousands of separate licenses from every patent holder that came along, many of whom would likely resort to legal action, resulting in lawyers taking half or more of the proceeds out of the hands of the product manufacturer, the patent innovator and ultimately their stock holder's and investors. Companies participating with Mhyrvold get to benefit from the economy of scale and sharing with others who are looking for the same technologies. The companies want the freedom to operate while reducing the uncertainty of cost that comes from unpredictable patent holders. They also want to supplement their R&D efforts with technologies that were created out of their corporate boxes. This very innovative business model is likely viewed as a service by the corporate players rather than a strongarm.

This would explain why Mhyrvold has raised billions of investment dollars in several funds from many of the same players each time. If it were a scam, they would have only played ball once, not over and over again.

From a return on investment, they must also be doing quite well since they recently acknowledged they have over grown to $5B under management. They also acknowledge that many of their investors are pure financial investment players such as non-profit foundations and university endowment funds, who do enormous due diligence to insure they do not invest in scams.

Using shell companies is very common for any holding company and is routinely used by insurance companies and others like real-estate development groups, etc. You do this not for nefarious reasons, but to isolate your holdings from encumbrances on other holdings. It is no different than one not mixing their work expenses with their personal ones.

In the world of patent licenses, NDA's are not just common, they are mandatory. A corporation does not want every person who has a patent to know what they are willing to pay. Mhyrvold keeping mum about the who, what, and how much of his patent licensees is also a service to them and makes them learn to trust that he has their interests in mind.

I write all of this from personal knowledge since I worked for one of the companies that has chosen to work with Mhyrvold. We embraced the concept, got value from the relationship, and found that we happily signed up for the next round when it was offered.

This article's take on the situation does not measure up to common sense and shows that the writer has very little experience in the world of intellectual property and investments.

[spothannah]

I don't know if it helps or hurts the society, but seeing as how this is the only planet we've got and if you ruin this one we're all dead, there's just one question you have to ask yourself. Do you feel lucky? Well, punk, do you?