Richard Lloyd

There are few clearer examples of how much the monetisation landscape has changed in the US than the news earlier this week that Intellectual Ventures is to wind down its acquisitions programme. The move effectively takes one of the largest buyers of patents over the last two decades — one that has swept up tens of thousands of assets — out of the market. 

If any patent business was originally set up to succeed it was IV. It was founded by some of the smartest people in tech and licensing; it had the backing of a number of the biggest names in Silicon Valley; and it had deep pockets, with its first two funds bringing in ten figures.

It was making a bet on the long-term importance of innovation and IP, a fair wager in an economy where companies derived more and more value from their intangible assets. In 2006 IV founder Nathan Myhrvold described IP to IAM as “the fate of the US economy”, pointing out that the two were inextricably linked. “In 10 years patents will be even more important than they are now,” he said.

Instead, thanks to successive changes to the legal and regulatory climate in the US, patents have become devalued, the assertion environment has become far more inhospitable and a large aggregation business like IV has begun to look increasingly out of place. Plus, as the company’s head of licensing Cory Van Arsdale made clear in our story breaking the news, IV investors were starting to get cold feet about what is, in essence, the largest NPE in the market.   

In that sense there are some clear parallels with Rockstar, the monetisation vehicle for the former Nortel patents. While it also suffered from tough market conditions, it was clear that some of it shareholders, which included Apple, Blackberry, Ericsson, Microsoft and Sony, had also become less and less enamoured with backing an assertion vehicle when the patent message from the Valley was more and more about collaboration not confrontation. That ultimately led to the five owners selling the assets to RPX at the end of 2014.

IV is not about to disappear — as this blog pointed out on Tuesday, continuing to focus on its own innovation efforts through its labs and possible spin out companies makes a lot of sense; while from an assertion point of view, it is in many ways becoming a far more potent force, seeding its IP into a wide range of licensing vehicles as well as focusing on its own efforts. If the decision to pull out of the market was driven by investors, you have to wonder just how happy, in the long term, those backers are going to be with the prospect of more IV assets being litigated in court.

Should market conditions improve, there’s always the chance that IV will look to raise money for a new fund; but it seems unlikely that its tech investors are going to back a new round of investment any time soon – especially when the need to buy into or take a licence to large, aggregated funds has been so reduced thanks to the much more challenging environment for patent owners that now exists in the US. For financial investors, meanwhile, the “pretty good” fund performance that Van Arsdale spoke of earlier in the week does not make patent aggregation and licensing sound a particularly compelling proposition.

So we’re left with the prospect of a smaller IV, albeit one that will remain a significant player on the monetisation front and an increasingly significant one on the invention development side of things. To hear how the wider market is reacting to the news, I got in touch with a number of patent dealmakers. Here are some of their thoughts:

“While there is no dispute that the market is still recovering from its lows, we definitely see strong, more sophisticated direct activity from operating companies somewhat disintermediating the large, general purpose aggregators. Given often strong negative reaction to invitations to license from IV, in particular due to the size of their portfolio, it makes sense that smaller, more focused monetisation efforts can be relatively more successful.  This is the arbitrage opportunity for investors. Said another way, buyers are moving away from the buffet and towards an à la carte menu.” 

James Malackowski, Ocean Tomo

“Give IV credit for adjusting its strategy—I think it is an intelligent move and reflective of good stewardship on their part.  We continue in a significant bear market and a broadly focused buying programme like IV has previously executed is unlikely to turn out well in the current market. It is time to be highly selective as a purchaser and very realistic as a seller.”

Erich Spangenberg, Marathon Patent Group

“I am not surprised by this announcement, as this phenomenon had been going on for a while. IV has essentially announced more formally this week what it has been doing for a couple of years already; ie, divesting as much as it was investing, if not more. For instance, our firm sold about 10 patent portfolios to IV during their Fund II acquisition period, but only one since 2014 under the new Fund III. Part of it reflects the fact that IV has been sitting on 50,000+ patents and licensing/asserting those assets is not the only (let alone the fastest) monetisation scenario available.

But more importantly, this is a byproduct of how the US patent market (which constituted the bulk of IV’s assets) has been damaged by many of the same companies who were IV’s early backers and later decided they would rather fight patent rights through lobbying, rather than being on the receiving end of a lawsuit.  IV also had a pretty bad run before the courts and the PTAB lately that surely contributed to the timing of this decision.

We believe this announcement closes the chapter of “patents as an asset class” 1.0. However, to the extent these assets are snatched by NPEs like Dominion Harbor and Equitable, this will only bring them into assertion faster and may actually end up accelerating a market rebound given the lowering of the threshold for enhanced damages and the recent removal of the defence of laches by the US Supreme Court. That should help push patent valuations up and encourage infringers to weigh the added risks and consider early settlements more often, rather than simply challenge the validity of the patents at stake as they have been doing these past years. “

Louis Carbonneau, Tangible IP, LLC

“From a strategy point of view, IV just removed one of the benefits of signing up with IV, that being the continued purchasing and clearing of patent risk. They are now simply a monetisation business. I could see IV announce that they are going to wait for a while before further purchases, but this indicates that the investors (as you point out) are done with this model and do not see the value in further IV investments.

Any licensing models made by companies that reflected Fund III's continued purchases need to be redone and reflected in future deals. Additionally, current non-licensees will be emboldened to not sign up.

The privateering model appears to be IV's focus to apply pressure on companies that have not signed up to a licence. It may work, but I think the price point is going to be lower. 

The impact on the market will be small. IV was spending much less on assets in recent years. The biggest drop in IV purchasing occurred eight years ago and then again when Fund II finished purchasing around 2012. Although IV was a top buyer last year, their purchases were too few to be significantly impactful. Basically, the market is more robust and diverse now.

IV's return on Fund II must have been poor or projections for Fund III were poor. Because Fund III stopped buying so soon, the investors in Fund III cannot have invested but a fraction of what they must have put into Fund II.”

Kent Richardson, Richardson Oliver Law Group

“As far as i know it was never the intent of IV to split up their portfolio and sell parts off. Part of their value proposition to investors/licensees was to have a one-stop shop which would "clear risk" in the market. The decision by the investors in the funds to sell parts off and stop adding assets I believe is the direct result of their unsuccessful efforts to attract new companies to pay their rates. Their litigation campaigns have failed to a large degree and IPRs/CBMs have resulted in many patents being found invalid.   They have also been unable to attract new sectors such as financial and automotive to join and have largely decided to fight instead. If they had focused on quality at the beginning rather than quantity they be in much better shape now in my opinion. This could be a final gambit to get companies to sign up before they carve up the portfolio, a la Blackberry. I am doubtful in this market they will be able to get substantial money upfront from NPEs. In my opinion it is much more likely they will sell major pieces to operating companies to build their defensive portfolios, but without a licence to the rest of the patents. That would achieve the greatest return the quickest.  I would think their investors would much rather get money now than the uncertainty of NPE litigation to recoup.”

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