Intangible investor: A strong case for a new approach to patent investing
A provocative new book claims that the high cost of generating a return on patents is forcing small businesses to re-think how their IP rights are best owned and financed
The decision to secure patents has become increasingly difficult for many businesses. In the face of higher costs and greater uncertainty, filing a patent is no longer automatic. A deceptively simple book aimed primarily at start-ups aims to give patent filers (and investors) reason to believe that their time and money can still be well spent.
Investing in Patents by Russell Krajec promotes a return to patent basics and clarity of purpose, encouraging a new way to think about how to make good patents more financially viable in the current anti-monetisation environment. Initially aimed at start-up investors, this 139-page book is, in fact, worthwhile to anyone interested in return on intellectual property, including executives, lawyers, clients, employees and shareholders.
Investing in Patents provides two key benefits:
- basic advice which is often overlooked (eg, what are patents? When can they be relied upon? How are they best used to generate a return?); and
- a new approach to defraying the cost and mitigating the risk of obtaining and deploying patents.
“The real problem,” writes Krajec in his introduction, “has more to do with patent applications than the examiners and the legal system”. He points out that currently 95% of patents are worthless and that they are a kind of financial future with speculative value. He also concedes that exclusive licences can be more valuable to a start-up than owning a patent, and that there are trade-offs which can make filing an application damaging.
The average cost of a US patent over its lifetime is $56,525 (see www.ipcloseup for a breakdown). Because of the cost and risk of a lawsuit, contingency litigation makes business sense to most law firms where $50 million or more is at stake. This means that due diligence and appropriate uses for the right patents are more important than ever; so is measurement. “Companies in Silicon Valley and elsewhere have been taking the position that they will not even look at another company’s patents and negotiate a reasonable license,” Krajec explains. “This short-sighted and damaging practice actually compounds the patent trolling problem. Legitimate patent owners must now employ patent trolls to file law suits just so they can open discussions.”
Many types of return
Readers of this column may recall that some 14 years ago, I began promoting broader use of the term ‘IP investor’, especially as it applies to patents. Those who focus exclusively on the shares of public patent licensing companies experience only one of the many types of return that patents can generate. For most companies, less direct uses of intellectual property for return on investment are the coin of the realm: freedom of action, competitive advantage, risk mitigation, market share, capital formation, and customer and vendor relationships.
Investing in Patents provides a deft introduction to patent strategy and value. It also posits an alternative financial model which involves outside capital and more skin in the prosecution game for patent attorneys. It suggests that most law firms do not believe in what they file for clients because there is little incentive to. Krajec’s back-to-basics approach flies in the face of patent prosecution mills and volume filers.
Krajec is CEO of BlueIron IP – a Colorado investment firm which invests solely in intellectual property for start-ups – a patent attorney, engineer and inventor named on over 30 patents. He has prosecuted more than 1,000 US patents for domestic and foreign clients. Previously, he worked for McDonnell Douglas and Hewlett Packard, among other companies.
Given the high-risk proposition of obtaining and licensing patents, Krajec’s ownership alternative is worth considering. However, while the approach shows promise – especially in the current post-America Invents Acts and post-Alice landscape – the devil is in the details. In the BlueIron investment model, “the startup receives an exclusive license to the assets, which is transferrable to acquirers and always includes a buyout provision”. The structure resembles a conventional patent holding company licence with a commercial lease-back financial model.
It is unclear how Krajec believes ownership of a patent should be divided and who has the right to license, enforce, sell or otherwise leverage it – and when. Perhaps, most importantly, who gets to define success? It may have nothing to do with generating licensing royalties or resolving a dispute. It may have more to do with raising capital or M&A. How performance gets measured, benefits allocated and ownership transferred with partially owned patents is sure to be challenging.
Shared ownership model
BlueIron is attempting to redefine the term ‘portfolio company’, for both rights holders and investors. Tracking the performance of patents filed, held and managed in the context of their enterprise value over time will show whether the shared patent investment model is something that more mature businesses can also rely upon. The book is available for free on KindleUnlimited, which readers can access on any PC or device.
This may be the perfect time – and Investing in Patents a worthy catalyst – to reconsider the nature of patent investments and investors. Written ostensibly for entrepreneurs, the book represents a challenge and a potential resource to anyone interested in return on intellectual property, including significant holders and law firms. Offloading much of the overhead associated with obtaining patents in exchange for shared ownership may not be right for everyone, but it is difficult to ignore.
Bruce Berman isof , New York, United States