IP value creation in a covid-19 world

The covid-19 crisis builds on two prior economic shocks in IP terms – the dotcom bubble of 2000 and the 2008 financial collapse.

Defaults in the debt markets catalysed the 2000 crisis, creating a credit crunch that pushed an overheated tech market off a cliff. While the impact on Main Street was minimal as tech had not yet become woven into the fabric of industry (venture capitalist Marc Andreesen’s famous Wall Street Journal op-ed “Why software is eating the world” was not written until 2011), the 2000 crash unleashed many of the patent assets that led to the NPE boom of the following decade. It also marked the end of the electronic era and the start of the software age.

However, the 2008 financial crisis hit Main Street as hard as Wall Street. The impact on intellectual property was significant as companies were forced to fundamentally reappraise their businesses – and by implication the intellectual property supporting them. There was an unprecedented collapse in asset prices as investors with liquidity made acquisitions for cents on the dollar that paid huge returns for those able to wait for a government-bankrolled recovery.

Since 2008 the tech industry has emerged as a dominant force in all sectors of industry, with intellectual property playing a fundamental role in business models; the focus was initially in patents but has since broadened to include data and trade secrets. The actual collapse of Nortel and effective collapses of Motorola and Nokia were this period’s bellwether events for the tech IP industry, alongside the cannibalism inherent in the life sciences industry, which struggled with R&D productivity.

Research analysts Pierre Ferragu and Jack Scannell, while at Bernstein Research, wrote a series of excellent pieces on these trends and their market impact, citing the high points from 2008 to 2020 as the emergence of AI, the IP chess game in the automotive sector and the weakening of the US patent system alongside China’s rise. The dominance of Facebook, Apple, Amazon, Netflix and Google (the so-called FAANGs) and Microsoft’s embrace of the Cloud have also been game changers on Main Street, Wall Street and in the IP realm.

The world post-coronavirus will therefore be very much a product not only of this shock, but also of the preceding two and the momentum that they established in corporate behaviour, investment dogma and regulation. Patent wars come and go with every paradigm shift in technology or systemic blow that shakes loose intangibles to be financialised by investment professionals. It is a far cry from Intellectual Ventures co-founder Nathan Myhrvold’s vision of patents as the universal currency of ideas in his 2010 Harvard Business Review article “The big idea: funding Eureka” – but perhaps this crisis will give the notion new life.

Tech is eating the world and will continue to do so, with data as the IP value driver. The primary long-term opportunity for investors is therefore to deploy capital into the companies and ecosystems that create, own and monetise data. The impact of covid-19 will accelerate this as data migration to the Cloud increases and virtual business models grow.

Other areas for investment will be in manufacturing (eg, onshoring and chemical engineering), digital health, wellness and energy. Most IP investment will thus continue via the equity and debt markets and private equity or venture investments. Opportunistic investments will be in the restructuring, litigation and asset management of older intellectual property.

Universities and innovation funding

Universities have come to rely on overseas students for revenue, with the contribution of their technology commercialisation teams being minimal – however, this is set to change. Government funding to create or preserve jobs will fuel a potential renaissance but the skillset and IP know-how (ironically) is weak. There is value for investors in aligning themselves with this effort. While the history of prior programmes is not encouraging, it must be believed that there is a model that can work.

Problems

Intellectual property is a policy tool and a political football. Data is susceptible to the same political game that has bedeviled the patent system, although the data protection zeitgeist appears to have been diluted by the need to share information freely to combat covid-19. The risks for IP investors therefore include all of the usual dangers for illiquid and idiosyncratic investments, combined with this political dimension. In addition, the America Invents Act has ended a lot of business models.

Size is also an issue. There is ample evidence that small deals generate better returns and better risk-adjusted investment returns. But smaller deals are just not that interesting to many investors. There are large pools of capital chasing very few appropriately sized deals, which can erode investment returns, drive poor dealmaking and inflate prices. We are far from price inflation at present but origination remains the most challenging part of specialist IP investing. There are many professionals in the IP industry but only a few with the requisite blend of skills, experience and capital to be effective and fewer still in the vanilla investment world.

In summary, a post-coronavirus world presents a positive opportunity for investors seeking to generate value from intellectual property. Finding the right partner to do this very much depends on your asset class entry point, risk profile, timeframe for returns and investment quantum.