Is invention set to become the next software?

February 24, 2010

As a Growth Venture Capital fund and an investor in Expansion Stage software companies, I’ve always been intrigued by intellectual property and licensing.

In 2005-06, I had an opportunity to work with Marshall Phelps, Corporate VP of IP Policy and Strategy and David Harnett, senior director of IP Ventures at Microsoft. Marshall oversaw Intellectual Property and Licensing at IBM for 28 years and then went on to work for Microsoft as Corporate VP of IP Policy and Strategy responsible for setting the global Intellectual Property Strategies and Policies for the company (comprising well over 60,000 patents and patent applications worldwide). He also co-authored a book entitled Burning the Ships: Intellectual Property and the Transformation of Microsoft which describes Microsoft’s radical overhauling of its intellectual property (IP) strategy.

The mission of IP Ventures was to spin-out IP from Microsoft Research (MSR) to entrepreneurs and companies in order to foster innovation and new product development. At the time, I worked for Dan’l Lewin, corporate vice president for Strategic and Emerging Business Development, responsible for fostering relationships with venture capitalists and start-ups worldwide. Dan’l has been in the Valley for several years and very well respected by venture capitalists and entrepreneurs, as well as Microsoft’s primary emissary to the Valley. Dan’l has also been a great mentor to me for the past 7 years and someone I often turn to for advice.

Needless to say, the relationship between IP Ventures and Emerging Business was a natural fit. What we learned is that VCs don’t invest in technology, only the entrepreneurs who can build a business around it, and there was no way the VC community would ever go for deals unless they were structured according to “industry normal” terms. While these were major hurdles to overcome, they were nothing compared to changing the strategic mind set at the company that had long discounted the value of collaboration and technology sharing.

How vividly I recall the number of miles that David Harnett and I racked up traveling back and forth to Microsoft’s research facility in Cambridge, England to establish a working relationship with the research teams, while evangelizing corporate spin-offs at various venture capital events throughout Europe and Silicon Valley. It wasn’t until the announcement of IP Ventures at the National Venture Capital Association Conference (NVCA) in San Francisco on May 4, 2005, that the venture capital community would stand up and take took notice that Microsoft was serious about reaching out to entrepreneurs and VCs in helping to launch new and exciting ventures. This also went a long way to enhancing Microsoft’s image with venture capitalists and start-ups worldwide.

Yesterday, I had an opportunity to meet with Ellyn Foltz, senior managing director of Microsoft’s Strategic IP Partnerships responsible for negotiating cross-license agreements (CLAs) and formulating Business Growth Strategies for the Company. Ellyn and I go back a number of years. She hired me as a managing consultant for Microsoft Consulting Services (MCS) and brought me to the great city of Atlanta. I respect her dearly and she has always been a great mentor and friend. Ellyn is busy these days working on Microsoft’s strategic open source partnerships such as their IP and interoperability agreement with Novell.

You may have also read about Microsoft’s recent deal with Amazon in which both companies have access to the other’s patent portfolios.

Since Microsoft launched its IP licensing program in 2003, the company has entered into more than 600 licensing agreements and continues to develop programs that make it possible for customers, partners and competitors to access its IP portfolio. In recent years, Microsoft has entered into similar agreements with other leading companies, including Apple Inc., HP, LG Electronics, Nikon Corp., Novell Inc., HOYA CORPORATION PENTAX Imaging Systems Division, Pioneer Corp., Samsung Electronics Co. Ltd. and Fuji Xerox Co. Ltd.

While this approach promises to move the needle over time (IBM grew to $2 billion) and promotes the benefits of innovation and avoiding costly patent litigation, there are pundits that believe this is nothing more than a Microsoft “tax” levied against Amazon. In this case, Amazon’s use of Linux which Microsoft claims violates several hundred of its patents.

Over the past few years, a new model has evolved called invention capital. This is namely driven by Intellectual Ventures founded by Nathan Myhrvold, former chief technology officer at Microsoft. This secretive $5 billion investment firm has scooped up 30,000 patents and inspired both admiration and angst among special interest groups, high technology companies, and venture capitalists.

Intellectual Ventures has been described by special interests groups as “patent trolls” or “non-practicing entities”, *a pejorative term used for a person or company that enforces its patents against one or more alleged infringers in a manner considered unduly aggressive or opportunistic, often with no intention to manufacture or market the patented invention.

Nathan recently published a whitepaper in the Harvard Business Review entitled The Big Idea: Funding Eureka! in which he claims:

Like software, the business of invention would function better if it were separated from manufacturing and developed on its own by a strong capital market that funded and monetized inventions.

Nathan asserts that while inventiveness is one of our nation’s competitive strengths and fuels a powerful engine of economic growth, it gets amazingly little direct attention or funding from product makers, universities, or the government (he refers to it as the charity model). 

Consider this: Inflation-adjusted federal spending on academic research rose by 60% from 1983 to 2007. Meanwhile, investments in the business sector by the U.S. venture capital and private equity industries soared by 1,140% and 1,940%, respectively. The total $1.6 trillion (in 2008 dollars) invested by venture capital and private equity firms in this period is three times the $537 billion that the U.S. government spent on academic research.

The only way invention can attract comparable private-sector investment is to treat inventing like a for-profit business. Needless to say, there are organizations and people who feel threatened by change and loudly oppose it. Remember when venture capitalists were called “vulture capitalists” for taking companies away from founding entrepreneurs?

Is invention set to become the next software?

*Wikipedia

Key Account Director

Marc Barry is an experienced sales leader in the Enterprise Technology Industry including Software, Cloud and Consulting. Currently, he is the Key Account Director at <a href="http://www.oracle.com">Oracle</a>. He was previously a Venture Partner at OpenView.