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Funding Eureka!

by Nathan Myhrvold

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Included with this full-text

Harvard Business Review

article:

Idea in Brief—the core idea

1

Article Summary

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Funding Eureka!

An industry dedicated to

financing inventors and

monetizing their creations

could transform the world.

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Funding Eureka!

page 1

Idea in Brief

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The big idea:

The world needs a capital market for invention like the venture capital market for start-ups and the private equity market for revitalizing inefficient companies.

The argument: Inventing—producing useful, patent-worthy ideas—is a dysfunc-tional, cash-starved activity that’s overly de-pendent on government largesse because it is not organized as a for-profit activity.

A better approach: Create a market where patents can be efficiently bought, sold, or licensed through investment funds that manage the high risks by amassing huge portfolios of patents and packaging them to maximize their value. Professional inven-tion capitalists would not only operate such funds but also provide services to help companies, universities, and solo inventors to develop and monetize their ideas.

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Funding Eureka!

by Nathan Myhrvold

harvard business review • march 2010 page 2

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An industry dedicated to financing inventors and monetizing their

creations could transform the world.

My company, Intellectual Ventures, is misun-derstood. We have been reviled as a patenttroll—a renegade outfit that buys up patentsand then uses them to hold up innocent com-panies. What we’re really trying to do is createa capital market for inventions akin to the ven-ture capital market that supports start-ups andthe private equity market that revitalizes inef-ficient companies. Our goal is to make appliedresearch a profitable activity that attractsvastly more private investment than it doestoday so that the number of inventions gener-ated soars.

“That’s preposterous,” some might say. “In-venting can’t be a business in its own right. It’stoo risky, and inventions are too intangible togenerate sufficient profits by themselves. In-venting and inventions can’t be separated fromthe companies that turn the ideas into actualproducts. And the notion of creating a liquidmarket for inventions is absurd.”

I couldn’t disagree more. In the 1970s, peo-ple said the same thing about another type ofintangible intellectual property: software. Back

then, everyone in the computer industry be-lieved that software was valuable only becauseit helped to sell mainframes or minicomputersand that you could never sell software by itself.As a result, software engineers worked for com-puter manufacturers or for companies thatused computers. Very few independent soft-ware vendors existed, and those that did werebarely profitable. As a business, software washopeless. Everyone said so.

Everyone was wrong, of course. Over thenext three decades, software became one ofthe most profitable businesses in history. Iknow because, as a manager and ultimatelythe chief technology officer at Microsoft, I hada ringside seat to this amazing success story.

Software owes its ascent largely to two cru-cial developments. First, software vendorsgradually persuaded software users—throughboth education and lawsuits—to respect intel-lectual property rights and pay for somethingthat they might otherwise simply copy. Thenvendors liberated software from hardware byovercoming system incompatibilities and de-

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veloping solutions that could work on manydifferent brands of computer. When the PCrevolution hit, software became an industry inits own right.

I believe that invention is set to become thenext software: a high-value asset that will serveas the foundation for new business models, liq-uid markets, and investment strategies. Thesurprising success Intellectual Ventures hashad over the past 10 years convinces me that,like software, the business of invention wouldfunction better if it were separated from man-ufacturing and developed on its own by astrong capital market that funded and mone-tized inventions.

The lessons we have learned so far suggestthat a full-fledged invention capital systemcould solve many of the problems that havelong plagued both inventors and the con-sumers of inventions: inadequate funding forapplied research, an inefficient market forconnecting companies with the inventionsthey need and for monetizing inventions, abalkanization of the inventors and inven-tions required to tackle big problems, and anenforcement and arbitration system that si-multaneously permits too much infringe-ment and relies too heavily on lawsuits to de-termine price.

My company—the largest of a new breed ofinvention capital firms—is leading the drive tosolve these problems. It is still early days. ButI’m convinced that if we and firms like us suc-ceed, the invention capital system will turbo-charge technological progress, create manymore new businesses, and change the worldfor the better.

Charity Is Not Enough

America took a global lead in invention dur-ing the nineteenth century, when Eli Whitney,Robert Fulton, Samuel Morse, Nicola Tesla,Alexander Graham Bell, Thomas Edison, andothers helped transform the United Statesfrom an agrarian economy into an industrialpowerhouse. That tradition has continued tothis day. Americans generally recognize inven-tiveness as one of their nation’s competitivestrengths. They understand that invention is apowerful engine of economic growth. Yet itgets amazingly little direct attention or fund-ing from product makers, universities, or thegovernment.

Outside the pharmaceutical and biotech in-

dustries, few companies consider inventing, orproducing patented intellectual property, to betheir primary mission. Corporate R&D has be-come mostly “D”: the development of prod-ucts. Hardly any large corporations have “in-venting” as a job category—even though itrequires a different mind-set, has differentgoals, and must be managed differently thanresearch and development positions.

At universities and government agenciesthat fund academic research, patents typicallydon’t enter into tenure or grant decisions. Pub-lished research is rewarded, but invention usu-ally is not. Indeed, these organizations prima-rily fund blue-sky programs aimed atexpanding scientific knowledge. That’s a wor-thy thing to do. But it’s quite different from in-vention, which applies scientific knowledge innovel ways to create something useful, some-thing that has economic value.

Invention’s stepchild status is reflected inthe way it’s typically funded, which I call thecharity model. The entities that provide thevast majority of research funding to U.S. uni-versities—mostly government agencies likethe National Science Foundation, the Na-tional Institutes of Health, and the Depart-ment of Defense, along with private donors—do so without any expectation of a financialreturn. In other words, research grants aregifts, not investments.

The shrinking handful of corporations thatstill fund long-range research have the samemind-set. Their leaders rarely run research as abusiness in its own right; instead, they fund itas an act of faith that the ideas produced willsomehow create value as they percolatethrough the product organization.

The result of the charity mind-set is a dearthof private sector investment and an overdepen-dence on government funding. This is undesir-able on many levels. It allows federal priorities,rather than the potential market for new in-ventions, to determine how much funding par-ticular areas receive. For example, the share offederal funding devoted to basic health andbioscience has steadily grown since the 1950sto about half of the total, whereas the share al-located to areas that produce a greater propor-tion of fruitful inventions—such as the physi-cal and information sciences—has shrunk.

A second problem is that most federal fund-ing goes to traditional research programs fo-cused on individual disciplines. Innovative

Nathan Myhrvold

is the CEO and a cofounder of Intellectual Ventures, a company that makes a business out of invention. He is a former chief tech-nology officer at Microsoft.

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cross-disciplinary teams, however, are muchbetter equipped to come up with solutions tothe increasingly complex challenges the worldfaces.

A final problem is that government fundingisn’t dependable. Federal spending on basicand applied research, adjusted for inflation, de-clined by 14% from 2003 to 2007, according tothe National Science Foundation. The Obamaadministration has pledged to reverse thisslide, but a skyrocketing federal budget deficitwill make that a hard promise to keep.

Rather than relying on the charity modeland its overdependence on government-sponsored research, we should be looking forways to harness the tremendous financialpower of the private sector to fund invention.Consider this: Inflation-adjusted federal spend-ing on academic research rose by 60% from1983 to 2007. Meanwhile, investments in thebusiness sector by the U.S. venture capital andprivate equity industries soared by 1,140% and1,940%, respectively. The total $1.6 trillion (in2008 dollars) invested by venture capital andprivate equity firms in this period is threetimes the $537 billion that the U.S. governmentspent on academic research.

The only way invention can attract compara-ble private-sector investment is to treat invent-ing like a for-profit business. To do that prop-erly, we need an efficient capital market run bya cadre of professionals. I’m absolutely certainthat if we establish such a market, investorswill flock to it.

I don’t expect this to be easy. There are someformidable obstacles: the high risks that in-venting entails, a disregard for intellectualproperty rights that prevails in certain indus-tries and countries, a need for much more pro-fessional expertise in the emerging inventioncapital industry, and the disorganized state ofthe inventing world. We also face a chicken-and-egg quandary: You have to be able to effi-ciently and profitably monetize inventions inorder to attract investors, but to organize sucha market, you need the liquidity that only in-vestors can provide. These obstacles can be andare being overcome. Here’s how.

How to Manage the Risks

Undeniably, a huge challenge in attracting in-vestors is the highly risky nature of inventions.The unavoidable fact is that most inventionsfail: Some simply don’t work. Others work butare too costly. Still others are cheap and workbrilliantly, but lose out to even better inven-tions. Statistics on the true risk of investing ininventions are sketchy, but government re-ports suggest that just 1% to 3% of patents gen-erate a profit for their inventors. Corporationshave a similar success rate.

Fortunately, other industries have foundways to manage high risk. Insurance compa-nies dilute risk by aggregating policies intolarge portfolios. They also distribute risk byspreading it around a well-developed reinsur-ance market. Pension funds, mutual funds,and other investment pools assemble largecollections of assets to which many investorssubscribe.

We can apply these approaches to managethe risk inherent in new inventions. A single in-vention is typically very risky. However, if youbuild (as my company has) a diversified portfo-lio of tens of thousands of inventions that spana wide range of technologies, the aggregaterisk becomes quite manageable.

It takes a lot of money, of course, to build alarge portfolio of inventions—but not an un-precedented amount. Venture capital and pri-vate equity firms routinely raise hundreds of

What an Invention Capital Market Would Do For:

Inventors

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Provide funding

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Identify fertile topics for invention

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Assess the market for specific inventions

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Establish market rates for inventions

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Provide reliable compensation

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Help produce strong patents

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Market and license inventions

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Bundle inventions from multiple sources to increase their value

Academic Institutions

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Provide funding

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Match areas of scientific discovery with industry needs

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Structure deals when multiple organizations have a stake in a patent

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Help monetize inventions

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Enforce patent rights

Product Manufacturers

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Provide one-stop shopping for patents

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Bring together outside inventors to meet company-specific needs

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Lower the risk of lawsuits by providing access to patents

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Serve as a ready market for patents a company wants to license or sell

Society at Large

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Accelerate progress in technology

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Reduce dependence on government funding for research

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Foster respect for intellectual property rights

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Efficiently recycle good ideas of failed ventures

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Increase competition and consumer choice

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millions or even billions of dollars for a singleinvestment fund. Similar-sized funds dedicatedto inventions would provide the scale neces-sary to hedge their risk.

Such large scale also provides another im-portant ingredient: upside potential. Some in-ventions will be successful—and a few will beblockbusters. Even if only one patent in a port-folio of, say, 2,000 patents is really successful, itcould generate $1 billion in revenues, returningmany times the cost of the entire portfolio.

Plenty of real-world examples prove the prin-ciple. A patent portfolio of very respectable,but not enormous, size forms the core asset ofQualcomm, a public company now worth morethan $70 billion. Earnings of the consortiumMPEG-LA, which owns patents on technologyused in DVD players and digital set-top boxes,are reported to exceed $1 billion a year. IBM isalso said to garner more than $1 billion a yearfrom licensing its inventions. Similar programsat Hewlett-Packard, Lucent, Texas Instruments,and a few other large technology companieseach reportedly generate net annual revenuesof more than $100 million.

There’s an obvious difference between in-vesting in invention capital funds and invest-ing in venture capital and private equity funds:The time horizon to make money from inven-tions is much longer. The typical VC or PEfund lasts 10 years and often generates hand-some returns for its investors within five. In-vention capital funds require much greater in-vestor patience. Once Intellectual Venturescreates a fund, for instance, we add patents toits portfolio during its first five years and willcontinue to license them for up to 25 years,until all have expired.

Are there investors with that kind of pa-tience? In our experience, the answer is yes. Wesee two distinct types of investors among theseveral dozen who have committed more than$5 billion in capital to the four funds and onestart-up we have created since 2000. The firstkind sees invention capital as simply another fi-nancial investment alternative, similar to deriv-atives, hedge funds, private equity, and real es-tate. These traditional investors include pensionfunds, university and foundation endowments,and wealthy families and individuals.

The second kind are what we call strategicinvestors, because they seek more than just adirect financial return. The members of thisgroup—which includes Fortune 500 companies

and market leaders in high technology, tele-communications, financial services, consumerelectronics, and e-commerce—are attracted bythe prospect of tapping into Intellectual Ven-tures’ network of invention talent. They’reseeking help in coming up with game-changingideas, or they want early licenses to the patentsin our portfolios. Our practice of aggregatingpatents in specific areas provides strategic in-vestors with efficient one-stop shopping.

Giving Patents the Respect They Deserve

The main barrier to the emergence of a bonafide market for inventions and a strong, vi-brant invention capital industry, however, isnot financial. It is cultural.

In affluent nations, product companies toooften see inventors and other patent holders asadversaries, and vice versa. But product com-panies should see inventors as wellsprings ofinnovation and should trust them—and inven-tion capitalists—enough to tell them what newtechnology the companies actually need. In-ventors, for their part, should see manufactur-ers and invention capitalists as customers andshould trust them to pay fair prices for theideas they use. We aspire to be a trustworthymatchmaker that helps make this happen.

The cultural impediments are somewhat dif-ferent in emerging economies such as the ris-ing technology centers of Asia. There, rights topatented inventions and other intangible prop-erty are too often simply ignored. Comparedwith their peers in the U.S., few prominent uni-versities in Asia file patents, and those that dorarely complain when manufacturers in theirown country appropriate their intellectual cre-ations without compensation. We hope todemonstrate to leaders in these regions thatgreater attention to intellectual property rightscan generate immediate and substantial eco-nomic rewards, while simultaneously produc-ing valuable new technologies.

We have no illusions that it will be easy toachieve these twin cultural shifts. Even in theU.S., a disregard for patents is deeply ingrainedin parts of certain industries. While respectingintellectual property rights is a cornerstone ofsome high-tech industries—branded pharma-ceuticals, biotech, medical devices, and wire-less, for instance—that’s sadly not the case inothers, most notably software, computing, andother internet-related sectors. These “winner

I’m convinced that an

invention capital system

will turbocharge

technological progress

and change the world for

the better.

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harvard business review • march 2010 page 6

takes most” industries impose extreme com-petitive pressure on young firms to increasetheir market share by any means necessary,even copying the ideas of others. To this day,some software and internet companies takethe very narrow view that “saving” money onpatent licenses (by infringing) is good, becauseit frees capital for expansion.

Not helping matters, some large tech-hardwarecompanies treat patents as a defensive weaponto be used mainly in retaliation against anycompetitors that sue them for infringement.This strategy of mutually assured destructionusually resolves itself in cross-licensing or astalemate, but the effect is not benign: Itbreeds a disdain for inventors. And becauseuniversities and individual inventors don’thave the power to play this game, some com-panies just flat out stiff them. All in all, suchbehavior tends to dissuade inventors fromworking in these areas and to impoverish oursystem of invention.

When I’m attacked as a patent troll, it’s usu-ally by people from these special interestgroups, who don’t feel they have to respect oth-ers’ patents. At a business conference recently,the CEO of a big technology company whom Iknow pretty well came up to me and said, “So Iguess you must be planning on suing me.”

I responded, “Well, no. But why do you ask?Are you planning on cheating me?”

He laughed and said, “Yeah, that’s probablyright.”

The funny thing is, we have never sued any-body to defend our intellectual propertyrights. While I don’t rule it out, I see it as ahighly undesirable recourse for several reasons:It’s expensive, it’s unpredictable, and it takesyears.

There are always organizations and peoplewho feel threatened by change and loudly op-pose it with fearmongering and false predic-tions of doom. We’ve seen it before. Once upona time, venture capitalists were called “vulturecapitalists” for taking companies away fromfounding entrepreneurs. Early private equityfirms were tarred as “barbarians” and “preda-tors” for threatening the cozy world of ineffi-cient corporate management. Over time bothgroups came to be seen as positive forces in theeconomy—and so will invention capitalists.

There are signs that this is happening:• The number of court battles over patent

infringement in the U.S. peaked in 2004 and

has since declined. As invention capital firmsmake it easier for inventors to get paid for theirinventions and for companies to reduce theirlitigation risks and acquire rights to broad bun-dles of useful technology, lawsuits should de-cline further.

• IT companies, which historically haven’tbothered to patent many of their inventions,are filing many more patent applications eachyear. (Microsoft is now one of the top patentfilers in the world.)

• Technology companies are starting tocome to us for inventions that could help themsolve pressing problems.

For these reasons, I’m not concerned thatthe so-called patent-reform movement in theU.S. will seriously hinder our progress. The ef-fort, led by a lobbying group for large techcompanies, hopes to weaken patent rights be-cause it sees patents primarily as a source of li-ability. But the other side—made up of compa-nies like General Electric, Procter & Gamble,3M, DuPont, and Caterpillar, which rely onpatents as fundamental business assets—arepushing back strongly. In general, the courtshave protected intellectual property rights,and Congress is likely to act accordingly, mak-ing some needed reforms but not weakeningthe patent system overall.

Building a Professional Industry

Another obstacle to creating a robust capitalmarket for inventions is one that all complexsystems face in their early days: the need toachieve a critical mass of key players. The cur-rent market for inventions is illiquid, opaque,and dysfunctional. Few of the existing play-ers—from technology development compa-nies, brokers, and agents, to investment funds,auction houses, and exchanges that specializein intellectual property—operate at largescale, and frankly, the quality of their workvaries enormously.

As we and others supply a critical mass of ex-pertise, more liquidity, greater pricing visibil-ity, and a better set of options for inventorsand patent users alike, I believe the marketwill start functioning well and will then growrapidly. Indeed, our purchases of patents havealready fueled a noticeable increase in thenumber of patent brokers in the market. Intime, new companies will spring up to fill themany niches of the invention ecosystem. Wewill see a more intricate and efficient inven-

It’s time to harness the

power of the private

sector to fund invention.

Federal spending on

academic research rose

by only 60% from 1983

to 2007. By contrast,

investments in the

business sector by the VC

and private equity

industries soared by

1,140% and 1,940%,

respectively.

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tion industry populated by professional patentfinders and packagers, appraisers and under-writers, financiers and sales agents—and otherroles not yet conceived.

For our part, Intellectual Ventures aims tobe the first full-service invention capital firm.Like venture capital and private equity firms,we raise money from investors, create assetsourselves (by sponsoring inventors), and buyassets from others who would have troublemonetizing them effectively on their own. Weactively manage those assets to maximize theirvalue and then provide exit strategies to realizethat value.

Our 650 employees include scientists andengineers, patent analysts and attorneys, fi-nance experts, and licensing sales agents. Toraise capital, we have an investor relationsteam. Our topic generation teams continuallystudy trends in technology development andnew discoveries in science to try to identify thebest opportunities for investment. Their con-clusions guide three distinct groups. The first isour in-house invention effort, which involves30 staff inventors (myself included) and a ros-ter of more than 100 extraordinary consultinginventors who work part-time for us. The sec-ond is our external inventor network of morethan 1,000 inventors in seven countries. Thethird is our acquisitions group, which buys ex-isting patents or stakes in them.

Creating inventions from scratch. I co-founded Intellectual Ventures with EdwardJung, a colleague at Microsoft who is now ourchief technology officer. As inventors our-selves, we were extremely interested in findingmore efficient ways to create high-quality in-ventions. We wanted to build a company simi-lar to Thomas Edison’s highly productivelab—Edison invented the invention capitalmodel of raising money by promising inves-tors a certain number of patents per year—butwith one big difference. Edison built his labaround one person: himself. Many of the greatgeniuses of the nineteenth century worked atEdison Labs, but not for very long. We’re try-ing to build a scalable invention company thatis not dependent on any one person. The rea-son is not just that we want our company toproduce many more inventions in many moreareas than Edison Labs did. It’s also that we be-lieve today’s complex problems can best besolved by getting brilliant people from differ-ent disciplines together to tackle problems in

a systematic fashion.Accordingly, we’ve hired scientists and engi-

neers who already had impressive track recordsfor inventiveness in a wide range of technolo-gies. We’ve also signed up world-class research-ers in academia and industry as consulting in-ventors. This gives us the ability to make strongcontributions in about 50 areas of technology,from medical devices to software to consumerelectronics to nuclear engineering.

A typical team might consist of 10 inven-tors—for instance, some physicists, a surgeon,a chemist, some programmers, an expert indigital imaging, and engineers. Needless to say,such people don’t ordinarily work together. Wehold invention sessions in which we focusteams on solving specific problems (such as re-ducing infection rates in hospitals) or ask themto brainstorm about how new scientific discov-eries (such as metamaterials with electromag-netic properties not found in nature) might beapplied to solve real-world problems.

This cross-disciplinary approach is remark-ably effective at generating creative solutionsto tough problems. Lately, for example, wehave been working on new ways to combatmalaria, a disease that every year sickens hun-dreds of millions of people and kills nearly onemillion children. Our invention sessions—in-volving biologists, computer scientists, physi-cists, epidemiologists, and other experts—haveyielded numerous promising approaches. Oneis a pest-control system that was inspired bymilitary technology for shooting down ballisticmissiles. (Some of our inventors were scientificleaders in the “Star Wars” program.) Our sys-tem uses inexpensive, low-power computers,cameras, and lasers to identify female mosqui-toes (the males don’t carry the disease), trackthem in flight, and blast them with a cripplingpulse of light. It may sound far-fetched at first,but we built a prototype in our lab, and itworks. A similar approach could be used toprotect organic crops—or even people at back-yard barbecues—from pests.

One series of invention sessions we heldbrought highly respected heart, chest, bone,and brain surgeons together with many of ourstaff inventors. We asked the doctors to draft“wouldn’t it be great if...,” or WIBGI, technol-ogy wish lists, which generated exceptionallyproductive discussions. We came up with newdesigns for surgical tools that are self-sterilizingor that can snake their way around delicate

It takes a lot of money to

build a portfolio of

inventions, but not an

unprecedented amount.

VC firms routinely raise

billions for a single fund.

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areas of the brain rather than passing throughthem. We invented novel ways to make im-plantable devices that can intelligently dis-pense medicines where and when most neededin the body; smart shunts for draining excessfluid, which can signal when they are cloggedor can actually clean themselves; bone screwsthat can be adjusted remotely, using a wirelesspower source; and tiny implants that can auto-matically monitor the blood glucose levels ofdiabetics. Not bad for a couple of weeks’ work.

Another invention session resulted in a revo-lutionary kind of nuclear reactor that all buteliminates the need to enrich uranium. Be-cause enrichment technology can also be usedto make weapons, our designs could vastly re-duce the risk of nuclear proliferation.

We produce thousands of inventions a yearthis way. Each idea gets vetted and prioritized,and then we file for patents on the best one-fifth to one-third of them. In 2009, we appliedfor about 450 patents for in-house inventions,placing us among the top 50 filers in theworld—ahead of far larger companies such asBoeing, Johnson & Johnson, 3M, Mitsubishi,and Toyota.

Cultivating an inventor network. In paral-lel to our in-house invention process, we havewithin the past two years invested roughly$100 million in our external network of inven-tors. The inventors are for the most part aca-demics, and our deals are usually with their in-stitutions. For example, last year the IndianInstitute of Technology in Mumbai selectedour company to help it commercialize inven-tions produced by its faculty and staff.

Inventors in the network receive what wecall “requests for invention” that outline chal-lenging technical needs and point to fruitfulavenues for them to pursue. They then submitideas for evaluation. Our firm issues cash pay-ments for the most promising submissions andalso files patents. The inventors and their em-ployers get a share of any royalties that materi-alize. By late 2009 our network had producedsome 4,000 invention ideas and more than1,000 patent applications.

Investing in existing inventions. Even as ro-bust as our network of talented inventors is, itcould never supply enough inventions for ourfunds. So we have purchased most of the30,000-plus patents in our portfolios. In doingthis, we strive to expand the market by offer-ing inventors new or better options for profit-

ing from their work. Our acquisitions team ofbusiness strategists studies the patent holdingsof our existing and potential customers, iden-tifies their technology needs, and does its bestto assemble portfolios that fill those needs. Ap-praisers and buyers evaluate inventions on themarket and decide whether and how much tobid for them.

One significant source of patents is the ar-chetypal solo inventor. Many such inventorshave no interest in writing a business plan orbuilding a company; they prefer to just handoff their invention to a licensee and move onto the next great idea. Investment firms likeours spare them the work of tracking downand negotiating with lots of potential licenseesseparately, and we can almost always givethem a fairer deal. We’ve paid about $315 mil-lion so far to individual inventors, making usone of their largest sources of new capital.

Universities and nonprofit research organi-zations are a second source of inventions forus. A surprisingly large amount of IP producedin academia lies fallow because the institutionslack the resources to fully develop its businesspotential. Smaller academic institutions in theU.S. and many universities outside the U.S. areoften unable to fund a technology transfer of-fice. The institutions that do have such opera-tions peddle only a small fraction of their in-ventions—typically those that were createdentirely within their walls and can be easily li-censed or sold. That’s because when scientistsfrom different institutions collaborate to pro-duce an idea (as is often the case), the owner-ship of the IP is complex. Schools balk at in-vesting the resources required to structure adeal. Or they may not feel up to the task ofmonetizing the inventions when there is anarray of potential customers, or when custom-ers are likely to disregard their IP rights. An in-vention capital firm can afford to take on thishard work because it can amortize the fixedcosts of large licensing teams over a lot ofdeals. So far our firm has provided analysis,patenting and licensing expertise, and cash tomore than 100 institutions.

Occasionally we take advantage of more ser-endipitous sources of high-quality patents,such as distressed or bankrupt companies thatput their IP on the market, either at auction ordirectly. In some cases, they are big companies(Enron, for example). But most are small start-ups that failed for reasons that had nothing to

We asked the doctors to

draft “wouldn’t it be

great if...” technology

wish lists for our

invention teams.

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do with the quality of their ideas. By providinga ready market for dissolving start-ups andideas that were ahead of their time, we injectmoney back into the venture capital system sothat it can be used to fund new enterprises.Deals of this kind can also rescue good inven-tions that might otherwise be lost.

For instance, we recently looked at five med-ical device start-ups that worked in the samespace but are all now in various stages of col-lapse. Their technology is fine; the currenteconomy will simply not support so manycompetitors in this area, and venture capital-ists are reluctant to give them more funding.We considered a deal to combine and restruc-ture their intellectual property into a largerpackage that could then be sold to a strongerstart-up or to a big company like GE, Baxter, orJohnson & Johnson.

Finally, a good number of the patents we buycome from large, healthy companies: We havedone deals with more than 100 Fortune 500companies and their international equivalents.

For many large companies, one of the frus-trating things about inventing is that it’s unpre-dictable and can’t be controlled. When you setout to tackle one problem, you often come upwith something totally unexpected that hasnothing to do with your business. Most compa-nies have difficulty exploiting ideas that lie out-side their core business.

A functioning capital market would make iteasy for companies to monetize such inven-tions. If invention capital companies are suc-cessful in creating such a market, 10 or 20 yearsfrom now it will be commonplace for CFOs toask their R&D people, “Are we spendingenough on inventions? Are we selling enoughof our inventions?” Instead of being the blackhole it is today, research will be a profitablebusiness and a lot more money will be spenton it. In fact, that’s one of my goals: to get big-ger R&D budgets for everybody.

Turning Inventions into Money

Other than a handful of technology areas—such as compounds that have potential asdrugs—buying, selling, and licensing patentsremain difficult. Transaction costs are high.The vast majority of transactions occur behindclosed doors, so reliable pricing information tohelp buyers and sellers gauge the worth of anyparticular invention is hard to come by.

To create an efficient market that extracts

the full value of inventions, market makersmust be amply capitalized. And by amply, Imean a lot more than the $5 billion we’veraised to date. But to get investors to providethat kind of money, viable exit strategies—inother words, options for monetizing patents—must be routinely available. Here are a coupleof approaches that we’re pursuing now andone that is a possibility down the road.

Package patents. One way to extract the fullvalue of patents is to aggregate them intelli-gently so that the whole is worth more thanthe sum of its parts. We have assembled largeportfolios of patents in wireless technology,memory microchips, and other areas. Eachportfolio typically contains some inventionsthat are already being used, some that arehighly likely to be used in the future, andsome that are much more speculative.

Any one of the patents would have somevalue, but as a package the value is much morecompelling, because customers save the timeand expense of tracking down all the patentholders and negotiating separate deals. Cus-tomers can easily get all the patents they needto roll out an innovative product faster and atthe same time reduce the risk that they’ll missa necessary license and get blindsided by an in-fringement suit.

Most of our large customers understand thisapproach and want to license our patents inbundles of 1,000 or more. Many also subscribeto a portfolio so that they will automaticallyget licenses as inventions are added to it. Ourlicensing activity has so far earned more than$1 billion.

That said, constructing such portfolios is farfrom easy. One of the biggest challenges weface is discerning which kinds of inventions aremost valuable to our strategic investors andother customers. Companies are not used totalking about such needs with others. Andsometimes they just haven’t thought that farahead.

Launch a start-up. Some ideas are so revolu-tionary that not even venture capital firms willtake a chance on them. And occasionally anidea is so good that it would be folly to letsomeone else commercialize it. In such excep-tional cases, an invention firm might launch astart-up.

If an invention is powerful but the market iscrowded with players, a joint venture with oneof the giants may offer the surest path to com-

Ten years from now, it

will be commonplace for

CFOs to ask their R&D

people, “Are we spending

enough on invention?”

Funding Eureka!

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harvard business review • march 2010 page 10

mercialization. Partnerships are attractivewhen developing an invention requires notjust substantial capital but industry expertise.For this reason, we’re exploring partnershipswith multinational energy companies to com-mercialize our new kind of nuclear reactor.

Create patent-backed securities. Successfulpatent portfolios can throw off a lot of cash, sothey could be the financial underpinnings of anew class of investment assets: patent-basedsecurities. Indeed, shares in companies likeQualcomm essentially function this way al-ready. Patent-backed securities would simplycreate a more direct link between patent per-formance and security returns.

One can easily imagine that once trading insecurities backed by a portfolio of patents be-gan, people would speculate on individual pat-ents that showed unusual potential. Compa-nies with a stake in related technologies—forexample, those trying to commercializethem—could use such securities to hedge theirbets. This possibility will remain only that,however, until there are ways to value such se-curities—something that we’re working on.

Not so very long ago, professional venturecapitalists did not exist. Entrepreneurs had toborrow from their rich uncles or collegefriends. Then, in 1946, Georges Doriot, an im-migrant from France who rose to become abrigadier general in the U.S. Army and aHarvard Business School professor, foundedAmerican Research and Development Corpo-ration (ARDC) as a vehicle to create and in-vest in innovative new companies. Doriotswitched the primary funding mechanismfrom debt to equity. Any interested investorcould put his money into one of ARDC’sfunds, and any aspiring entrepreneur couldapproach ARDC with a business plan.Doriot’s scalable model for raising and invest-ing venture capital gave entrepreneurs a stan-

dard, predictable way to raise money. Nowit’s time to do the same for inventors.

Invention is too important to leave it tocharity, and I don’t see why we have to. KleinerPerkins, Benchmark, Sequoia, and the othertop venture capital firms don’t have to go toCongress and beg for a little bit more moneyfor the small company sector. Research inareas like astronomy and fundamental physicsthat is very long range and has diffuse benefitsfor society should be funded by the govern-ment. But funding the invention of usefultechnology that can make money in a rela-tively short period of time—say, 10 years—shouldn’t be the government’s job. It’s the pri-vate sector’s job. And the U.S., with its combi-nation of research talent, openness to financialinnovation, and a culture of inventiveness, isperfectly positioned to be the nexus of thisnew industry.

What will it take for the invention capitalmarket to come into its own? A group of com-panies—not just Intellectual Ventures—has toprove the concept. We have to get more peopleto accept our inventions. We have to vastly ex-pand the number of companies that licenseour patents. And two or three invention fundsneed to produce great returns.

A functioning invention capital market andindustry can enable inventors around theglobe to create hundreds of thousands moreinventions each year than are being made to-day. Sure, some of those inventions will be sillyor useless. But what matters is the top 1% thatwill make our lives vastly richer and better.Create an invention capital market, nurture aninvention capital industry, and the resultingvirtuous cycle will surely transform the world.

Reprint R1003A

To order, see the next pageor call 800-988-0886 or 617-783-7500or go to www.hbr.org

The U.S., with its

research talent, openness

to financial innovation,

and culture of

inventiveness, is

positioned to lead this

new industry.