“I don’t know for how many people in the room this is also true, but 2014 wasn’t a great year for my business,” Edward Jung, co-founder of Intellectual Ventures, explained during his keynote presentation at the 2015 IP Dealmakers Forum in New York City on Monday, December 7, 2015. “2015 is looking a lot better.”
And that was the general consensus throughout the two-day event, attended by some of the biggest dealmakers and patent owners in the industry – things seemed to have flat-lined in 2015, or may even be on a slight uptick depending upon who you talk with. While there was not unanimity as to whether the patent market has hit the bottom yet, many seem to think we have or soon will hit the bottom of the market. Those who think that the market has not yet bottomed acknowledge they are starting to dip their toes back into the water and acquiring patents again because even if we haven’t hit the bottom it is near, and those who seek to time a market bottom always wind up getting burned. Whether it is because things couldn’t get any worse, “you can’t fall out of the basement” as one person put it to me during a private conversation, or because there are positive signs on the horizon, there was near agreement that a mildly bullish outlook for 2016 seems appropriate after a 2015 that showed some signs of life.
“We all know in this room that there were two cyclones we got hit by that really unwrapped themselves in 2014,” Jung explained. “In one sense we saw some legislative reforms that happened to quash nuisance suits but probably happened too big too fast and had a lot of unintended consequences or at least I think mostly unintended consequences [that] damaged the innovation economy in general.” Jung would go on to cite the uncertainty created by the Supreme Court’s decision in Alice v. CLS Bank as the other event that ran through the industry in 2014. Jung told the audience that when policy shifts “you create uncertainty in a business environment, it becomes harder to price your asset… and that makes it hard for people to invest in it.”
Jung cautioned not to overreact to market downturns, as others did during the course of the conferences, including Jim Skippen, CEO of Wi-Lan Technologies. “Downturns happen,” Jung explained. “It may not have been as common in our market or as well-known but they happen in every market. They happen in venture capital, they happen in real estate… if you’re a gold investor you’re probably not happy right now, but they happen, downturns happen. But I think just as importantly they’re temporary. People figure out how to actually recover from the downturn, turn things around and the IP market will do the same thing. I think it’s important for a lot of people who are in this business to stay the course because if you give up too early you never know when you are just around the corner from the success.”
During his presentation as he was talking about not giving up because you never know when success will be right around the corner Jung posted the popular quote from Edison about how a lot of people who failed gave up when success was right around the corner. “Of course you don’t see a lot of quotes from the people who failed, so take it with a grain of salt.” As you might expect the audience laughed, but the point was taken. The message is clearly that Jung does not see now as the moment when the industry should retreat from the IP monetization model, although it may need to evolve and adapt to new realities. “IP is still pretty fundamental to the economy. Patents remain strategically important,” Jung explained. He would also go on to tell the audience that he believes IP will continue to be protected and remain “super important” in “high-growth industries, like 3D printing, graphing, AI and so on.”
As the conversation pivoted to how to navigate these uncertain times, Jung told the audience that as the patent market has been evolving Intellectual Ventures has been focusing on three types of diversification as a part of an overall strategy.
“So the first one is commercialization,” Jung said. “The media mostly talks about our assertion and licensing activities but we’ve always had things like startups and joint ventures that we do. These are startups. We’re going up to a run rate of about a dozen new company formations per year so actually we’ll produce more companies than many venture capitalists do. And it’s interesting because there isn’t like an Instagram-like company in here. It’s not like trying to do software where the technology is not the limiting factor, it’s consumer acceptance. This stuff is all technology as the limiting factor. It is actually very difficult technology. In many of these cases, like the meta material ones, we invest in the R&D for almost 10 years before the first company gets started so even before the first venture capitalist stepped in… So these are very, very deep technology things that cannot be done without strong patents. No investor will invest over that time horizon and no investor will trade with another investor to a longer time horizon or a shorter time horizon without the notion of having patents there.”
“Joint venture is another example,” Jung told the audience. “There are a lot of companies… that are looking to try to innovate and one of the possible ways of innovating is to actually do a joint venture with those companies to create a new company that can take their technology and mix it in with many other people’s technology and know-how and build value that way.” Jung would go on to give an example of a company back by Intellectual Ventures that has a technology that can improve the production of milk from cattle, explaining that it might seem low tech but it is highly valuable, with the joint venture currently valued at over $600 million.
The second part of a diversification strategy is to look beyond the United States, which as has become commonplace with these types of industry conferences a sad, but all too true reality. Injunctions are readily available in Europe where they are practically impossible to get in the United States, and some types of software is more likely to be patented in Europe than in the United States, and more likely to remain valid if patented.
“The US has been a challenging place to be,” Jung explained. “A lot of the European multinationals, possibly because they’ve gone through great challenges, seem to be much more open-minded about looking at new models and I think we’re finding a lot more attraction in deals there. Also as many people here will know there are a few areas in Europe where the litigation environment is very friendly and presuming that the Unified Patent Court continues its progress as currently specified, that’s actually very, very good news for those who want to assert their IP. So Europe diversification, very important.”
“On the enforcement side China is also a very attractive venue,” Jung said. “There is a sense the policymakers in China are trying to have China deliberately find in favor of patent holders in order to build up the incentives for China to file patents and build up their innovation rate… Injunctions are virtually guaranteed. It’s very cheap, it’s very fast and, of course, many things are made or sold in China so it’s a very interesting venue there.”
“At the end of the day innovation is important,” Jung explained before he lamented the fact that the United States “seems to be making it harder and harder to be competitive globally…”
Jung ended his presentation by pointing out that in 1820 the United States contributed only 1.8% of world GDP, but that thanks to an innovation economy the United States peaked at about 30% of world GDP, “predominantly driven by invention-driven industries like automotive, like aerospace, like pharmaceutical and so on. These were all based on key inventions that the US dominated the landscape on. That’s clearly not going to be the case going forward. It’s going to be much more distributed across many different countries, which is why I think, again, diversity is going to be the key.”