Recent court rulings and legislative efforts have prompted intellectual property companies not only to set more realistic expectations in licensing IP assets, but also to begin broadening their business models beyond traditional licensing. Among the most promising of these new efforts are ventures that revitalize the once-intimate connection between intellectual property and operating businesses with real products and services.
For example, Marshall Phelps, the former chief of IP and licensing at IBM and Microsoft—he is often called the “father of modern corporate patent strategy”—has teamed up with former IBM top inventor John Cronin to launch invention-on-demand firm ipCreate. The new firm partners with global technology companies like Philips and Sony to create patented inventions—and disruptive new products and services—at the chokepoints of market change.
Phelps isn’t the only one using IP to strengthen operating companies with innovative products and services. The patent advisory and optimization firm where we work, Dominion Harbor Group, has also launched a new venture that repurposes curated, third-party intellectual property to buttress companies’ IP positions. Only in our case, the companies we support with IP assets and services are not global technology leaders but creative young startup businesses, which are responsible for most breakthrough innovation and job growth in the U.S.
Our partner, the Monument Bank of Intellectual Property, seeds promising young companies with high-quality, vetted IP that strengthens their market position, encourages venture funding and increases the likelihood of an IPO or other strategic market success. Dominion Harbor also provides these startups with advisory services like strategic portfolio development and prosecution management needed to maximize the competitive and financial value of their IP, including whatever IP they develop internally.
In the process, the IP Bank also offers in-house counsel at firms with underutilized patent portfolios a new means of monetizing those portfolios without all the legal and reputational risks often associated with licensing, litigating or “privateering” via an outsourced non-practicing entity (NPE).
The deposit and withdrawal process at Monument IP Bank is straightforward. Patent owners, whether corporate or individual, negotiate mutually acceptable terms with the bank to deposit IP in exchange for a return from the equity position the bank holds in the startup that holds the deposited IP. Startups wishing to strengthen their IP positions, meanwhile, can negotiate to withdraw IP from the bank in exchange for equity in their company, and also take advantage of Dominion Harbor’s IP advisory services. It is important to note that the startups gain actual ownership of the patents they withdraw from the bank, rather than merely a license. This is crucial if the IP is to give them a genuine competitive advantage in the market.
In the three months since its formal launch, the Monument IP Bank has provided roughly a dozen startups with access to more than 1,000 patent assets from 20 bank depositors. By year-end, we expect to have between 5,000-10,000 patents available from 50 major depositors. Patents in the bank cover a range of industries and technology fields, including energy, health care, finance, automotive, materials, green chemistry and general technology.
Startups face many tough challenges as they enter the market. One of the toughest is the fact that for most, the “time to IP” has now become much longer than the “time to IPO.” It takes most startups many years (and considerable sums of money) to develop an IP portfolio internally that can protect their products and protect their market position. But in today’s speedy startup economy, IPOs or other strategic exits often occur much more quickly.
The IP Bank solves this knotty problem by ensuring that fast-growing startups have the robust IP they need when they need it most—as well as the advisory services needed to ensure that their IP is aligned with the firm’s overall business strategy. And make no mistake: The economic research clearly demonstrates the critical role that intellectual property often plays in startup success.
How? Patents increase the likelihood of venture investment. According to Haussler, Harhoff, and Muller’s study The Role of Patents in Venture Capital Financing, “Patents are a signal of quality that facilitates access to financing and helps startups overcome the liabilities of newness.” This finding was confirmed by the 2008 Berkeley study Patenting by Entrepreneurs: An Empirical Study, which found that 67 percent of venture-backed startups reported that patents had been vital in securing investment. While 40 percent of all startups held patents, 80 percent of those that received venture capital owned IP.
The data also shows that startups with IP achieve greater long-term success than startups without it. In their 2015 study Patents, Innovation, and Performance of Venture-Capital-Backed IPOs, Cao, Jiang, and Ritter found that “[p]atents strongly and positively predict the long-run performance of VC-backed IPOs.” Indeed, “VC-backed IPOs with patents substantially outperform other VC-backed IPOs. The same holds true even for non-VC-backed IPOs.”
Indeed, as IPfolio CEO Rupert Mayer recently wrote, patents have helped at least 10 major startups launch billion-dollar empires. Take Dropbox’s network folder synchronization patent, Zynga’s asynchronous challenge gaming patent, Square’s patented system and method for decoding swipe card signals, GoPro’s patented harness system for attaching a camera to a user, and of course Google’s original page rank patent—filed before the search giant even had a business plan or a domain name, and so valuable to Google it paid Stanford $336 million in shares for an exclusive license to it. These are just five examples of IP’s value to a startup.
But perhaps IP’s critical role in startup success is best illustrated by a real-world market example. Shortly after intelligent home products startup Nest introduced its first product —a “smart” thermostat—it secured a number of third-party patents from patent aggregator Intellectual Ventures to support the IP it was developing internally and buttress its overall IP position. Nest’s robust IP portfolio was cited by Google as a key factor in its later acquisition of the company.
As noted earlier, the IP Bank provides large corporate depositors of IP with an alternative means of monetizing their underutilized IP that suffers from none of the poor branding and public relations optics often associated with litigation-backed licensing. IP depositors also benefit by sharing in the equity position the bank holds in a fast-growing young operating company in which the IP has been deposited—plus the chance to get in on the ground floor of an emerging new market and industry. There are also, of course, all the positive PR benefits that accrue from partnering with the next generation of innovative startups.
And finally, the IP Bank offers large innovating firms an important new channel for sourcing their next-generation products and services. According to a 2014 National Science Foundation-backed study, 49 percent of manufacturing and service firms used inventions obtained from external sources to develop their most important new products and services. In 14 percent of these cases, the source was startups. The IP Bank, therefore, can serve as a kind of scaffolding for corporate joint ventures and R&D partnerships with startups.
To be sure, betting on a startup can be risky. The IP Bank mitigates this risk by “asset claw back” provisions that give the depositor the right to reclaim the IP if the bank is unable to invest the IP within a given period. This provides patent sellers with a degree of opportunity and security heretofore unavailable in the market.
Another way the bank minimizes risk is to curate the patents it accepts for deposit by employing customary analytical methods, as well as some proprietary tools and technologies, to assess the patents for quality. The bank is also working with a number of partners, including crowdsourced prior art research leader Article One Partners, on additional frameworks for vetting the key patents in each patent family. If successful, this will give the bank’s core IP something akin to a patent quality version of a “Good Housekeeping” seal of approval.
For independent inventors and small startup businesses, the IP Bank represents one of several new ways to strengthen their commercial prospects through the acquisition and use of intellectual property. Others include Priceline.com founder Jay Walker’s U.S. Patent Utility, since renamed Haystack IQ, which offers companies bundled licenses to patents directly related to their business, and Google’s newly announced “Patent Starter Program,” which offers startup businesses with less than $20 million in revenues ownership of up to two patent families to be used for defensive purposes only.
As Marshall Phelps notes, “The Monument IP Bank can be an important new vehicle for generating IP value as well as provide growth companies with the IP protection they need.” It appears that IP’s value in supporting real companies with innovative products and services is once again being recognized.
David Pridham and Brad Sheafe are CEO and chief intellectual property officer, respectively, of the patent advisory and optimization firm Dominion Harbor Group.