FEBRUARY 25, 2010
By TOM PERKINS
Too often, there is confusion between investment banking and venture capital. This isn't helped by investment bankers' occasional assertions that they too do venture capital. They don't. In light of the attention both of these activities have lately received in Washington, it seems a perfect time to explain what makes them so very different.
Venture capitalists work with entrepreneurs to start new companies from the ground up. We earn our reward only when companies become successful.
Investment bankers are deal makers. They're in charge of bringing companies public and advising on acquisitions. Their money is earned by the transaction, and in the fraction of the time it takes a venture capitalist to realize a profit.
Whereas Wall Street has been the source of what feels like endless scandals and financial catastrophes, venture capital has created jobs, jobs, and more jobs of the highest caliber. It's no surprise that Silicon Valley's Sand Hill Road in Menlo Park has been the locus of our national high tech activity and the envy of the world, while Wall Street is secure in its reputation as the planet's frequent scourge.
The facts speak for themselves. Approximately 11%, or 12.1 million, of private-sector jobs reside at companies that were founded with venture capital. These companies include Intel, Genentech, Google, FedEx and Starbucks. Another 500,000 jobs are currently housed in newer start-up companies that are still privately held, and are poised to grow exponentially over the next decade.
In 2009, a year with nearly universal shrinkage in employment, 35,000 new jobs were posted on the job board StartUpHire.com, all created by companies backed by venture capital. This job creation has occurred in every one of the 50 states. Wall Street's share? Zip, zero, nada.
Yet the politicians on Capitol Hill don't seem to recognize these differences. Venture capital is constantly at risk of being swept up in federal tax and regulatory initiatives aimed at curbing Wall Street's abuses.
Last year our industry was originally included in new SEC rules aimed at hedge funds and other sources of systemic risk. But the managers of venture capital firms, usually partnerships, are not risking capital raised from the general public or guaranteed by the federal government. They are not financial advisers in any sense of the term.
But the default mode in Washington is to regulate broadly, without regard for unintended consequences. Thankfully, Congress listened to our concerns and ultimately exempted venture capital from these rules. Still, it was an arduous process to help them understand who we are. That process continues.
Our industry is a very patient one. We invest over the long term, striving for capital gains. And we invest continuously in bull and bear markets.
As Wall Street came to a screeching halt in 2009, our industry nevertheless invested more than $17 billion in emerging companies. Many of those companies will take a decade or more to mature. It would be killing the golden goose to tax venture capitalists as if they were hedge fund or investment banking casino operators.
How has our industry been able to keep its skirts so clean and continue to serve as our country's economic engine? Why is it so unlike the age-old crash-and-burn pattern of Wall Street? I think the answer goes back to venture capital's earliest days in Silicon Valley (before the name of that place had even been coined). The first practitioners, including Eugene Kleiner and me, had familiarity with Wall Street operators and we set up our partnerships to avoid specifically problematic practices.
These parameters included: no leverage; audited statements; never investing personal capital where the partnership could or should do so (that is, no "cherry picking" at the investors expense); no profit participation until the investor's entire capital had been repaid; limited partnership life and no investments of new capital in older deals. These early ideas have become nearly universal over the decades. And in my opinion, they have kept our industry healthy, profitable and largely scandal-free.
It is time the venture industry is rewarded for the work that we do and how we go about doing it. We are not asking for bailout money or additional tax breaks. We simply want those in the Beltway to leave us alone and let us do our jobs -- which means creating more jobs for our country.
Mr. Perkins is a former president of the National Venture Capital Association, a partner emeritus of Kleiner Perkins Caufield & Byers, and author of "Valley Boy: The Education of Tom Perkins" (Gotham, 2007). He is a director of News Corporation.
Saturday, February 27, 2010
Sunday, February 21, 2010
Turning Patents Into ‘Invention Capital’
February 18, 2010
Turning Patents Into ‘Invention Capital’
By STEVE LOHR
BELLEVUE, Wash. — Nathan Myhrvold wants to shake up the marketplace for ideas. His mission and the activities of the company he heads, Intellectual Ventures, a secretive $5 billion investment firm that has scooped up 30,000 patents, inspire admiration and angst.
Admirers of Mr. Myhrvold, the scientist who led Microsoft’s technology development in the 1990s, see an innovator seeking to elevate the economic role and financial rewards for inventors whose patented ideas are often used without compensation by big technology companies. His detractors see a cynical operator deploying his bulging patent trove as a powerful bargaining chip, along with the implied threat of costly litigation, to prod high-tech companies to pay him lucrative fees. They call his company “Intellectual Vultures.”
White hat or black hat, Intellectual Ventures is growing rapidly and becoming a major force in the marketplace for intellectual capital. Its rise comes as Congress is considering legislation, championed by large technology companies, that would make it more difficult for patent holders to win large damage awards in court — changes that Mr. Myhrvold has opposed in Congressional testimony and that his company has lobbied against.
Intellectual Ventures spent more than $1 million on lobbying last year, according to public filings compiled by OpenSecrets.org. In the three most recent election cycles — 2006, 2008 and 2010 — Intellectual Ventures executives, led by Mr. Myhrvold, have contributed more than $1 million to Democratic and Republican candidates and committees.
Mr. Myhrvold makes no apology for playing hard under the current patent system. If his company is going to help change things, it must be a force to be reckoned with. “We have to be successful,” he said.
The issues surrounding Intellectual Ventures, viewed broadly, are the ground rules and incentives for innovation. “How this plays out will be crucial to the American economy,” said Josh Lerner, an economist and patent expert at the Harvard Business School.
Mr. Myhrvold certainly thinks so. He says he is trying to build a robust, efficient market for “invention capital,” much as private equity and venture capital developed in recent decades. “They started from nothing, were deeply misunderstood and were trashed by people threatened by new business models,” he said in his offices here.
Mr. Myhrvold presents his case at length in a 7,000-word article published on Thursday in the Harvard Business Review. “If we and firms like us succeed,” he writes, “the invention capital system will turbocharge technological progress, create many more new businesses, and change the world for the better.”
In the article and in conversation, Mr. Myhrvold describes the patent world as a vastly underdeveloped market, starved for private capital and too dependent on federal financing for universities and government agencies, which is mainly aimed at scientific discovery anyway. Eventually, he foresees patents being valued as a separate asset class, like real estate or securities.
His antagonists, he says, are the “cozy oligarchy” of big technology companies like I.B.M., Hewlett-Packard and others that typically reach cross-licensing agreements with each other, and then refuse to deal with or acknowledge the work of inventors or smaller companies.
Ignoring the patents of others is “deeply ingrained in parts of certain industries,” he writes in the article, “most notably software, computing and other Internet-related sectors.”
Large technology companies complain about patent suits but, Mr. Myhrvold says, their actions often invite litigation. “The attitude of the big guys has been that unless you sue me or threaten to sue me, get lost,” he said in the interview. “I know, I was one of those guys.” Indeed, Mr. Myhrvold, 50, supplied his considerable brain power to Microsoft for 13 years, serving as chief technology officer until 2000.
Mr. Myhrvold personifies the term polymath. He is a prolific patent producer himself, with more than 100 held or applied for. He earned his Ph.D. in physics from Princeton and did postdoctorate research on quantum field theory under Stephen Hawking, before founding a start-up that Microsoft acquired.
He is an accomplished French chef, who has also won a national barbecue contest in Tennessee. He is an avid wildlife photographer, and he has dabbled in paleontology, working on research projects digging for dinosaur remains in the Rockies.
His Intellectual Ventures is not simply a patent hedge fund. Its 650 employees include scientists and engineers, and it has an in-house invention effort and lab that last year applied for 450 patents. To date, the company has paid $315 million to individual inventors.
He calls patents “the next software,” noting that software did not become a market on its own until the 1980s, spurred by innovators and the enforcement of intellectual property laws. “I’m trying to get inventions that kind of respect as an economic entity,” he said.
Yet while Mr. Myhrvold is saying one thing, his company’s main activity is quite another, according to Mark Bohannon, general counsel and senior vice president for public policy for the Software and Information Industry Association.
Intellectual Ventures, Mr. Bohannon says, is the largest of the category of firms that hold patents, but do not make products. Lawyers call such firms nonpracticing entities, NPEs, though they are often labeled as patent trolls. “Our concern is that it games the patent litigation system so it can extract licensing fees and investments from technology companies that create jobs, innovate and make products,” said Mr. Bohannon, whose trade association includes I.B.M., Google, Oracle, SAP and Adobe.
Several analysts say that Intellectual Ventures has been primarily a master practitioner of exploiting the current rules of the game to its advantage. Many companies in the patent field use shell companies to mask their activities, and Intellectual Ventures seems to employ them with uncommon frequency. A report last month by Avancept, an intellectual property consulting firm, said that up to 1,110 shell companies and affiliated entities appear to be linked to Intellectual Ventures. The secrecy, said Thomas Ewing, principal consultant for Avancept, makes it “far more difficult to confidently negotiate with Intellectual Ventures.”
Intellectual Ventures, founded in 2000, began operating in 2003. It says it has returned $1 billion to investors and collected more than $1 billion in license fees to date. Most of the revenue has apparently come from 16 so-called strategic investors — big companies that pay to license patent rights and get a stake in an Intellectual Ventures fund.
The companies must sign strict nondisclosure agreements to even talk with Intellectual Ventures. Only Microsoft has publicly stated that it is one of the group. In 2008, The Wall Street Journal reported that Verizon Communications had agreed to pay Intellectual Ventures $350 million. Other companies that have agreed to sizable payments to Intellectual Ventures include Intel, Nokia and Sony, according to people told of deals. And Intellectual Ventures has sought deals with others, including I.B.M. and Amazon, so far without success, say people informed of the talks.
Intellectual Ventures’ penchant for secrecy, Mr. Myhrvold says, is partly a legacy from its early days as an upstart when it did not want to tip its hand. Personally, he says he advocates not only the public disclosure of patents but also license agreements, but he will not give up the competitive edge of secrecy unilaterally. “If everybody in the industry does it, I’ll be right there,” Mr. Myhrvold said.
Turning Patents Into ‘Invention Capital’
By STEVE LOHR
BELLEVUE, Wash. — Nathan Myhrvold wants to shake up the marketplace for ideas. His mission and the activities of the company he heads, Intellectual Ventures, a secretive $5 billion investment firm that has scooped up 30,000 patents, inspire admiration and angst.
Admirers of Mr. Myhrvold, the scientist who led Microsoft’s technology development in the 1990s, see an innovator seeking to elevate the economic role and financial rewards for inventors whose patented ideas are often used without compensation by big technology companies. His detractors see a cynical operator deploying his bulging patent trove as a powerful bargaining chip, along with the implied threat of costly litigation, to prod high-tech companies to pay him lucrative fees. They call his company “Intellectual Vultures.”
White hat or black hat, Intellectual Ventures is growing rapidly and becoming a major force in the marketplace for intellectual capital. Its rise comes as Congress is considering legislation, championed by large technology companies, that would make it more difficult for patent holders to win large damage awards in court — changes that Mr. Myhrvold has opposed in Congressional testimony and that his company has lobbied against.
Intellectual Ventures spent more than $1 million on lobbying last year, according to public filings compiled by OpenSecrets.org. In the three most recent election cycles — 2006, 2008 and 2010 — Intellectual Ventures executives, led by Mr. Myhrvold, have contributed more than $1 million to Democratic and Republican candidates and committees.
Mr. Myhrvold makes no apology for playing hard under the current patent system. If his company is going to help change things, it must be a force to be reckoned with. “We have to be successful,” he said.
The issues surrounding Intellectual Ventures, viewed broadly, are the ground rules and incentives for innovation. “How this plays out will be crucial to the American economy,” said Josh Lerner, an economist and patent expert at the Harvard Business School.
Mr. Myhrvold certainly thinks so. He says he is trying to build a robust, efficient market for “invention capital,” much as private equity and venture capital developed in recent decades. “They started from nothing, were deeply misunderstood and were trashed by people threatened by new business models,” he said in his offices here.
Mr. Myhrvold presents his case at length in a 7,000-word article published on Thursday in the Harvard Business Review. “If we and firms like us succeed,” he writes, “the invention capital system will turbocharge technological progress, create many more new businesses, and change the world for the better.”
In the article and in conversation, Mr. Myhrvold describes the patent world as a vastly underdeveloped market, starved for private capital and too dependent on federal financing for universities and government agencies, which is mainly aimed at scientific discovery anyway. Eventually, he foresees patents being valued as a separate asset class, like real estate or securities.
His antagonists, he says, are the “cozy oligarchy” of big technology companies like I.B.M., Hewlett-Packard and others that typically reach cross-licensing agreements with each other, and then refuse to deal with or acknowledge the work of inventors or smaller companies.
Ignoring the patents of others is “deeply ingrained in parts of certain industries,” he writes in the article, “most notably software, computing and other Internet-related sectors.”
Large technology companies complain about patent suits but, Mr. Myhrvold says, their actions often invite litigation. “The attitude of the big guys has been that unless you sue me or threaten to sue me, get lost,” he said in the interview. “I know, I was one of those guys.” Indeed, Mr. Myhrvold, 50, supplied his considerable brain power to Microsoft for 13 years, serving as chief technology officer until 2000.
Mr. Myhrvold personifies the term polymath. He is a prolific patent producer himself, with more than 100 held or applied for. He earned his Ph.D. in physics from Princeton and did postdoctorate research on quantum field theory under Stephen Hawking, before founding a start-up that Microsoft acquired.
He is an accomplished French chef, who has also won a national barbecue contest in Tennessee. He is an avid wildlife photographer, and he has dabbled in paleontology, working on research projects digging for dinosaur remains in the Rockies.
His Intellectual Ventures is not simply a patent hedge fund. Its 650 employees include scientists and engineers, and it has an in-house invention effort and lab that last year applied for 450 patents. To date, the company has paid $315 million to individual inventors.
He calls patents “the next software,” noting that software did not become a market on its own until the 1980s, spurred by innovators and the enforcement of intellectual property laws. “I’m trying to get inventions that kind of respect as an economic entity,” he said.
Yet while Mr. Myhrvold is saying one thing, his company’s main activity is quite another, according to Mark Bohannon, general counsel and senior vice president for public policy for the Software and Information Industry Association.
Intellectual Ventures, Mr. Bohannon says, is the largest of the category of firms that hold patents, but do not make products. Lawyers call such firms nonpracticing entities, NPEs, though they are often labeled as patent trolls. “Our concern is that it games the patent litigation system so it can extract licensing fees and investments from technology companies that create jobs, innovate and make products,” said Mr. Bohannon, whose trade association includes I.B.M., Google, Oracle, SAP and Adobe.
Several analysts say that Intellectual Ventures has been primarily a master practitioner of exploiting the current rules of the game to its advantage. Many companies in the patent field use shell companies to mask their activities, and Intellectual Ventures seems to employ them with uncommon frequency. A report last month by Avancept, an intellectual property consulting firm, said that up to 1,110 shell companies and affiliated entities appear to be linked to Intellectual Ventures. The secrecy, said Thomas Ewing, principal consultant for Avancept, makes it “far more difficult to confidently negotiate with Intellectual Ventures.”
Intellectual Ventures, founded in 2000, began operating in 2003. It says it has returned $1 billion to investors and collected more than $1 billion in license fees to date. Most of the revenue has apparently come from 16 so-called strategic investors — big companies that pay to license patent rights and get a stake in an Intellectual Ventures fund.
The companies must sign strict nondisclosure agreements to even talk with Intellectual Ventures. Only Microsoft has publicly stated that it is one of the group. In 2008, The Wall Street Journal reported that Verizon Communications had agreed to pay Intellectual Ventures $350 million. Other companies that have agreed to sizable payments to Intellectual Ventures include Intel, Nokia and Sony, according to people told of deals. And Intellectual Ventures has sought deals with others, including I.B.M. and Amazon, so far without success, say people informed of the talks.
Intellectual Ventures’ penchant for secrecy, Mr. Myhrvold says, is partly a legacy from its early days as an upstart when it did not want to tip its hand. Personally, he says he advocates not only the public disclosure of patents but also license agreements, but he will not give up the competitive edge of secrecy unilaterally. “If everybody in the industry does it, I’ll be right there,” Mr. Myhrvold said.
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