Venture Capital; Up or Down? (And What about IP?)

"Venture Capital"-- The words (and their anthropomorphic derivative,"the VC") are virtuously synonymous with start-ups, entrepreneurship,and innovation. According to the common wisdom, the US has done well because of its VCs, Europe less so. Whatever you think about the winners and losers in the VC race, careful attention should be directed to the current state of Venture Capital, lest past perfect, at least with start-ups, fail to achieve the future perfect that so much depends upon for future growth and development and, for IP professionals, the engine for continued good fortunes.

Against that backdrop, I took another look at an interesting column that was published in what may have been the last free-standing issue of BusinessWeek magazine (it is now called Bloomberg Business Week, after its acquisition by the eponymous media giant late last year). The article, entitled "How Venture Capital Lost Its Way", and authored by Carl Schramm and Harold Bradley, appeared in the November 30, 2009 issue.

First a word about the authors and their affiliation. Schramm is president and Bradley is the chief investment officer of the Ewing Marion Kauffman Foundation. Located in the American heartland of Kansas City, the Foundation is reported to be the largest foundation dedicated to the promotion of entrepreneurship. It has tended to focus its activities on the U.S. (which be a function of its mandate), but its influence extends beyond North America. Attention should be paid whenever the Kauffman Foundation opines on weighty issues concerning entrepreneurship.

The gist of the article is as follows:

1. Venture capital has been a critical component of innovation. However, venture capital seems to be on the wane. The amounts funded and the number of companies supported by such funding continue to decline. The industries most requiring VC funding, clean tech and biotech, are being shunned in favor of info tech, which have much less need for substantial capital investment.

2. The root of the problem is the VC financial model, most notably the "2 and 20 rule", where fund managers charged an annual 2% management fee and took 20% of the proceeds of an IPO or sale. Historically (that means the 1980's), VC types were structured as partnerships, where the funds invested mostly came from wealthy individuals. This allowed them to maintain a patient capital outlook for their investments. Choose your companies carefully, and permit yourself a time horizon of 10 years or more for the success of your investment, were the defining characteristics of VC investing in those days.

3. However, when institutions entered the VC game, the dynamics changed. Able to aggregate larger sums than even the most well-heeled private investors, the focus changed from nurturing growth to increasing fees based on ever-larger investment pools. The result is that the venture capital industry has aped the business model private equity, namely the short-term "flip." To keep their investors happy, in the words of the article, "VC funds are ...going for maximum liquidity, creating early payoffs via premature "exits" ...."

4. The result is that investment capital is no longer being put to work for long-term use, including for such capital-starved industries as clean tech and high tech. Moreover, the investors themselves are not reaping appropriate return on their investment (over the decade, "an investor would have done better in a small-cap Russell 2000 index than in VC").

5. Schramm and Bradley offer several suggestions to ameliorate the situation: (i) tie management fees to a budget rather than the size of the fund: (ii) pay investors a guaranteed amount before the fund can claim its 20% share; (iii) require the VC fund itself to put more its own funds in the companies in which it invests.

I am hardly the person to evaluate how successful these suggestions for change might be. In a world of "short-termism", I reckon that the problem is deeper than altering the arrangments for the VC investment community. That said, from a more modest perspective, I wonder how the changes in the VC world described by Schramm and Bradly has, or might in the future, affect IP practice. The following questions immediately leap to mind:

1. Are more patents being filed early on, whatever their quality, mainly in order to "improve" the position of the company for an early exit?

2. If so, does this affect the compensation arrangements for patent drafting and prosecution?

3. Do changing VC patterns affect the staffing requirements of patent law practices?

4. What is the role, if any, in providing strategic IP advice to companies funded by VC's?

5. Do trade secrets or branding matter in such a world?

6. I guess that the overarching question is this: If Schramm and Bradley are correct, and the VC ship is not righted, will the IP profession be better or worse off at the end of the decade?

Patent Term Adjustment

I am indebted to my friend, Steve Yoder, now CEO of German Biotech Company Pieris AG for pointing out to me the financial implications of the recent US decision on patent term adjustments involving Wyeth. . The Amerikat over at our partner blog IP Kat has already covered the legal aspects of the case and can be read in more detail here.

The concept of the patent term adjustment is – as far as I know – unique to the United States and is governed by the provisions of the US Patent Code 35 U.S.C. 154.. This provision provides that a patent term (lifetime) will be extended if one of three situations occurs:

i) The US PTO fails to issue a first office action within fourteen months after filing or respond to a reply (or appeal) within four months from filing the reply (or issuing the patent within four months if the issue fee is paid). This is referred to as the A-delay.

ii) The US PTO fails to issue the patent within three years after filing. This is the B-delay.

iii) The patent is subject to an interference proceedings, secrecy order or appeal. This is the C-delay (and played no role in the decision).


The two most common reasons for a possible extension of the patent term beyond the statutory twenty years are the failure to respond to a reply in a timely manner and failing to issue the patent within three years.

In the past the US PTO took the view that only the longer of the A or the B delay was relevant. The US Court of Appeals for the Federal Circuit disagreed in an opinion issued on 7 January 2010. There can be no "double counting" of delay days. However there could be an accumulation of delay. A patent holder - in this case Wyeth - could be entitled to both an extension based on an A-delay and an extension based on a B-delay, less any "double counted days" in which there was both a delay under A and B (which would represent delay days in responding to a reply to an office action after the three year period has expired. So, if the US PTO takes more than three years in granting the patent and then takes an additional length of time to issue the patent, the patent holder is entitled to an additional three years plus additional time of lifetime of its patent.

This may not seem so important since many (most) patents are terminated before the end of the twenty year lifetime. However, in some technologies even an extra month’s protection may be significant. Suppose the patent protects a "blockbuster"drug. The US PTO takes over three years to grant the patent and also delays issuing office actions. The extra patent time granted can add significantly to the profits made as generics may be delayed from enterin the market.

The European Union in its pharmaceutical sector enquiry defined a block buster drug as being one with global revenues of over USD 1 billion in revenues (see Executive Summary, page 3) worldwide. Patent Term Extensions are only available in the US. The pharmaceutical sector enquiry's final report noted that the US market represented 42% of prescription drug sales (see report, page 27, Fig. 3- So, if we assume that the US makes up 42% of the market (i.e. USD 420 million in revenues), then every extra month of extension is worth USD 35 million in revenues in US sales alone. The final report goes on to state that a rather conservative estimate suggests that 30% of the turnover is profit (see paragraph 68 on page 28) which means that every extra month of extension represents a profit of USD 10.5 million.

Technorati Tags:
Patent Term Adjustment, Wyeth

Verizon borrows Intellectual Venture's IP

The Tangible IP blog recently reviewed the Economist's article on Intellectual Ventures (see here for the review). Head on the tails of the article follows a report that US telecommunications giant Verizon has exploited its USD 350 Million investment in Intellectual Ventures by having US Patent 5,410,344 assigned to it and then countersuing TiVo in its ongoing patent infringement suit (Verizon also allege in their counterclaim that TiVo infringe the following US Patents: 5,635,979, 5,973,684, 7,561,214, 6,367,078 which were already held by Verizon). The Assignment has not yet been recorded on the US PTO website which still lists an Intellectual Ventures subsidiary as the Assignee.

Intellectual Ventures has always maintained that it was not a "trolling" operation and here we have an example of the investment made by Verizon presumably paying off.

In another patent infringement dispute with Echostar, TiVo have been awarded damages of USD 200 million (down from the USD 1 billion claims by TiVo). The decision is being appealed according to a statement made by EchoStar. This was based on an assumed royalty rate of USD 1.25 per month per subscriber (according to the 10 Nov 2009 10-Q filing made by TiVo) Now I'm not certain of the market share of Verizon, but given it's size and reputation it may well be that the USD 350 million investment in Intellectual Ventures could easily pay off if the counterclaim against TiVo succeeds

MG Rover's IP lives on

The reporting of MG Rover’s demise in 2005 was notable for its considerable discussion of intellectual property. According to The Times of 26 July 2005, Nanjing Automobile Corporation acquired the MG marque and intellectual property associated with the MG variants of the Rover 25, 45, 75 and the MG TF sports car. Sources suggest a price tag of £50 million, which included the MG Rover assembly lines, engine plant and R&D capabilities.

If the significance of IP went over the heads of the general public at the time, this may change with the recent decision of the High Court in Nanjing Automobile (Group) Corporation & ors v MG Sports and Racing Europe Ltd & anr. [2010] EWHC 270 (Ch) (available on Lawtel).

The decision relates to the efforts of an English company to continue using the trademark “MG” in its name. The fact that a co-defendant is William Riley, great-grandson of the founder of the iconic Riley Motor Company, lends further interest. Both defendants base their entitlement to continue on the purchase in 2007 of certain assets from the liquidators of MG Rover Group and MG Sport and Racing Limited. Unfortunately for both defendants, judge Sir William Blackburne found them liable, ordering them to change their company name to one which does not include the letters MG and to transfer to Nanjing any domain names including the mark “MG”.

Rights in the “Rover” mark were never sold to the Chinese or indeed to their predecessors Phoenix. Rather, they were retained by the even earlier owners, BMW, before being sold to Ford as part of their acquisition of Jaguar and Land Rover in 2006. It is presumably for this reason that the vehicles now manufactured by Nanjing are sold under the name “Roewe”.

Boycott in Wonderland: now you see it, now you don't

Via The Globe & Mail (eagerly spotted by friend and blogger Nikos Prentoulis) comes this news of a settlement of the publicity-rich spat (or is it a marketing ploy?) between leading European theatre chain Odeon and Disney over its threatened boycott. Says the report:

"A top European theatre chain said Thursday it will show Walt Disney Co's “Alice In Wonderland,” after threatening to boycott it in some countries to protest Disney's plans to release the DVD early.

Odeon's reversal on Thursday in signing a deal with Disney came the same day the chain hosted a London premiere for the movie at its Leicester Square theatre.

Odeon's concession follows similar deals by the UK's Cineworld Cinemas and Vue Entertainment chains, which were also initially reluctant to show “Alice,” but have relented and reached deals with Disney in recent days.

Odeon said in a statement it reached an “enduring agreement” with Disney “encompassing all the different aspects of both companies' commercial relationship.”

The statement did not offer details on the agreement. A Disney spokesman also declined to give specifics. [IP Finance offers a small prize to whoever (i) comes up with details of the agreement before they hit the public, and (ii) whoever comes up with the best explanation of the effect of the agreement on the short- and long-term financial implications for Disney's rights management policy]

... Disney has upset theatre owners with its plan to shorten by about a month the standard 17-week [that's four months, a hell of a long time for parents to put up with kids' nagging] window between the film's theatre debut and its DVD release, in part to spark disc sales.

The chains grumbled that audiences would skip going to theaters, and wait to see the movie on DVD. [None, of course, would dream of filling in the gap -- whether 12/13 weeks or 17 -- by practising a little P2P. Even with really slow connection times, it won't take that long!]

Odeon & UCI Cinemas Group, owned by London-based private equity firm Terra Firma, said earlier this week that it would not show “Alice” at its UK, Irish and Italian theaters.

Odeon's 110 theaters in the UK make it the largest chain in that country".

Someone has to lose. If Disney pushes out the DVD on or around the launch date, theatres suffer and so do some of the traditional pirates, those who trade in hard copies. If the DVDs come out later, the theatres get some advantage (unless the movie flops) but the window for pre-legitimate-DVD piracy and file-sharing at a time when there simply is no legitimate product can seem gapingly long. There are other items to factor into the equation: how much merchandise is being tied in, how close to Christmas, and so on. This time round, the excitement about Alice being a 3D movie might just have given the theatres the edge. But next time ...?

The Smarter Business Model

The Smarter Legal Model: more from less is the title of a book by Trevor Faure (Global General Counsel and Partner, Ernst & Young Global), published this month by Practical Law Company. According to the promotional literature

"The legal profession is under fundamental examination as a result of the unprecedented impacts of globalization, financial pressures, trans-territorial laws and instantaneous global communications, amongst others. The imperatives to perform as both commercial and compliance leaders have never been higher.

The Smarter Legal Model is a practical "toolbox" of complementary methodologies which have been applied on a multi-million dollar scale and proven to:
- Increase legal coverage by maximizing individual potential
- Reduce legal costs
- Improve both compliance and client satisfaction at the same time
- Replace the traditional law firm-client tension with a mutually-profitable partnership

The Smarter Legal Model applies world-class business and behavioral principles such as six Sigma, return on invested capital, zero-sum game theory and neuro-linguistic programming to the practice of law for the first time with tangible results. Recently reported benefits of the Model include a 27% reduction in legal fees, a 60% reduction in litigation volume and demonstrable improvements in client satisfaction. The Smarter Legal Model will be of use to in-house lawyers, private practitioners and even professionals from non-legal disciplines. It is being taught at Harvard Law School as part of its program on the legal profession and was also the subject of two Harvard Law School case studies in 2009".

I have not yet had a chance to read and review this book, but will do so with great interest since its author is not without familiarity with the cost of the legal system as it applies to intellectual property rights enforcement and management, having spent some years gaining practical experience in the field of copyright in the recording industry before changing the direction of his career.

The Sale of Polaroid's Collection: The End of a Photography Era

The art market is one of those esoteric worlds that I can only appreciate from afar, if at all. It takes on a particular curiosity when intertwined with bankruptcy and court-ordered sales of multiple works of renowned artists. All of this will come together on June 21st and 22nd, when numerous instant photographs taken by such famous artists as Andy Wharhol and Chuck Close, as well as prints from such photo masters as landscape photographer Ansel Adams, will be sold at a controversial public sale at Sotheby's in New York City.

According to a recent news report by Lindsay Pollack on Bloomberg.com, entitled "Controversial Auction Sells Wharhols from Polaroid's Collection", the sale is part of the bankruptcy of Polaroid, the leader in the once instant camera business. The tale of the Polaroid demise is itself a riveting tale of a company that once dominated a technology that was later superseded and then went through two bankruptcy proceedings during the past decade, the second time as a result of an alleged Ponzi scheme by its then owner, Petters Group Worldwide.

As a result of the bankruptcy, the Polaroid name and assets were acquired last year for approximately $88 million dollars. However, the company's photo collection was not part of the previous sale, and it the auction at Sotheby's is expected to fetch between $7.5 million to $11.5 million dollars. The collection was amassed in the 1970's is one what is described as an "acquisition and barter" arrangement. The company offered artists free cameras, film and studio time; in exchange, the company received free prints, which ultimately numbered over 16,000 works.

So where is the controversy? It appears that the problem arises not in the instant camera photographs assembled in the 1970s under the acquisition and barter" arrangement, but rather the photographs assembled for Polaroid 20 years before by the legendary Ansel Adams at the request of Polaroid's founder, Edwin Land. Adams apparently purchased a large number of works from famous photographers of the time, including Edward Weston, Margaret Bourke-White and Dorothea Lange (whose photo from the Depression era--"Migrant Mother, Nipomo, California"--is valued at $80,000).

And here is the rub. According to photography critic A.D. Coleman, "[t]he collection is going to be dispersed, which is against promises made to the photographers." Coleman claims that the photographers would remain together, primarily for the purpose of enabling the public to view and study them. Coleman also claimed, in the words of the article, that "the artists were promised access to the images for copyright infringement and subsidiary right licensing--all of which would be difficult if the prints are sold to anonymous buyers." Coleman says that the photographs were in fact never really "sold" to Polaroid. Rather, in his words, "[t]his was permanent custodianship for Polaroid,with visitation rights for the photographers."

I am not certain what to make of Coleman's comments. It would be an interesting legal question if permanent custodianship by Polaroid was a bailment over rather than a transfer of ownership of the works. However, the article does not mention that any of the photographers involved are challenging the sale of their works. One photographer, Neal Slavin, simply lamented that it is "a disservice to a piece of history," but he does not suggest that a legal claim will be mounted against the sale", where the individual works "will go out into the ether."

Moreover, while there may be cultural and aesthetic reasons to claim that a collection can take on a collective identity of its own, it is difficult to see how that can translate into a legal argument in favour of maintaining it intact. So I guess the sale will go on as planned. Still, if I find myself in New York City around the time of the summer solstice, maybe I will try to gain access to the sale--just to observe, of course.

RSA Budget Speech - some IP implications

Yesterday, RSA's new finance minister - Pravin Gordhan - delivered his 2010 Budget Speech. With the help of a useful summary of the speech from Moneyweb, this blogger considers some of the IP implications below:

• Exchange control reforms are proposed: the proposed reforms do not appear to impact the continuing effect of this form of protectionism on the international technology transfer market and IP licensing requirements (which include intra group brand licenses) where RSA residents are involved. There is renewed talk of promoting RSA as a gateway to Africa and for dropping some of the controls to encourage this development.
• Tax on a pack of cigarettes to increase by R1.24 from R7.70 to R8.94. Beer to increase by 6c a can and wine by 16c a litre. The impact is likely to squeeze profits on these goods. Branding may become even more important to retain customers, and those with smaller ad spends are likely to suffer. Counterfeit goods may increase to meet the addictive demands associated with these products.
• Congestion, pollution and landfill taxes are considered. The need for alternative solutions is likely to continue spur innovation in this area. Of course, it is going to be even more difficult for any trade mark lawyer to secure rights over the colour "green".
• Real public spending growth limited to +- 2% per annum, lower than preceding three years. Meanwhile the public sector wage bill almost doubled in five years. This blogger hopes that CIPRO is/has been in the front of the queue for funding and wage increases.
• Economic growth of 2.3% projected for 2010, increasing to 3.6% by 2012. Modest by recent RSA standards but may positively impact on local IP filings which declined (especially trade marks) remarkably in 2009

• 2010 FIFA World Cup to contribute 0.5% of GDP in 2010. Perhaps the compensation for the vice like control FIFA has over the tournament and all advertising around it. It is worth considering too that "so far, government has spent R33bn preparing for the soccer games."
• R8.4bn for fighting HIV/Aids with antiretroviral therapy. This spending is likely to spur the ongoing discussion about costs and the economic role of IP in fostering innovation and/or restricting access to ARVs and related infrastructure.

Why use experts? An expert explains

At last week's IP Finance-supported seminar on Funding and the Fortunes of Intellectual Property, hosted and organised by Hardwicke, I asked speaker Elizabeth Gutteridge (Partner, Forensic & Dispute Services, Deloitte LLP) if she could give any pointers to SMEs --which are notoriously reluctant to engage the services of financial consultancies if they can avoid having to do so -- which might either demystify some of the challenges of quantum assessments and/or give SMEs (and others) some degree of reassurance that engaging an expert doesn't have to be scary and/or expensive. Elizabeth has responded by producing some headings that correspond areas in which experts operate. This is what she says:

"1 Lost profits: If you're considering claiming for damages, be realistic as to how the infringement has affected your business. Dig out contemporaneous documents which show how your plans changed as a result of market developments and try to pinpoint the effect of the infringer's behaviour.

2 Royalties: A fall-back option will be assessing a reasonable royalty: consider how you would have responded if the infringer had approached you to take a licence instead of infringing. How have you treated other licensees? What benefits would you/they have expected to realise were a licence to have been granted? How does this compare with the licensing practice of other industry competitors?

3 Account of profits: How well do you know the infringer's business? Really? Can you tell how much they will have profited from infringing? Have they competed directly with you or would you actually have struggled to make the sales they have?"

If a business knows the answers to these questions already, it presumably won't need expert advice. However, in the vast majority of situations, the information or intuition of an SME needs to be supplemented if it is to be credible and reliable, and that's where experts come in. Thanks, Elizabeth, for your thoughts.