The collector

The first thing one sees upon entering the headquarters of Intellectual Ventures is what appears to be a dinosaur fossil mounted on the wall. Then, as one goes down the hall to founder and CEO Nathan Myhrvold's corner office, one passes a life-size replica of the head of a Tyrannosaurus rex from the set of Steven Spielberg's 1997 film The Lost World: Jurassic Park. In his office, there's even more dinosaur memorabilia. Myhrvold is something of an amateur archaeologist in his off-hours, given to visiting dig sites all over the planet.

The computer on his desk, with its double screens and unusual Dvorakstyle keyboard, suggests a person who goes about his business somewhat differently than others do. And the fossils and other old objects scattered around the office – including an impressive collection of antique scientific equipment – paradoxically give one the impression that Myhrvold is on the cusp of a new, modern age. More prosaically, it also gives one the feeling that Myhrvold eagerly likes to collect things; indeed, some have accused him of collecting patents for mysterious, and nefarious, purposes.

When Myhrvold appears, he says he just got back from Europe, and he will be flying out of town again the next day – but he shows no sign of jetlag. In fact, in spite of the breakneck schedule, he's bursting with energy, as if he's eager to move on the next big thing. Myhrvold's cheerful demeanor doesn't quite jibe with the image that's often painted of a genius bent on world patent domination.

Myhrvold's seemingly boundless energy has served him well throughout his life. As a postdoctoral fellow at the University of Cambridge, he worked with famed physicist Stephen Hawking. He has a doctorate in theoretical and mathematical physics and a master's in mathematical economics from Princeton University, as well as a master's in geophysics and space physics from UCLA.

It's classic for a researcher to beat their head against one hard problem their whole life. Generally, what inventors like to do is say, ‘Don't beat your head against the wall too long. Give it one or two good, hard cracks. If the wall isn't feeling soft after that, why don't you go and find a softer spot on the wall?’

That might be enough accomplishment for some people, but not Myhrvold: after his small software company was bought by Microsoft in 1986, he went on to found Microsoft Research. As chief technology officer, he co-wrote the bestselling 1995 book The Road Ahead with Microsoft chief Bill Gates. He left the Redmond, Washington-based giant in 2000 to start Intellectual Ventures in nearby Bellevue, with a brand-new business plan based on, he says, investing in invention. That business attracted high-powered corporate investors – an unconfirmed and well guarded list that has been said to contain such boldface names as Sony, Intel and Microsoft.

Myhrvold is a man whose business depends on thinking hard about the future, and, in his experience, where he goes, the world follows. IP is a case in point. “There's this general trend through my life that I'll get interested in something, and then long after I get interested in it, magazines pop up, and all kinds of other things,” he says, popping open a Diet Coke from his office fridge as he sits down for an interview.

Intellectual Ventures was started in January 2000 – auspiciously, the dawn of a new millennium – with the stated purpose of investing in inventions created in-house. But it eventually started to buy up patents from outsiders – so many, in fact, that some industry watchers started accusing Myhrvold of being a “patent troll”.

It's a term that, ironically enough, was invented by Intellectual Ventures' co-founder and managing director, Peter Detkin, back when he was a general counsel at semiconductor monolith Intel. Simply put, patent trolls make their money by suing others for infringement of their patents. They don't produce anything themselves, say detractors – but merely feed on the spoils of litigation. What exactly is Myhrvold going to do with all of these patents? There's no sign that he plans to do any actual manufacturing. The question soon arises: is he in fact the biggest patent troll of all?

Far from it, according to Myhrvold. The company started with a fairly simple premise: put some money behind the process of invention – then licensing or selling those patents in the future. And there's a difference between invention, says Myhrvold, and the patentgenerating research that goes on at corporate research labs.

“Once upon a time, Bell Labs and IBM Research and Xerox PARC, places like that, were centers of innovation in the IT industry,” says Myhrvold. “And, pretty much, those have all fallen on hard times. The only real new company that has pumped significant money into making a research lab is Microsoft.” Myhrvold knows what he's talking about, of course: his Microsoft Research is easily the largest corporate research lab started in a generation.

“The difference is research tends to be about trying to solve hard problems,” says Myhrvold. “A classic research issue is ‘let's work on speech recognition’ or ‘let's work on artificial intelligence’ or ‘let's work on better compilers.’ So you pick the technology, and you work hard at it. In some cases you work on an almost impossible problem – and you just beat your head against it.”

Invention, though, resembles “pure” research – brainstorming in order to expand human knowledge. “Invention, to us, is about combination of really interesting technology, but also making sure that technology is really useful to somebody. It's classic for a researcher to beat their head against one hard problem their whole life. Generally, what inventors like to do is say, ‘Don't beat your head against the wall too long. Give it one or two good, hard cracks. If the wall isn't feeling soft after that, why don't you go and find a softer spot on the wall?’”

This kind of restless invention suits Myhrvold's nature. “We are a pureplay on investing in invention,” he says. “So regardless of whether it's investing in existing inventions, or investing in our own new inventions, that's all we do.”

The company files some 400 patents per year, and investing in existing inventions has become a key part of the company's plan. Indeed, the company has apparently already bought thousands of patents from outside sources. But why bother with outsiders, when you have in-house inventors yourself? The issue was, quite simply, speed.

There's only one way to make big money in software, and that's to become a pseudo-monopoly

“The interesting thing about the intellectual property business, broadly speaking, is that it's a great business in many ways, but it has got a couple of challenges, and the main, big challenge is timescale,” says Myhrvold. “A patent is a very longlived thing, but it can take a lot of years before it's in the money. So if you invest in creating a new patent – if we brainstorm one, right now, this morning – probably it'll be three years before we get the patent; depends on which group in the patent office it's in, depends on how much time is spent discussing it and revising it and kicking it around, but three years is kind of the minimum.

“So, in building our business, we realised that we were not going to be able to address a lot of our potential opportunities for such a long period of time, that it made sense to do a combination of both doing our own invention and investing in others' – the reason being: the other ones, they're already done. So it's a way of buying yourself five or six or 10 years into the future.”

Myhrvold came to a realisation about his initial plan to do everything in-house: it was very difficult and time-consuming to grow. “However, when it comes to being able to evaluate other people's ideas and make investment decisions – that's much more scalable.”

Private equity is Intellectual Ventures' model when it comes to investments in other portfolios. “We are private equity investors. It's a kind of private equity,” he says. “Typically, what private equity guys do is: they buy companies or they invest in them, and they try to make money on them. I don't see that it's any different here.”

But why the “patent troll” accusations? Myhrvold's no psychologist, but he has a theory. “You know what it is? It's a very common phenomenon in psychology: it's called projection. This is where you assume, ‘He's going to do with this exactly what I would do with it’.”

“The reason the ‘patent troll’ thing comes up is really two issues,” says Myhrvold. “The first is the world hasn't seen large-scale professional patent investing like this before. The other is that people that complain about patent trolls are often patent thieves. Flat-out, there's no polite way to say this – most of the people who complain about patent trolls, or who say they're afraid of us, or of me, it's exactly like people who deal in stolen goods saying, ‘Oh my God, I heard the FBI's going to make a big database of stolen cars. What a tragedy this is! This is terrible!’”

Patent-trolling, Myhrvold claims, simply isn't cost-effective. “It would be a stupid goal for us to have litigation as our primary means of making money. It's very expensive. Any product sale – stock, a car, real estate – could wind up in court. You have a contract, someone breaches the contract, and you have a lawsuit. So does that mean that you stock your sales force full of attorneys? Nobody else does, in any other walk of life. Why should I do this? I've never filed a patent lawsuit. In fact, the only lawsuits I've ever filed in my whole life had to do with a subcontractor at my house – and believe me, that wasn't my goal there, either!”

The constant threat of litigation has caused some big businesses, primarily in the IT industries, to push for change in the way the patent system works. Companies such as Microsoft, Intel, Cisco Systems, and other IT companies have often been accused of infringing patents without paying for them; weakening patent enforcement would certainly benefit those companies. They “feel very threatened, because they think, ‘Wait a minute. If this whole industry becomes very efficient, that means I'm going to have to pay something.’ The people we're talking about here are the most successful companies on earth. These companies are leading in what is laughingly called ‘patent reform.’

“Older, established companies tend to be for it, particularly for themselves,” says Myhrvold. “They are deeply hypocritical, and they'll whine about me, but they sue the crap out of each other every other day, trying to get some advantage.

“These are companies that totally play hardball. These are the most hardball-playing companies in the world that brutally compete to squelch their own competition in their industries by many means, including patent lawsuits. So these are big boys, this is not some Sunday school class that we're beating up on.”

Those who favor strong patent enforcement, like Myhrvold, have been dealt some setbacks lately. In a recent US Supreme Court case, MercExchange v. eBay, the Court ruled against the principle of “injunctive relief” in the case of a small patent holder who claimed that the online auction giant had infringed its patent. Ordinarily, eBay would have been shut down temporarily until the infringement question was resolved. Not in this case; instead, eBay could continue its business as usual. That outcome could have repercussions throughout many industries.

The interesting thing about the intellectual property business, broadly speaking, is that it's a great business in many ways, but it has got a couple of challenges, and the main, big challenge is timescale

In the software sector, says Myhrvold, patents weren't seen as an asset, a perception that Myhrvold wants to change. “There's only one way to make big money in software, and that's to become a pseudomonopoly. Essentially, every successful software company has dominant market share in at least one area. It's not just Microsoft; it's Oracle, it's Adobe, you can go right down the line. Anything that detracted from them getting to dominant market share was something they didn't put any focus on.”

Thus software-based companies have more or less ignored patents entirely. “Last I looked, eBay had 10 patents or 11 patents,” says Myhrvold. “This is a multibilliondollar company. If you looked at a semiconductor company with the same market cap as eBay, you'd have thousands of patents. I expect if you look, you'd find that they're filing patents like crazy, because they understand that they need them for the future.

“The thing that's myopic about this is that these companies grew up around copyright, because without copyright they couldn't make a dime, and patents weren't part of the business model. They never made a dime on them, so they would just as soon see patents go to zero. Many of them have big tracts on their websites arguing that there should be no patent system at all. And the reason is: they've become the wealthiest people on earth by ignoring it.”

Myhrvold sees IP as an asset class developing along the lines of private equity. “I think if you really look at this in the long run, invention is important, and by creating a means to get inventors funded, and get inventors rewarded, including having a liquid market, and having people be able to invest in it – that's a good thing,” says Myhrvold. “If we look at every other industry where that has occurred, it's been a very good thing. The private equity industry has been a fantastic addition to the American economy, yet when it started, they were vilified just like I am vilified. They were called ‘barbarians at the gates,’ not ‘smart guys with money.’

“The people who were threatened in the RJR Nabisco case [the deal famously recounted in the bestselling 1990 book Barbarians at the Gate by Bryan Burrough and John Helyar] were the CEOs of existing companies, who were fat and inefficient, and who didn't want what they viewed as robber-baron, ‘barbarian’ kind of guys coming in saying, ‘You've got to restructure, cut costs, make everything more efficient.’”

I think that the great business innovation in the first part of the 21st century is going to be this: treating inventions – and patents, as the specific legal form – as a first-class asset

Now if a company has a division that you don't know what to do with, Myhrvold says, everyone knows you can call the private equity guys. If you buy too much real estate, you can call a broker and sell it. “There are a million different things you can deal with like it's a for-real asset,” says Myhrvold.

Not so with patents; at least not yet. “Currently, the way the world works, there is no liquid market; there is no set of investment profession that is supplying liquidity to create an effective market. But suppose there was. If there was, you'd find more people willing to put capital in the front end.

“I think that the great business innovation in the first part of the 21st century is going to be this: treating inventions – and patents, as the specific legal form – as a firstclass asset. If we do, I think it's crazy not to believe that all of the general benefits of capitalism will develop, some people will be better at it than others.”

So far, Intellectual Ventures is making venture capital-like investments in its own inventions, and private equity-like investment in others' inventions. “If we're successful, and if the world follows us – and I hope the world does follow us – and 10 years from now there's 50 of these funds or 100 of these funds, that will channel billions of dollars into the hands of inventors and inventing organisations.”

Myhrvold doesn't know exactly how much money he's going to wind up spending on Intellectual Ventures, but he's going to spend “a lot of money,” he says. “And besides me, a whole bunch of other people are [spending money], and that's a measurable amount of return that flows right back into the system, which only stimulates more.”

The reasoning behind investing in IP is simple, says Myhrvold: if you give the world the incentive to make great inventions, more people will do it. “By creating that incentive – and by creating a meritocracy where the people who do it best get paid more – that will cause other people to say, ‘Hey, I'll go do that.’” The potential technologies that might be created are unknowable, of course – but tantalising.

“I don't claim that I'm going to be successful, but I think it's a very powerful idea, that has lots going for it,” concludes Myhrvold. “I might be the old fogy that screws up, and 20 years from now, all of the successful young invention investors will say, ‘Let's pass the hat for Nathan's retirement. You were right, but you screwed up.’” At this, Myhrvold lets out a big, boisterous laugh.

Intellectual Ventures, this unarguably ambitious project that Myhrvold is working on here in an unassuming office park, could end up transforming IP investment worldwide. Myhrvold is a collector, hoarding patents like he does dinosaur fossils – but will those patents remain as lifeless as those prehistoric bones? One thing is for certain: whatever Nathan Myhrvold does in the near future won't be ignored.