Silicon Valley’s Most-Hated Patent Licensing Firm Is Reinvented

The dietary habits of Finland’s populace went through a drastic change in 2011. Thanks to the low-carb craze and a rising preference for all-natural products, Finns started eating butter with impunity. Dairies failed to keep up with demand, and a butter crisis ensued. “It’s difficult to believe, but if you went to the grocery store, there was no butter,” Merja Holma says.

Holma, an animal-nutrition expert, had 20 years earlier developed a cow feed that increased the fat content of their milk. At that time fat was the enemy, and her invention languished. Now it looked like a solution to Finland’s lipid shortage. Holma rushed the feed through successful trials, and her employer, closely held agricultural supplier Raisioagro Oy, began selling it under the name Benemilk. About 1,000 Finnish farmers now rely on the feed, which turns out to produce higher-fat milk and also happier cows that pump out more milk overall. The Finns once again have ample butter, Bloomberg Businessweek reports in its Sept. 8 issue.

Raisioagro next started looking for a partner that could help turn Benemilk into a global blockbuster. It needed expertise in patenting the ideas behind its cattle chow, making contact with large-scale dairies in other countries, and perfecting its feed recipe to maximize milk production. Raisioagro tapped Intellectual Ventures Management LLC, a Bellevue, Washington, technology investment company. The move made sense on one level: IV certainly knew how to handle the dirty work of protecting the ideas behind Benemilk. Less clear was how this loathed company, the supposed enemy of innovation, could help create a hit product.

Hoards Ideas

Founded in 2000, IV has earned a special brand of hatred in the business world as the ultimate patent troll. It doesn’t delay your flight like United Airlines (UAL), buffer your movie stream like Comcast Corp. (CMCSA), or shellac your shrimp with oil like BP Plc. (BP) Rather, it hoards ideas. Over the past 14 years, IV has bought tens of thousands of patents and hired teams of scientists and lawyers to brainstorm and file for thousands more. It then wields this intellectual-property portfolio -- the world’s largest -- like a weapon. Companies can either pay up or face a lawsuit.

Google Inc. (GOOG), Apple Inc. (AAPL), and Intel Corp. (INTC), among other companies, have gritted their teeth and paid IV about $6 billion so far. “I think IV is basically a parasitic tax on the tech industry,” says venture capitalist Peter Thiel, a PayPal Inc. co-founder who’s also a Facebook Inc. (FB) board member.

Having earned billions in payouts from powerful technology companies, IV is setting out to build things on its own. Rather than keeping its IP under lock and key, the company is looking to see if its ideas can be turned into products and the basis for new companies.

Self-Healing Concrete

The first wave of products includes an ultra-efficient nuclear reactor, a waterless washing machine, self-healing concrete, and a giant squeegee for sucking up oil spills. One country has asked IV to help lower its temperature, and another wants it to create robots that can replace migrant workers.

As part of its transformation, IV fired 20 percent of its employees, about 140 people, most of whom were tied to its patent business, on Aug. 19. A new team busy turning ideas into products has raised millions of dollars to fund a flood of IV-backed startups. A network of 25,000 independent inventors submits ideas for review by IV and earns royalties when products based on their ideas reach market. Says Edward Jung, IV’s chief technology officer and co-founder, “We have built an engine that can solve big problems.”

As far as Jung is concerned, it’s Silicon Valley, not IV, that has lost the plot. A former child prodigy and chief architect at Microsoft Corp. (MSFT), Jung argues that venture capitalists have become obsessed with trifles such as social and mobile apps, while large corporations have pared back their research and development budgets.

Long Term

“Everything has moved toward the short term,” he says. “The public markets have gotten so efficient, and they’re not pleased when a CEO says, ‘Hold on. Give me 10 years, and I’ll figure this out.’” IV, he says, has been taking the long-term view all along. First it had to amass a patent portfolio. Then it needed to learn how to mine it for great ideas. Now it’s time to put those ideas to the test. Critics who only saw IV as a giant IP collector misjudged the company, he says. It will soon be pumping out dozens of revolutionary products.

Which brings us back to butter. Holma, the dairy researcher, says IV dug into its database to find a diverse set of inventors and flew them to Finland to brainstorm with her for two days. The researchers piled into a conference room.

Benemilk Patents

“I’ve never been involved in that kind of session before,” she says. “There were experts in mitochondrial function, biochemistry, and metabolism. It was so nice and productive to see people from these different areas work together.”

The group came up with several more patents around the Benemilk concept, with the goal of capitalizing on global milk demand, which is projected to rise as much as 50 percent in the coming years. China in particular has turned into a major dairy consumer and already pays big money to import milk from Australia and other countries, while the U.S. now faces a butter shortage of its own. “If we’re not able to increase the efficiency of production, we’ll need another planet to make all the feed,” Holma says. Tim Londergan, an executive at IV, is heading a venture formed between his company and Raisioagro around Benemilk.

“Inventions take time,” Jung says. “You are usually inventing the future, and you have to wait until the timing is right.”

Bellevue Laboratory

It’s impossible to tell the story of Intellectual Ventures without a visit to its laboratory in Bellevue. Spread across five buildings in an industrial part of the Seattle suburb, the campus is the workplace for 170 scientists, 40 of them Ph.D.s. They have access to more than 8,000 pieces of scientific equipment, including mass spectrometers, lasers, particle sizers, and a hydraulic airplane wing bender. If the engineers need to weld metal or saw wood, they can do that in a giant machine shop. Scientists who work in the IV labs must come up with ideas, test them, and then either patent them or move on to the next thing. Soon the lab will relocate from this 50,000-square-foot setup to an 80,000-square-foot one.

The invention lab has already produced spinouts, including a few backed by Bill Gates. There’s TerraPower LLC, which is building a novel type of nuclear reactor; the satellite company Kymeta Corp.; and Evolv Technologies Inc., which has built image-detection technology.

Vaccine Thermos

IV has also invented a barrel-size thermos contraption that can keep vaccines cold for months with only a couple handfuls of ice. It’s being used throughout sub-Saharan Africa. A large Chinese appliance maker is taking the same technology to see if it can manufacture a line of commercial refrigerators that can run without reliable electricity.

The laboratory is the brainchild of Nathan Myhrvold, IV’s chief executive officer, who founded the company with Jung. A former chief technology officer at Microsoft, Myhrvold is the protagonist in many news stories about IV, because he likes the attention and because of his record of eclectic accomplishment. He’s found T. rex skeletons while working as an archaeologist, studied “curved space-time” with Stephen Hawking, and written a 2,438-page cookbook. Yet while Myhrvold, 55, remains IV’s chief, it’s Jung, 48, who’s spearheading much of the company’s transition and who takes time to explain its plans.

289 Travel Days

Sitting in a small conference room tucked in a corner of the main laboratory, Jung is dressed all in black and sports a ponytail down to the middle of his back. Over the past year he’s traveled 289 days, flying around the world to meet with inventors and work on massive deals with the companies, cities, and countries that want to embrace IV’s most ambitious technology. He says Silicon Valley’s distrust of IV bothers him.

“It’s unfortunate that we have a bad reputation,” he says. “I don’t get why we’re singled out so much as being particularly evil.” As the conversation goes on, however, Jung moves from lament to anger. “I am not embarrassed by the inventions we come up with,” he says. “If someone from Google or wherever wants to give us a hard time, I’d ask them, ‘How many of your inventions have saved 10,000 lives?’ If there are talented people out there who can solve these big problems, we should let them solve the goddamn problems.”

IV’s moneymaking part is called the Invention Investment Fund. IIF is similar in theory to a fund set up by a venture capital firm. The twist is that instead of investing in startups, you are investing in IV’s ability to make money off its pool of patented ideas. Returns come predominantly from licensing, as well as the occasional settlement or win in court.

Cisco, Intel

The first time IV came to Silicon Valley peddling the fund, tech companies were pretty game to participate. The logic was straightforward: Backed by IV’s arsenal of 70,000 patents, large companies were less likely to face lawsuits from competitors, because they could pick with relative ease through the IP portfolio and find something worthy of a countersuit. It was a mutually-assured-destruction play. Apple, Microsoft, Cisco Systems Inc. (CSCO), EBay Inc. (EBAY), Intel, and SAP SE all joined Google as IIF investors.

IV also signed up startups. For example, in 2013, Nest bought into IV’s program and gained access to patents covering how devices such as a smart thermostat announce themselves on a network. Nest basically purchased protection from larger companies looking to block or slow it from coming to market.

The problem was that IV kept asking for more. It raised a second fund and then a third. Some companies, Microsoft and Intel among them, have invested in multiple funds; others such as Google dropped out after the first.

Friend, Foe

The risk an IIF investor runs by not re-upping is that IV will shift from friend to foe and file a lawsuit based on a patent violation. IV and Google, for example, have feuded for years, and it’s expected that Google may soon become the highest-profile target of an IV lawsuit.

The investor Chris Sacca laid into IV during an infamous This American Life piece on the company, describing its business model as “a mafia-style shakedown.” Sacca’s comments resonated with other detractors who grouse about IV’s so-called invention sessions, in which it has teams in a room thinking up ideas that can be added to its trove. These sessions represent everything people hate about the company—coming up with concepts in a vacuum so lawyers can weaponize them for a future lawsuit.

IV has filed more than 50 suits for patent infringement, a large chunk of them against banks and a handful against technology companies. The legal wranglings have, Jung admits, taken longer to process through the courts than IV expected.

Mixed Returns

Moreover, the returns on the funds have been mixed. The original fund had a 16.2 percent average annual rate of return at the end of 2012, according to a report by Reuters. The rate of return for the second fund, however, fell to 2.5 percent. (IV says the figure is wrong yet declines to share IIF’s returns to date.)

“We have a small set of companies that love the model,” Jung says. “Others in Silicon Valley hate it. They would like to make everything free or just screw the inventors. I have been surprised how many companies acknowledge they infringe a bunch of patents that we have, but they don’t want to pay.”

Jung says that while IIF remains the bulk of IV’s business, it’s always been a steppingstone for the company. Today, IV has several newer funds focused on licensing ideas that can be turned into products and launching pads for startups. The recent layoffs at IV are a result, he says, of the business honing its model. “We don’t need as many people to sift through and sort information now.”

Firing Fallout

When the firings became public, the company’s foes exulted. “First time I’ve ever been happy to see layoffs announced,” tweeted Adam Crouch, a digital strategy director at Walgreen Co. (WAG)

Jung says IV is now poised to accomplish more. “We can do spinouts, joint ventures, and mergers,” he says. “We have a lot of flexibility.”

Jung grew up in Buffalo, New York, the son of Korean immigrants and professors at the University at Buffalo, the State University of New York. He never quite fit in with his peers, yet he excelled in school. At 13 he started a business repairing electronics for family friends. It got big enough for him to hire two graduate students as employees. At 14 he’d already graduated from his elite prep school on a “dual track,” he says. “One was to be a good Korean and go to medical school, and the other one was to start companies.”

Solo Treks

Jung enrolled in a program at Washington University in St. Louis that allowed him to simultaneously pursue an undergraduate degree in mathematical physics and a medical degree. Even that hefty course load was not enough to keep him busy. Jung participated in the Homebrew Computer Club from afar through newsletters. He ran a company specializing in high-end computing projects that required the horsepower of many machines and took on projects for some of the large industrial powerhouses in St. Louis. During breaks from school, he would set off on multiweek solo treks -— one in the Arctic, others through the backwoods of the U.S. On one trip, Jung took no extra food and tried trapping animals for sustenance.

“It’s when you do something like that and see how hard it is to catch an animal that you realize the rifle was the best f- To contact the reporter on this story: Ashlee Vance in San Francisco at avance3@bloomberg.net

To contact the editors responsible for this story: Bradford Wieners at bwieners@bloomberg.net Elizabeth Wasserman, Jon Morgan

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