Tuesday, February 9, 2010

IP Problems

A few years back we started a company by licensing some technology from Stanford--actually we did a few of these types of deals and it was always fascinating to work with an enlightened academic institution. Having written a lot of my own patents (because we couldn’t afford patent attorney fees) I have a great respect for IP, but also a healthy skepticism--patents are great shields but rarely swords. Now in many places IP is seen as the crown jewels of a company and sometimes it can be but more typically it’s just a start. Unfortunately this obsession with IP leads to the fatal "technology leading the market problem."

In my short stint as a professor (now there’s a story), I thought wouldn’t it be wonderful to create a new method of collaboration with industry where academics were not so IP obsessed and focused instead on creating long term value. The problem, as I discovered, was that in the mind of the inventor, and most academic institutions, the IP itself is the work product. As such it is seen as 80% of the value of an enterprise emerging from it. In many cases there is a non technology oriented adviser involved who wants to split the IP 26 ways to create a portfolio of companies ... well actually a series of separate transactions where the same IP can be sold over and over again ...

So in this startup that I am remembering, the technology founder cut a rather aggressive IP deal with Stanford and managed to secure an exclusive license (which they rarely do), and on pre-financing equity structure, which of course tilted significantly post financing ... there were a few other non transparent items that ultimately conspired to give Stanford very little in return for this license.

Now this type of "hey I tricked you fair and square deal" is not worth doing, ever, but it seems to be rife in certain geographies--in this case Stanford was in a position to help us considerably with the implementation of the technology and to continue to invent, develop, and otherwise drive the evolution forward and we wanted an ongoing relationship with them. So once the company was funded we went back and renegotiated the deal by giving them more. You might think that our black blooded VCs would have opposed this move, but no in fact they applauded it and it increased their level of trust. Now this is not business school 101 approach--it's your job to negotiate the best deal you can for your side and the other guy beware--but it's rare to have a negotiation without an ongoing relationship, and if you value people you had better reward them otherwise they won't waste time dealing with you again.

So can you get to a stage where institutions will work with you in good faith, knowing that you will take care of them if they deliver real value?

I think so, but not easily. The converse problem is the licensing agreement where the institution gets so much royalty out of your sales that it hurts profits and you are no longer incented to pay it--in this vein we found Stanford to be extremely sympathetic to the practical realities of building a business and a simple sliding scale royalty that decreased when market forces reduced margins to ensure the company remained profitable and vibrant rather than weighed down by the weight of royalties.

Too often in IP deals, there is a focus on the lawyering of the agreements and parties lose sight of the objective, which should be the same for both--i.e. someone needs to commercialize the invention, and both need to profit from it. The vast majority of work will be done post invention and IP owners need to be realistic about this.

Exclusivity is the other issue--patents are legal monopolies for a time, so if the IP owner can pick a winner, it's better to let them run with the IP rather than try to be an arms dealer, and enable 20 competitors to slug it out in the market. As a worst case example think of the memory market and the cross licensing IP mess it is, which is largely at the heart of its distinct lack of profitability.

At the heart of the problem is that IP is a future value to be unlocked by a team of people, often not the inventor (and almost never the IP owner). For that future value to be realized, a team of people is needed--the IP creator needs to work with this team, roll over future inventions and value to that team if they are needed to ensure success, and bet on the success of that team--in the end, it's people, not patents that make startups work ;-)