Myhrvold’s Business Model

Historical Trends in Industry Funding for R&D and Patenting

Will Myhrvold’s Model Work?

In recent articles in both the NYT and the Harvard Business Review, Nathan Myhrvold, former CTO of Microsoft and current Founder of Intellectual Ventures (IV), defended his company against being labeled a “patent troll” and described the actual intent of IV:

What weʼre really trying to do is create a capital market for inventions akin to the venture capital market that supports start-ups and the private equity market that revitalizes inefficient companies. Our goal is to make applied research a profitable activity that attracts vastly more private investment than it does today so that the number of inventions generated soars…

I believe that invention is set to become the next software: a high-value asset that will serve as the foundation for new business models, liquid markets, and investment strategies…  like software, the business of invention would function better if it were separated from manufacturing and developed on its own by a strong capital market that funded and monetized inventions…

A functioning invention capital market and industry can enable inventors around the globe to create hundreds of thousands more inventions each year than are being made today. Sure, some of those inventions will be silly or useless. But what matters is the top 1% that will make our lives vastly richer and better. Create an invention capital market, nurture an invention capital industry, and the resulting virtuous cycle will surely transform the world.

Myhrvold’s Business Model

Before assessing Myhrvold’s intent as stated in the first paragraph above, it is important to understand the distinction between invention and innovation.  Invention is the creation of a new idea, which, in many cases, can be formalized into a patent.  Innovation is the commercialization (development and monetization) of an invention.  Wikipedia provides the following description: “Invention is the embodiment of something new. While both invention and innovation have ‘uniqueness’ implications, innovation also carries an undertone of profitability and market performance expectation.”

What Myhrvold envisions is the following, as illustrated in the diagram below:  Companies like Intellectual Ventures (patents funds) would attract funding from investors to be used to fund inventions from private inventors.  The resulting patents would be aggregated into portfolios owned and/or managed by the patent funds.  The funds would commercialize the patents, generally by licensing out portfolios of patents.  Due to their transaction cost efficiencies and risk diversification natures, the portfolios of patents will be more valuable than the sum of the values of the individual patents.  Returns on the funds associated with commercializing their patents would be divided between the owners of the patent funds (e.g., Intellectual Ventures) and their investors.