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Thoughts About IP Investment Strategy in Nanotechnology

By Pearl Chin - Managing General Partner, Seraphima Ventures

A number of VC funds, such as Nanotech Capital LLC, have implemented an intellectual property (IP) investment strategy recently for nanotechnology. A typical IP investment strategy is buying up IP or patent or licensing rights to some well known university or even some lesser known university. Often it is done in a carpet-bombing approach where a whole slew of IP is included in the portfolio being purchased without regard to what it is. This is not all that different than the carpet-bomb approach of some VC's trying to invest in the nanotech space because they don't understand it.

Firms are throwing millions of dollars at university IP portfolios without regard to what is actually in the portfolio. Are we seeing another lemming investment strategy that will take us to another nanotech bubble bursting because they are ill-informed and believe nanotech is still so far off for ROI that only IP is available? The average person still believes that nanotech only exists as IP and not product. There is plenty of evidence in the commercial markets that counters that. The internet is a very valuable research tool for nanotech information if someone wants to take the time to do their due diligence.

How many of these patents will actually be so tightly written and reap such rewards that claiming a piece of the profits from it will be worth it? Is this piece of the action going to generate the returns necessary to make those millions spent worthwhile? What type of IP are they investing in? How many successful IP investment strategies have happened before that makes this a proven strategy?

Patents are a defensive tactic to protect and defend yourself from those who want to steal your valuable idea, valuable meaning making money. In the past, patent infringement cases usually revolve around a specific technology or process already making money being copied by another company. It is not supposed to be used in an offensive strategy.

However, IP is certainly valuable. In certain situations, an entrepreneur can secure financing using their IP as asset collateral. In most cases, that IP has to have proven to generate revenues. Of course, if that is the case, you can also get financing backed by the collateral of your purchase orders (PO's). IP is important but it is not the driver for making money. Product is what actually sells and brings in revenues, not IP. IP supports the product. Not all IP will or should end up in product - but should IP be the product? Unless it's a process that is already producing money, that IP may very well be worth little.

Do the VC's who are investing in IP actually know what's in the portfolio? Would they know it well enough to know when there is a new technology that has infringed upon a patent? Blanket buying of university IP portfolios is like going to a garage sale and buying everything because you don't have time to pick through all the stuff but you like the previous owners. You thought they were great people so they must have great stuff, right? Well, then you find that along with the nice stuff, you bought all the useless stuff hidden in the attic as well and you have no idea what it all is.

In a February 2003 article in Small Times, Edward K. Moran, Director of Product Innovation for Deloitte & Touche's (link) technology consulting practice and leader of its nanotechnology practice, is quoted as saying "Whenever I run into a entrepreneur or company that's overfascinated with intellectual property (IP), it kind of raises the red flag for me." "And if someone is saying, 'I've got a couple of pieces of IP that give me a competitive advantage or lock up some important competitive advantage,' that's what I call 'Islands of IP'."

In that same article, "In most cases, unless a deep-pocketed development, manufacturing or venture capital partner is willing to put the time and money into turning that IP into a real product that exhibits demonstrable, mass-production-friendly manufacturing processes, the long-term prospects for most of these companies are not very good," said James Tully, Gartner's chief analyst specializing in IP issues for the company's Semiconductor Group (link). "This doesn't mean these companies will necessarily fail outright, but dreams of small tech glory and riches may one day be replaced by a licensing deal or buyout to pay off creditors" said Tully. "Based on the lessons of startup history, this is where most companies will end up." I must agree here.

However, in an April 2004 article in Chemical and Engineering News, Ed Moran is quoted as saying "Those buying nanotechnology IP have an opportunity not unlike getting into electricity or the automobile industry early and locking up patents""there's going to be unimaginable innovation [based on] these early discoveries. If you can claim a piece of that action going forward, that's good from an IP standpoint." He is also quoted here as saying "A lot of nanotechnology companies are going out and locking up these little islands of intellectual property,""They grab a couple of promising but limited patents in a given area, and then they figure that they are ready to take in financing. Unfortunately, nanotech is so new and evolving so quickly that it is very difficult to lay bets on whether a little sliver of technology is ever going to turn into a commercial product."

These quotes are confusing and somewhat contradictory in their position on IP. I am still not exactly sure what "Islands of IP" are and if it's a good or bad thing unless they happen to be the "right islands of IP" are but I expect Deloitte & Touche offers IP consulting services. Note also, there are a lot of people offering IP services in that article.

Ed Moran says, "But for now, companies seem to want to avoid fighting over patent turf even though they might have grounds to do so.""There's not a lot of litigation going on yet in nanotechnology, which is curious, because it's not difficult to find examples of one company's IP bleeding into another's." There are some answers provided in that article as to why no one is litigating now but it is actually not so complicated and quite simple. Why should they litigate now? It's expensive to sue. The reason someone sues someone is to recoup damages and make some money from someone who has money. Why spend time litigating things that are not making money yet? It is akin to suing someone who has no money yet. What an awful waste of time and resources.

This is obviously a very long term investment strategy because you have to wait until a patent actually makes a significant amount of money, then someone sues someone else to reap the benefits from it and you have to wait until it goes through the court system for a decision and the money comes in. And in the court system, the decision typically rests with people who do not understand the technology and must depend on interpreting the wording in the patent.

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Dr. Pearl Chin has an MBA from Cornell, a Ph.D. in Materials Science and Engineering from University of Delaware's Center for Composite Materials and B.E. in Chemical Engineering from The Cooper Union.

Dr. Chin specializes in advising on nanotechnology investment opportunities. She is Founder and Managing General Partner of Seraphima Ventures, focusing on investing in nanotechnology. She is also CEO of Red Seraphim Consulting where she advises investment firms and startup firms on the business strategy of nanotechnology investments. She was Managing Director of the US offices and co-Managing Director of the London offices of Cientifica. Prior to that, she was a Management Consultant with Pittiglio Rabin Todd & McGrath (PRTM)'s Chemicals, Engineered Materials and Packaged Goods group.

Dr. Chin will be advising the Cornell University JGSM's student run VC fund, Big Red Venture Fund (BRVF), on investing in nanotechnology.

She is a Senior Associate of The Foresight Institute in the US and was the US Representative of the Institute of Nanotechnology in the UK. She was an alternate finalist for a Congressional Fellowship with the Materials Research Society.

She was also a Guest Scientist collaborating with the National Institute of Standards & Technology (NIST) Polymer Division's Electronic Materials Group under the US Department of Commerce.

Dr. Chin is a US Citizen born and raised in New York City.

This is another monthly column contributed by Dr. Chin to Nanotechnology Now. The full article appears in our January 2005 Premium Newsletter, along with other outstanding pieces by leaders in the field.

Read all her articles.

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