A year after penning a piece on Intellectual Ventures for Forbes headlined Trolling for Suckers, Nathan Vardi has once again returned to the theme of the apparent lack of returns being made by investors in what is undoubtedly the world’s best-known NPE. Under the title Nathan Myhrvold’s Patent Investing Returns Are Still Lousy, Vardi begins: “Around 2008 Nathan Myhrvold, Microsoft’s former chief technology officer, raised $2.9 billion in two separate funds to invest in patents and inventions. More than four years later, those funds have returned very little cash back to their investors and the returns look lousier than ever.”

From an IV perspective the reporting does not improve from there. The firm’s Invention Investment Fund II, Vardi states, has an internal rate of return of - 2.55% and since it was launched institutional investors have had returns of just 30 cents in the dollar. As for the more recently created Invention Development Fund, which focuses on Asia, it is “a complete disaster”, Vardi claims; with an IRR of     - 69.23%, it has “yet to distribute a single penny to its investors”. The article concludes:

IV says it has generated more than $2 billion, though a big chunk of that seems to be in its initial patent-buying fund, and that 2011 was a record year for distributions to its investors. But IV will have to generate many times more than this and become a massive force in the tech industry for any of this to make sense for its investors.

Doubts about IV’s ability to provide decent returns to investors are not new. If you spend any time talking about the firm with people who operate in the marketplace it is a subject that almost always crops up. However, looking at the list of the investors revealed on this blog last year, you can see that there are two kinds: those who are in it purely for the money, and those who may be keen on cash at some stage but which very definitely have a current defensive motivation for being involved too. Thus, the interests of, say, a Flag Capital are not in perfect alignment with those of a Microsoft Corporation. The former is looking for cash and nothing more as quickly as possible; the latter is probably pretty happy that IV has bought up a lot of patents that cannot now be asserted against it.

As IV quite reasonably points out, the returns on patent funds are bound to be back-ended. Patents have to be purchased and deals done before the money starts rolling in; and it is a continuous process, not something that happens over a short time frame and then stops. This is surely a point that all IV investors should have understood before they parted with their cash. There is absolutely no doubt that Microsoft, Apple and other corporates would have realised; if those on the finance side did not, then unfortunately they only have themselves to blame.

One of the problems as IP becomes more mainstream will be one of education – to get returns from patents you have to grasp how they work, where the money comes from and how deal-making is done. It may be hard to pay many millions to IV in management fees each year at a time when the returns are low, but that really is the nature of the patent fund beast. If you are not prepared for that, then you are best off leaving your wallet in your pocket. Patents are not the equivalent of an investment ATM. 

A couple of weeks back, IV held a private event at the firm's HQ in Bellvue for a select group of intermediaries active in the patent market. The message was that if you do have patents to sell on behalf of clients we are very interested in taking a look at them; so there is no sign that IV is letting up in its acquisition activities. Indeed, there are also rumours that the firm may be looking to do another investment round. If that is the case, it will be interesting to see whether it gets any bites from the financial community. My guess is that it probably still has quite a lot of capacity to generate interest among big, IP-owning corporates. However, whether these on their own will provide the size of cash pool IV’s management wants is another question entirely.

Sectors

Licensing, Patents, IP business, IP finance

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