Intellectual Property Portfolios – Investors Beware

Implications: The Nuance v. Vlingo case may be an example of two things; first is Intellectual Property growth via acquisition and second is Patent Infringement Litigation Gone Wild.

Analysis: I don’t know all of the details of this case.  It frankly makes me sad to see a small startup called Vlingo having to deal with a patent infringement suit.

I am not going to take a side in this matter.  However, I feel it important that investors understand some of the issues that may impact investors.

I have no trouble with companies buying up intellectual property portfolios.  Many inventors do not have the resources to monetize their inventions.  In fact most inventors have no clue how to go about raising money to build a company.  There are also many a great company today that have built a business based on acquiring other companies.

There are a slew of telecom and infocom companies that have acquired companies with impressive intellectual property portfolios.  These companies are also suing other companies and are doing quite well.  Some of these companies even make money selling real products at the same time.

The real issue I have with what is going on in the telecom technology space (I include all information and Internet companies in the telecom space) is the potential for devaluing corporate intellectual property portfolios.  Imagine some company knowingly and wrongfully suing another company for patent infringement.  The defendant is stuck spending millions of dollars defending themselves from the plaintiff.  Right does not make might in these instances.  What counts is how much money you have to bury the other guy under a mountain of legal costs.  Heck, it does not even matter if you have a good case or not.  You can spend so long in court you end up begging the other guy to drop the suit even though you are in the right.

The current situation with technology companies is plain scary.   How does an investor or a creditor value a startup technology company when it has no revenue?  The answer is revenue potential.  How does a creditor or investor value a company where many players are embroiled in multiple intellectual property lawsuits?  Answer is: you can’t or at least not easily.  How does an established company maintain intellectual property leadership if the competition is constantly taking potshots via the courts?  The answer does not come easily to me.

Some folks will tell you that the threat of patent infringement has always been looming on the horizon for all technology companies.  These same folks will tell you that the patent portfolio means less than the business case.  My comments are:  These folks would be correct that the threat of patent infringement lawsuits has been there but now the industry is seeing large numbers of lawsuits in the works.  Next, the patent portfolio does mean less than the business case but when you are a technology company your patent portfolio is half your business case.  Finally, the telecom space was never this litigious 10 years ago, 15 years ago, or even 30 years ago.

How does an investor or creditor mitigate their risk in today’s very litigious telecom environment?  The patent portfolio allows investors to collaterlize their loans/investments.  If the portfolio is being litigated than what value is their to the investor or creditor.

Nowadays, creditors and even equity investors are demanding corporate founders to invest a minimum of 35% (of their own money) of the company’s equity value.  Equity investors are now debt & equity players in the same company.  I don’t blame investors one bit because the only way to ensure their money is protected and their position is protected is by becoming senior secured creditors.

Come to think of it, the current situation for startup companies and established companies looks like the old days in the early 1990s when banks and investors asked for things like: revenue record, management track record, and management having a lot of skin in the game.

The current situation is tough for debtor management, creditors, and investors.