It Ain’t Easy Being a Patent Troll – Intellectual Ventures’ Money Troubles

It seems that the patent trolling industry may not be ready for Wall Street after all. Intellectual Ventures, the “gentleman gangster” of the patent troll world, isn’t looking like such a hot investment.

First, there was the news that its “invention funds” are performing poorly. As of last May, one of the funds had a return of -70%!

Now, IV is trying to raise money to start a new fund. And it’s having a little trouble finding investors.

This has apparently created other problems for IV. It seems that all of its existing funds have closed in the sense that they can no longer buy more patents under the terms of the funds, which only had five years in which to purchase patents. (There’s nothing wrong with that – it just means that IV has no financing with which to buy more patents.) Deals have been cancelled or delayed as a result.

This money trouble helps explain why IV is now following the Willie Sutton rule, doing things like suing banks.

What happened? Isn’t patent trolling just easy money?

Patent trolling can be easy money – trolling takes from operating businesses and gives to companies that contribute little to nothing to society. You don’t have to bother with all that messy making a product or service that people want to pay for.

But that doesn’t mean that scaling up the patent troll business model is as simple as buying up thousands of patents.

So why didn’t IV’s attempt to go big work better? I suspect that one of the problems is that it isn’t as easy to evaluate patents as IV would like to believe. That is, the very vagueness that IV relies on to “encourage” companies to take licenses also makes it time-consuming and expensive to determine whether a patent is worth buying.

I took a look at the numbers IV puts on its website, and a little back of the envelope math tells the story.

IV reviews a lot of patents:

Intellectual Ventures is the world’s largest buyer of individual patents. In fact, in a typical year we evaluate an average of 35,000 assets. We work hard to be your buyer of choice for both issued and pending patents. This means that you can expect quick responses and thorough and direct asset evaluations.

To do a proper infringement and invalidity analysis typically takes 30 or more hours of an attorney’s time (and that’s being generous – it usually takes more than 30 hours). Reviewing 35,000 patents properly then would take 35,000 patents x 30 hours/patent = 1,050,000 hours.

If we assume 40 productive hours per week per employee, with each employee working 50 weeks, that would take 525 employees working full-time analyzing patents.

According to its FAQ, IV has about 800 employees, 120 of whom are doing research. It seems extremely unlikely that out of the remaining 680 employees, over 500 of them are dedicated full-time to reviewing patents for possible purchase.

That means that IV almost certainly isn’t spending adequate time reviewing the patents it purchases.

That’s how IV could buy a patent from an inventor that turned out to be fraudulently obtained. And it’s why the “high quality assets” that IV claims to own aren’t such high quality.

It’s also part of why IV opposes transparency. I wrote a few weeks ago that the reason IV opposes transparency rules is that it doesn’t want the world to know just how ordinary it is. I may have been a bit closer to the mark than I realized.

Anyway, I’m hardly broken up over IV’s poor return to its investors. I can only hope that IV becomes a cautionary tale for anyone who thinks about becoming a giant patent troll.