Interview: Edward Jung, Intellectual Ventures founder, CTO

To create an efficient market where high-quality patents can circulate

- What was your intention in setting up Intellectual Ventures?

It has been 5 years since Intellectual Ventures began buying patents.  So far we have analyzed about 35 thousand patents.  Some of them were from Fortune 500 companies and some were from researchers at universities.  We actually bought only a small percentage of them.  Most of them turned out to be low-quality and of no value.

Of course, there were also wonderful patents that turned out to be competitive.  It’s really a mixture of good and bad.  Why so?  Because an efficient market does not exist.  If there was one, natural selection would take place so that only good things ever circulated.  It is for that reason that we decided to create such a market.

Also, the number of patents that each product requires is rapidly increasing.  For example, a light bulb required only 2 patents while a PDA (Personal Digital Assistant) requires tens of thousands.  Even if a company wanted to enter a new field, there was no one who could provide many patents collectively like us.  This is a new type of business that didn’t exist several years ago.

While I was developing software at Microsoft, software, unlike hardware, had long been thought of as valueless.  However, many components have accumulated to increase software’s value, and this has been widely acknowledged.  Patents are exactly the same.  Even if the technology for a hard disk drive with a 10% higher speed results in a patent, no one would want to license it.  If you can add 100 more related patents to raise the added value, however, everyone wants a way to block such patents.

- You have been called a patent aggregator.

That expression is not accurate.  Toyota Motors is not a parts aggregator.  It assembles parts with a purpose rather than collecting parts at random.  It is this work that creates value.  They should call us an assembler.

- Have you secured investment returns from the fund?  What is their source?

So far we have spent $1 billion on patents.  The year 2003, when fund No. 1 was set up, was just after the collapse of the dot-com bubble.  Many ventures collapsed and many big companies that had entered the dot com field shut down these businesses.  As a result, we were given many opportunities to buy patents in fields with very high entry barriers such as communications and medical instruments.

In and after 2005, the profits of companies related to semiconductor, software, consumer appliances, e-commerce, and wireless equipment recovered and they became our licensing partners (companies to whom Intellectual Ventures’ patents are licensed).  This means that we were able to make good use of natural business cycles.

Apple’s cellular phone “iPhone” is one good example, but companies are always looking for new ideas.  There is an abundant need for new patents.

Meanwhile, there are also changes on the supply side.  With the Chinese government beginning to encourage invention, there is a growing motivation for invention in China.  Chinese universities as well as companies are excited by Intellectual Ventures’ business, and you could say they’re even over-earnest.  They are competing with each other trying to invite Intellectual Ventures to visit their facilities.

A good example is the artificial satellite, from which many companies have already retreated. This has begun to cross over with existing technology, like the solar cell.  Business opportunities are abundant.

- In Japan too, you are establishing tie-ups with university researchers and the TLOs.  You are not only buying patents, but also you’re also being entrusted with the evaluation of others’ patents, it seems.

We are running 3 projects.  The first is investment (buying patents), the second is the factory (patenting our own inventions) and the third is development.

We are supporting university researchers and individual inventors by shouldering the burden of the troublesome application for patents, by thinking of ideas for their practical utilization, and by licensing these patents to companies.  Also, with there being so many broad technical fields, it is difficult to employ experts in all areas.  So, by tying up with 300 to 400 researchers at present, we discuss current technical trends and jointly evaluate patents.  This relationship is our development project.

In the past, applications for patents were carried out mostly by individual inventors.  As industrialization progressed and the scale of companies became larger, companies began setting up internal R&D divisions.  After the war, many patents began accumulating in fast-growing industries and companies.  IBM is the archetype.  At the same time, companies began colliding with each other over patents, as a result of which cross-licensing among particularly big players began.

At that time, individual inventors and university researchers, though they had made numerous achievements, were left out in the cold.  This was because it is impossible for most individuals to contact 100 or 1000 companies.  Therefore, their sources of income decreased. 

We look ahead five to ten years, and help people to think about the most effective use for their patents. That has merit for each inventor.

- Some Japanese and American companies and people in administrative positions hold the view that Intellectual Ventures might take legal action against other companies.

We license our patent non-exclusively. But if someone decides to use our patents without paying the appropriate fees, we must naturally use legal means of some kind.  This is particularly true for cases in which an inventor has entrusted us with the licensing of their patents.

We would hope, however, that before a lawsuit became necessary, the value of our patents would be appreciated and that these fees would be paid.

To accelerate open innovation, it must be clearly and fairly determined how the profits from a patent should be shared, both at present and in the future.  By providing incentives for good-quality patents, poor-quality patents will undergo natural selection and be weeded out.