This week, Jason Colodne, Managing Partner at Colbeck, spoke with Elvir Causevic, co-founder and Managing Director at Tech+IP Capital, a company exclusively devoted to helping companies identify and monetize value from their intellectual property assets. He formerly served as head of Houlihan Lokey’s Tech+IP Advisory, where some of the world’s most sophisticated companies brought their toughest Tech+IP challenges.
Causevic began his career as an electrical engineer and is a named inventor on over 20 patents and patent applications. He has founded several boutique investment firms devoted to valuing and trading IP assets, and he remembers a time when much of the world believed it was impossible to value such assets. Causevic helped dispel such notions through his contributions to valuation frameworks and has witnessed it transform into “the sport of kings” that it is today. Most Companies are Underutilizing their IP Assets Colodne: What first drew you to IP assets? How did you get to this point in your career? Causevic: What I learned early on during my doctorate is that the bar changes for what’s expected of you. You’re not expected to just build something, but, for your doctoral presentation, for example, they say you have to improve the world-wide state of knowledge. You have to make a meaningful contribution there. And that’s really the same bar as what a patent does. You need to invent something that didn’t exist before. It’s not just about building something and putting something together. It has to be a genuine contribution. That’s really the first time I learned about patents and how they worked. Colodne: IP assets are generally misunderstood or overlooked as niche assets specific to tech and consumer-driven retail. How can companies better maximize their value through IP assets? Causevic: For the most part, people are not really taking advantage of their patent portfolios. Traditionally, there was more of a single-track view: you have a group of inventors inside a company, they invent gadget x, they file some patents around it, and then they go to market. They sell it, and if someone tries to steal or copy their product, they have the patents to protect themselves. What we’ve learned over time is that companies have large portions of their patent estate that are actually non-core to the product that they’re selling. For the last twenty-five or thirty years, especially with the scale of mergers and acquisitions, what you’re seeing is that Company A buys Company B, and each company has dozens of their own product lines. When they put the two companies together, they rationalize their portfolio of products, and they keep some products, and they drop some products, but they typically keep all the patents. There are tremendous opportunities in those patents, especially when you’re talking about larger companies with significant sales or companies that make very large R&D investments. Some companies have figured out how to do this well, but most have not. Patent Licensing Programs are Significantly More Profitable Colodne: What is the difference between a patent portfolio and patent licensing programs? Causevic: There are many companies that have great patents, but they’re not really monetizing them. There’s no function inside the company to make money from those patents. They just kind of sit there. That’s a wasted opportunity. I want to distinguish between patents sitting on their own, which do have market value and can be traded, versus licensing programs. With licensing programs, companies make quite a bit of money just from their own in-house licensing programs. IBM first started it. For years, they made north of a billion dollars from patent licensing. Meaning, they kept the patents, and gave non-exclusive licenses to various companies. They’re licensed to everybody. They’re licensed to Twitter and Google and Yahoo because they invented a lot of these technologies before they came to market. So, when other people started building companies based on IBM inventions, IBM knocked on the door and politely said, “You need to pay a royalty.” But what IBM was able to do was license these same patents dozens and dozens of times, rather than selling them. Global Crises Highlight the Value of Patents Colodne: How much has COVID-19 drive companies to further monetize their IP assets? Have you seen a significant increase in companies using patents for debt capital? Causevic: Yes. We’re seeing more clever ways to utilize the patent asset. There’s definitely a lot more focus on patents in any crisis because patents are generally considered to be a non-correlated asset. They don’t move up and down with any particular industry. They have their own clock. When software companies are getting valuations that are 15x forward, it’s hard to get them to focus on patents. But, when times get tough and people start looking at patents, what they realize is there’s a robust patent market out there, and the value that’s sitting in the patents — whether it’s a licensing program that you develop or some monetization program — you can leverage them in multiple different ways. You can monetize them: sell them. But you can also leverage them and use them as collateral. We’ve seen that time and again, and it’s done in a couple of different ways. One, is to be additional collateral when the company’s just issuing debt and the patents are thrown in to firm up the collateral base. The other way is to create a bankruptcy remote subsidiary and put the patents there.
Jurisdictions Wield Significant Influence Colodne: How much do courts influence the value of patents? We saw a few years ago the Alice Supreme Court case where a number of software patents were invalidated. Causevic: The courts are hugely influential, especially when our Supreme Court rules or the European Court of Justice comes down with a decision, or any other major jurisdiction. For example, in the US, it’s very hard to get an injunction. So, what’s your remedy for patent infringement? You own the patent, and somebody infringes the patent. In the US, most of your remedy is financial remedy. It’s very hard to get somebody to stop shipping product. You have additional things you have to prove if you want someone to stop shipping product. However, in the UK and Germany that’s not the case. It’s relatively easy to get an injunction. An injunction in Germany is enough to bring them to the table globally. You negotiate a global deal with them. That’s frankly what gives this uncorrelated nature to the patent assets. You have multiple jurisdictions, multiple courts, and they are not synchronized. Basically, the way you design an enforcement strategy is such that in the middle of COVID you might get a decision in the UK that forces some defendant to the table that you could never bring to the negotiating table in the US, but you can bring them to the table in the UK because they can’t ship phones in the UK anymore. It gives you a lot of leverage which gives the patent asset the ability to generate large returns in the middle of a crisis when nobody else is making any money. Colodne: So, in a sense, this is one of its greatest strengths then? Causevic: It is. You just have to work thoughtfully through the process. I should mention that this is the sport of kings. It’s very expensive. It takes time. But then the rewards are very, very large. But it’s not a lottery business. Software Patents Suffer from Unpredictability Colodne: What is the difference between software and hardware patents with respect to valuation and leveragability? Causevic: So, you mentioned the Alice case which is a seminal case in the US. Frankly, it provided more confusion. If you talk to the lawyers in the patent bar, nobody’s happy with that decision whether you’re pro-patent or anti-patent. Everybody hates that decision because it’s so random and it didn’t give guidance to the lower courts about how to deal with it. It’s that randomness that hurts the software patents. Markets reward simplicity and predictability, and when you don’t have that valuation automatically suffers. Software patents are also harder to write. Software can be a lot more complicated and it’s harder to discover infringement, especially in the cloud right now. If you have a patent that’s infringed by Amazon cloud, how will you ever know? You can’t walk into the Amazon data center. They’re not going to publish a data sheet. And you can’t even get discovery, because you can’t even allege anything because you don’t know. With hardware, it’s a little easier because you can buy the chip. You can take it to a tear down lab and you can see what they’re doing. Or, when a semi-conductor company sells a chip, they publish a data sheet, and in that data sheet it tells you how the chip works. Well, there’s your proof of infringement. The other thing about software patents is that it’s hard to attach damages. Look at Facebook, for example. Facebook’s machine is its website and all of the associated things that it does on the website. But it doesn’t make money from the website. It makes money from advertising. So, one thing that really hurts patent litigation in software is that it’s hard to attach damages. Let’s say you have some feature for the thumbs up, thumbs down on Facebook and you have all of the patents that are relevant to that feature. How much of Facebook’s revenue does Facebook owe you because you have that feature? One percent? Thirty-seven percent? You can’t tell because all of the users who use that feature don’t pay for the product. That’s another degree of unpredictability that really hurts software patents. The Market Has Matured Greatly Colodne: The IP market is relatively young when compared to more mature markets like commodities. What inefficiencies have you observed in the market? What improvements have you seen develop? Causevic: We came into the market and were one of the first ones. The reason we’ve been successful is with this idea of transparency in the market. We took patents from backwater, smoky room deals where you know, you try to hoodwink the other guy, and threaten them and sue them, and all of that. We worked really hard to make it an asset class. We had some others in the field that also helped do that. But I think the number one thing is transparency and having valuations. We spent a lot of time developing valuation frameworks that we borrowed from litigation. People always used to say, “Well, you can’t value patents.” Well, it turns out you can. We have hundreds and hundreds of transactions in our database. We have thousands of royalty rates in our database. And once you have a sufficient amount of data, yeah, some inventor can claim that a patent is worth a billion dollars, when in fact, it’s not. Because we can show 25 other similar transactions that traded between twenty-five and thirty million. Or we can show 25 other royalty rates that are between 1–1.5 percent. So, that’s the number one thing that’s changed that we had a major impact on, is adding real valuation muscle to really understand the value of these assets. The field is also maturing. What’s helped is there are so many intermediaries in the market now that are patent aggregators that buy both offensively and defensively. The best way to tell whether transactions are going smoothly or not is to look at the rates we’re able to charge. We routinely get 15–20 percent on smaller patent sales, and our M&A fees are easily double for the same size business on what traditional M&A fees are. The reason for that is that it’s a risky business and it’s hard to do it still. What’s missing is more of the market clearing mechanisms. And there’s been some attempts around patent auctions and markets, but they haven’t really worked. Patent Trolls are a Problematic Misconception Colodne: What’s one common misconception surrounding IP assets that you’d like to dispel? Causevic: It’s that if you do anything around patents, then you are a patent troll. That’s the biggest misconception that I’ve seen. Management teams and boards of directors that say, look, I just don’t want to be a patent troll. Well, there’s a distinction between being a patent troll and being a fiduciary. We often get calls from what we affectionately call the Lucky Buyers Club. Some company buys another company and says, hey, we paid them 300 million dollars for the business which we justified to the street, and these nice people gifted to us 1,600 of the awesome patents. Can you guys help us sell them? Well, that value really belongs to the seller’s shareholders. And the seller’s board didn’t really do a great job because we shouldn’t be getting that call. And when we dig into why people didn’t know, the board usually didn’t take a hard look at the value of the IP because they didn’t want to be a patent troll. Well, would you call IBM or Phillips a patent troll? Not really. Patent trolls buy cheap patents on the market at any price, and then they launch frivolous lawsuits, and they hope to settle it at the cost of the defense. They’ll send 10,000 letters and they hope to get twenty people to settle for 25,000 dollars to make them go away. That’s an abuse of the legal system. But there are tools and means to deal with that. We work exclusively with companies that have real patents or hundreds of millions in R&D, and there are clear infringers who need to pay. And they do pay. Lots of people pay without lawsuits when you can show them that somebody is infringing. About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at firstname.lastname@example.org.