to do something good with it. We could go to VCs and start a company, we could license it to folks, we could sell it, but we’re just focused on that one piece. So we’ve had to focus on what is a good model for that piece. It’s very analogous to coming up with venture capital in the first place. A lot of what we do in this building [the IV Labs] is a piece of that.
We also have a second model: investing in existing inventions. If private equity is about investing in companies where the owner has no clue, we invest in portfolios where the owner has no clue, or doesn’t want to be involved. It turns out there are even more inventions where the owner doesn’t have a clue than there are businesses. In that case, if you’re a private equity guy, they almost always take controlling investments. They use their control to reshape things, restructure, and improve the business. We do that with inventions. We’ve done more than 1,000 deals with inventions, and more than 100 deals with universities, where we make a controlling investment in the intellectual property, and then we figure out what to do with it—better, we think, than the previous guys.
It’s exactly like private equity, except it’s totally different. Private equity is all about leverage—we don’t borrow money. “Rollups” are relatively uncommon in PE, where you buy assets for multiple things, but for us that’s almost all we do. We try to find ways to get synergy between inventions. It’s easier to do rollup with patents, if you’re good at picking. You don’t have to worry about merging organizations, management teams, people getting pissed off—it’s patents! They can sit in a file folder perfectly well without colliding. Both of these ideas are about saying let’s get a liquid capital market that we’ll pump funding into.
X: So what’s the big deal about financing the invention process? Doesn’t that exist already?
NM: I think inventing is underfunded. If you look at who invents out there in the world, almost no-one has a full-time job inventing. Go to a great startup company, and the CTO or head of engineering, yeah, he might do some invention because they ran into a problem and they have to solve it, but he’s trying to build an organization, hire people up, get a product developed—it’s a tiny sideline for him. Go to a big company, and it’s the same thing: all kinds of project priorities over invention. At a university, you’re supposed to do research, but invention, not necessarily—though some do.
There’s no dedicated way to get funded if you’re an inventor. You’re in exactly the position Hewlett and Packard were before their professor loaned them the money. There was no standard way to get funded; that’s true now if you’re an inventor. It’s also true if you have an existing invention. Say my company has two projects, and we can only do one. What do I do with the other one—put it on the shelf? Throw it away? If you create a way to monetize these inventions, you create a liquid capital market, you get a dynamic ecosystem going, you get this Xconomy [short for “exponential economy”—our name was partly inspired by Myhrvold’s use of the phrase—Eds.] thing that you guys write about going.
If you look at venture capital between 1980 and today, there’s a factor of 77 increase in the funding per year (dollar to dollar; if you adjust for a constant dollar, it’s 20-something). For private equity, it’s a factor of 1,200. Those enormous factors exist because once it started working, the world was happy to put capital there. Well, how come big companies didn’t put capital towards that? The answer is the risk-return profile of startups is different. Big companies have a different set of priorities, you couldn’t expect them to go do that. Well, you can’t expect them to solve this invention funding either. They have their own priorities.
X: How will you measure your long-term success?
NM: The world is more than happy to risk money in crazy, risky ventures once people have established a model and established a marketplace. If we’re successful, we personally will channel billions of dollars towards invention, but if we’re really successful, people will imitate us and you’ll get this same kind of phenomenon. Go to a university and ask whether their budget is up by a factor of 77 or 1,200 since 1980. The old ways of funding don’t have that kind of dynamic growth. In order to get that, you have to create what we call the “invention capital industry”—where you create folks like us that take a bunch of risks, have some financial reward in it, specialize on this and nothing but this, and if we do all that, the world is more than happy to throw a few billion dollars towards this.
In the long run, it doesn’t matter whether it’s going to inventors upfront to create something from scratch, or being plowed back into existing inventions—either way it’s creating cash flow in the invention economy. We have a venture economy, we have a private equity economy, we certainly have a public markets economy, but we don’t have an invention economy—yet. That’s our simple goal!
Assuming we don’t screw it up, we see a world where there is vastly more invention being done, most of which won’t work. This is not like saying every one will work. Every venture deal doesn’t work, every private equity deal doesn’t work, and this is arguably riskier than both of them. But if you have great people inventing thousands more patents per year than the world otherwise would’ve done, it doesn’t take more than one of those to change the whole world. Probably the odds are it’ll be more than one.
X: And how are you doing so far?
NM: I’ll say “great,” and then qualify it. One of the aspects about this business is you have to be very patient. You have to have a structure that allows more patience than normal. If you file a patent today, it takes about 3 years to get the patent. We’ve been at this for 5 years now, and there was some ramp-up time. In our invention-oriented project, where we invent things from scratch, we have 1,650 patents applied for, and 45 issued. We’ve been growing and ramping up,
