The Wither and Whether of VCs and IP

When you practise in a hi-tech epicentre, as I do, you cannot help but follow the every move of the venture capital ("VC") industry. For that reason, the caption in the 31 August issue of the San Jose Mercury News caught my rapt attention. In "Grim Numbers point to the End of the Venture Capital Era" here, author Chris O'Brien chronicles the increasingly parlous state of the VC industry.

Writing from the "ground zero" of the VC world--San Jose, California--O'Brien focuses on the implications of the recent report from the National Venture Capital Association ("NCVA"), which concluded "that 10-year returns on venture capital investments had turned negative at the end of 2009, and nose-dived during the first quarter of 2010." Stated otherwise, "venture capital funds returned 25.8 percent for the quarter ending March 2009. For the quarter ending March 2010, that return had fallen to minus 3.9 percent. That spectacular dip is due to the outsize gains of the dot-com boom finally washing out of the official 10-year benchmark."

In a word, the business model that has depended on a critical mass of successful initial public offerings of stock (or in VC-speak--"IPO's") has largely become unstruck for most of the past decade. We had previously reported here on the structural change in the VC world, from patient family-based funding in the 1980s to "in and out" institutional funding beginning the 1990s.

Seen in this light, riding the end of a long-term bull stock market that had begun its course in the mid-1980s, the dot-com boom now appears to have been an aberration rather than the harbinger of a business model for the VC world. The belief was that VC funding would marry smart funding in world-beating technology with a willing public willing to buy equities in companies, many of which were long on potential but short on actual returns. The performance of the past decade has largely "put paid" to this panglossian view of the potential of the IPO.

The result is a continuing decline and contraction of the VC industry, as companies that would appear to be the most attractive for an IPO--such as Facebook, LinkIn and Zynga--eschew that route. They seem to have concluded for the moment, at least, that the funds to be received from such a move do not warrant the ceding of control that accompanies taking a company public.

The heart of O'Brien's downbeat report is the followng:

"Some will argue that at least in the area of Web startups, companies can be

launched on the cheap, and growing numbers of angel investors -- those wealthy individuals who invest at the earliest stages -- are stepping in to give these companies a boost. True, but that kind of funding doesn't work as well for biotechnology, medical devices or cleantech. And these angel-backed companies are small and lean, and don't create large numbers of jobs.

It's not just fewer startups, though. When companies don't go public, they don't generate the same number of jobs in their later stages. Heesen [the president of the NCVA] said the cash raised from an IPO usually triggers an explosion in hiring. "The real job creation starts far down the road, after they go public," Heesen said.

Instead of going public, the companies that do show potential now get gobbled up by the Googles and Facebooks of the world. At the same time, valley giants like Hewlett-Packard, Oracle, Intel and Cisco Systems continue their acquisitions of larger tech companies, a consolidation trend that more often than not is accompanied by big job cuts. So we're seeing fewer startups and sweeping consolidation. Tie those trends together, and you've got a drag on job creation that could weigh down the valley for years to come."

From the vantage of IP, I have several comments to O'Brien's observations:

1. For some time now, there have been rumblings about the diminishing role of IP (most notably patents) in the Sillicon Valley landscape. Under this view, the Valley is increasingly becoming the bastion of social media and related user apps, and decreasingly a centre for developing "the next big technological thing." The reference to Facebook, LinkedIn and Zynga as the most attractive candidates for an IPO would seem to offer some confirmation of this view. Further, the kind of investment required for cleantech, medical devices and biotech seems to be ill suited for the less form of VC funding that has become the business norm for nearly 20 years.

2. If this be true, even in part, the question becomes what impact the decline of the VC industry, and the arguably changing nature of the types of technological innovation being carried out, will have on the nature of high tech IP practice. Will it mean that there will be less patent filing activity, due to presumably fewer VC-funded start-ups, or will patent activity simply be increasingly centred on the companies that acquire the start-up technologies, rather than the VC-funded start-ups themselves?

3. Alternatively, it might also be the case that the nature of IP services required for certain kinds of high-tech companies, whether start-ups or otherwise, will also need to undergo at least a partial transformation. Under this view, there might be greater reliance on trade secrets and copyright as major sources of legal protection, and less emphasis on traditional patent protection. Afteer all, when one thinks of Apple, one thinks more of the functioning of the Apple ecosystem, which seeks to integrate hardware, software, contents and branding, rather than a dominant patent portfolio.

Take me to the IPO Exhibition

Will There Be an Indian Form of IP Practice?

We often read how the 21st century will be the "Century of Asia". In truth, it is more than I am capable of to imagine how this tectonic shift will ultimately play out. That said, I do often wonder how the face of technology will change with the rise of Asia. One glimmer was suggested in a recent article that appeared in The Economist entitled "Health Care in India: Lessons From a Frugal Innovator" (April 18, 2009). The focus of the article is a description of various ways in which Indian innovators are coming up with novel ways to compete successfully in the medical arena. The impetus for these developments is driven by a combination of poverty, geography, an underfunded public health system, and poor infrastructure, on the one hand, and world-class technology, nascent health insurance, liberalized terms for foreign investment, and entrepreneurial spirit, on the other.

For example, the article described how "beating heart" surgery has proved so successful as an alternative to conventional surgical practices in the West that the purveyor of the method, Wockhardt, an Indian hospital chain, has seen rising medical tourism to its site in Bangalore. Another example are chains of "no-frill" hospitals that appear to succeed in squeezing out of the hospital facilities "nice to have" but ultimately non-essential elements without compromising the provision of core health services. Somewhat ironically, the increasing access to health procedures by more and more Indians enable local doctors to actually hone their skills beyond those of their Western counterparts simply because of the absolute number of surgical procedures performed.

Even if one controls for rhetorical flourish, it cannot be gainsaid that the Indian experiment in carving a distinctive path to 21st century medical innovation is noteworthy. When one considers as well the great anticipation surrounding the Tata Nano car, one gets the sense that the Indian experiment is seeking various ways to reach out to the rising middle class with goods and services that cannot be provided by the more affluent West.

The question that comes to mind is whether the Indian experience in innovation will also result in a distinctive IP practice to support this innovation. In theory, technology should more or less be culturally neutral, and in a sense, that is probably true. It is for that reason that the exploitation of technology can leapfrog countries and continents. On the other hand, I wonder whether the ways that we do IP in the West are so tied up with the manner in which we do innovation and technology that we IP practitioners become captive of the very system that we are supposed to be serving. If so, it is not only Western technology that faces a significant challenge by the rise of Asia, but the legal and quasi-legal constructs that ballast Western innovation.

There is at least one whiff in the article that supports my rumination. Reference is made to Paul Yock, head of the bio-design laboratory at Stanford University. Yock expresses the concern that medical technology innovation has focused solely on need, while effectively turning a blind eye to cost. Hence the gaze towards India. As the article observes, Dr. Yock "believes that India's combination of poverty and outstanding medical and engineering talents will produce a world-class medical devices industry." If so, what is there to say that this Indian type of innovation will not spill over into the way that patents and other IP are conceived and drafted, and the manner in which the technology is diffused and protected. It is certainly food for thought.

Is this the portent of a distinctive Indian IP?