Troll Trouble

It has been an interesting week in the usually sleepy world of patents. Google’s $12.5B acquisition of Motorola Mobility and Apple/Microsoft’s $4.5B acquisition of 6000 Nortel patents highlight just how high the stakes have risen in the smartphone patent battle.

While all the media attention is focused on these sensational, multi-billion dollar patent battles between industry titans, little attention has been paid to how the dysfunctional US patent system is affecting early stage innovation and entrepreneurship. Eric Schonfeld’s recent TechCruch posting references a PWC study which describes how successful so called “non-practicing entities” have become in filing patent law suits. Ten years ago, the majority of patent settlements were paid to “practicing entities”, i.e. operating companies whose IP was judged to have been infringed by a competitor. In recent years, “non-practicing entities”, commonly referred to as trolls, have refined their strategies and identified friendly Texas jurisdictions which provide them with larger and larger payouts. This has encouraged yet more trolls to get into the game of acquiring patent portfolios and the whole situation risks spiraling out of control.

Within our portfolio of tech startups at Physic Ventures, this rise of the trolls is having two serious negative consequences:

Trolls are imposing an “Innovation Tax” on startups
Several of our portfolio companies have been hit by frivolous patent infringement accusations by trolls. Typically, the troll will write to a startup and accuse them of infringing an extremely broad patent related to widely used technology, such as Wi-Fi. The trolls have done their research and figured out the maximum that a startup could afford to pay for a license and they offer the startup the chance to take a license on those terms. The startup is faced with the unpleasant choice of succumbing to this shake down and paying the “license fee” or risking far higher expenses by defending themselves in a potential suit. These license fees consume extremely scarce cash resources, typically at a time when a startup is just launching its first product and needs to preserve every last dollar for product development, marketing and BD.

Business partners are practicing “Defensive Partnering”
Trolls get really excited by the opportunity to shake down a large corporation who can afford much higher license fees than a startup. As a result of increased Troll activity, we’ve observed several examples of potential partners that are reluctant to work with a startup unless that startup indemnifies the larger partner from any patent infringement costs associated with the startups product. Startups simply can’t afford to do this and so mutually valuable partnerships end up not getting signed because of a potential patent trolling.

It is important to point out that these unhealthy dynamics are almost exclusively related to the IT industry and software, in particular. Our investments in materials science and life science continue to focus on developing IP that will be valuable to potential partners and acquirers. While the glacial pace of the USPTO is a frustration to these companies, their business model still functions well.

Perhaps it is time to rethink how IP in software and tech is protected.  We should be able to continue supporting and rewarding tech innovation, without stifling it with frivolous and opportunistic exploitation of the current patent system.

The Thiel Fellowship sends a misleading message about the value of university education

Yesterday, the Thiel Foundation, created by legendary investor Peter Thiel, announced its first class of “Twenty under Twenty” Thiel Fellows.  These $100,000 fellowships have been awarded to elite High School and College students who will use the fellowships to either forego college or “stop out” of college to pursue entrepreneurial projects in science and technology.

In the current climate of rapidly escalating tuition costs and high levels of unemployment among recent college graduates, the announcement of these fellowships has re-ignited a broader debate about the value of a college education.  However, as I discuss below, these Thiel Fellowships do nothing to address the problems in our higher education system.  They also send a dangerous message to the vast majority of students for whom a solid University education is still extremely good value.

The Thiel Fellowship is solving the wrong problem

The recently announced inaugural class of Thiel Fellows is a group of highly talented, motivated and accomplished students.  They represent the elite-of-the-elite in terms of ability and achievement.  I have no doubt that each of these individuals will be successful in their careers and contribute to societal progress and economic development.  If these students feel that spending four years at University learning the fundamentals of their fields of pursuit is not the best use of the next four years of their lives, I’m sure they are well qualified to make that decision.

For the record, I strongly disagree with this decision.  I spent six years studying for a BA and Ph.D. in Physics at the University of Cambridge.  I attribute the success I have had in my career to the fundamental knowledge and skill sets I learned at Cambridge.  A University education provides a grounding in the fundamentals, but it also provides so much more.  I value equally highly the interactions and debates I had with my fellow students and Professors, the academic rigor I learned to apply to problem solving and the character I built studying for six years in an ambitious, competitive “incubator” like Cambridge.  In my opinion, there is no short cut to this learning and maturation process.

However, whether a few elite Thiel Fellows choose to eschew a formal University education is not the point.  The reason that the US is dropping in international competitiveness and despite 9% unemployment there are still insufficient scientists and engineers to fill available positions in the US is because far too few students are pursuing these degrees.  Unlike their peers in China and India, where Science and Engineering are the most popular degree subjects, far more American students opt to study Business, Accounting, Marketing, Law etc.  There are many reasons that US students are not studying Science and Technology.  These subjects are viewed as technically rigorous and Science and Engineering students typically don’t begin their careers with the same high salaries offered to Business and Law students.  Therefore, opting to study Business or Law is seen by some students as a short cut to greater wealth.

These new Thiel Fellowships send a dangerous message to high school students that there might be an even easier short cut to success and wealth – they don’t need to study for any degree at all, just start a company and you can be the next Mark Zuckerberg.

If we learned one thing from the recent financial crisis, it’s that there are no short cuts that work for long.  Too much financial engineering rather than actual engineering will end in tears.  Speculating on increasingly leveraged housing stocks is not a sustainable short cut to financial success.  Similarly, stopping out of college to start a social media company is not a sustainable path to long term career success for all but a tiny, tiny fraction of the population.  High school students need to appreciate that studying hard in rigorous subjects, like science and engineering, leads to marketable job skills and long term career success.  It doesn’t prevent students from pursuing entrepreneurial endeavors after college – rather it gives them the fundamental grounding to do so.

Science and Engineering is not the same as Social Media

The second point about the Thiel Fellowship that concerns me is that, in addition to the expected social media business ideas proposed by these fellows, many of the fellows plan to pursue entrepreneurial endeavors in scientific fields such as synthetic biology, solar energy, and space exploration.  These are technically sophisticated fields, built upon deep science and engineering foundations.  Given my science background I am obviously biased, but in my opinion starting a technology company is not the same as starting the next social media company.

Most technically talented students can buy a copy of “Ruby on Rails for Dummies” and “Object-C for Dummies” and put together a rudimentary social media website and accompanying mobile app in their bedroom over a weekend.  In fact, I recently did this and it was great fun.  I do not believe that reading “Synthetic Biology for Dummies” qualifies even the most talented student to setup a lab to produce bio-pharmaceuticals or cellulosic biofuels.  Similarly, reading “Quantum Mechanics for Dummies” doesn’t qualify even the brightest high school student to develop a higher efficiency solar cell material in their garage.  There are certain fundamental scientific concepts and foundational experiments that any young scientist needs to learn and perform before they can start a company and develop a technology.

Much has been made of how the Thiel Fellowship will find the next Gates, Jobs, or Zuckerberg.  Even in the fields of software and social media, it’s difficult to add many more names to this list.  In science and engineering, the list of people who made it to the pinnacle of their fields without first completing a degree is even shorter; Albert Einstein is the exception which proves the rule.

What’s the rush?

Finally, when I read about these teenage wunderkinds starting new science and technology enterprises, I find myself asking, what is the rush?  If I had one question for each of these Thiel Fellows, it would be – Is your entrepreneurial idea so good that you have to do it now?  Will it be scooped or stale by the time you graduate college? – and if you were smart enough to come up with this idea this year, won’t you come up with an even better idea after college, once you’ve learned some science and engineering fundamentals?

In sports there is always great debate about whether Kobe should have played college ball for a couple of years, or whether Andrew Luck should “stop out” of Stanford and join the NFL draft.  For these sportsmen there is the risk that they could suffer a career ending injury during college that could cost them millions in lost income.  They also know that the career of a professional sportsperson is short, so they need to make the most of it.

Neither argument applies to science and technology entrepreneurship.  I’ve never heard of a career ending injury incurred during an undergraduate science laboratory.  Also, no-one is suggesting that entrepreneurial careers are getting shorter.  High school students today are unlikely to qualify for a social security paycheck for at least 50 years.  Isn’t it worth spending the first four years of that 50 year career learning the fundamentals that will stand you in good stead for the next 46?

In conclusion, it is time for a debate on how best to educate the next generation of American scientists and engineers.  We need to ensure maximum access for our most talented students to the best possible education.  Stimulating their research, innovation and entrepreneurship is key to US economic growth and to solving the huge problems facing our society such as healthcare, energy supply, and climate change.  In my opinion, suggesting that some of our most talented students are best served by skipping a University education is not the way to start this debate.