Recently, I wrote a strong rebuke of one author’s interpretation of the recently released High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey that came out the day after Bilski was decided.

I was particularly upset in that I believe the author was intentionally distorting the facts of the survey for his own benefit.  Given how important patent policy is to this country’s innovation economy, I was amazed how a professor at a major University could be so cavalier with the facts of his own survey.  It was also disappointing that the first and best analytical study of its kind was being degraded by false interpretations.  If you feel like seeing the back and forth, feel free to check out his article and our collective comments). 

While I was away recently, Pamela Samuelson, (who was also one of the authors of the survey) gave her interpretation of the survey.  Her article is entitled Why Software Startups Decide to Patent …. Or Not.  I realize that I’m  a bit biased from view of software patents in general, but Pam’s analysis is much more neutral and balanced and therefore much more instructive in its teachings.  I will also point out that many of my comments of the prior article are supported by Pam’s analysis.

My partner Brad wrote an excellent summary of Pam’s analysis and is a must read for anyone who is interested in the subject.

Well done, Pam.  I really look forward to your future work based off the survey. 

The Bilski decision came down yesterday and I’m still in a state of complete denial.  Basically, the court punted on the difficult issues and while denying Bilski his patent, they didn’t do anything to help the horrible state of the patent ecosystem that we have today. 

(For a great summary of the case, check out the Groklaw summary). 

To make my stomach even more upset, today I was alerted to an article authored by Ted Sichelman entitled “Why Bilski Benefits Startup Companies.”

In short, Sichelman points to a study that he was involved with and tries to come to the conclusion that these types of patents are good for startups. 

To quote him:

“in a recent survey of startup firms, the Berkeley Patent Survey—which I conducted with Robert Merges and Pamela Samuelson of UC Berkeley School of Law and Stuart Graham (now Chief Economist at the PTO)—startup executives reported that nearly 70% of venture capital firms and 50% of angel investors said that patents were important to their investment decisions.”

While I vehemently disagree with the article, what I found most interesting was a commenter who used a prior post that I wrote on why the study that Shichelman was involved in may be flawed.

Sichelman attempts to refute my post in the comment section, but fails badly.

First of all, it seems clear to me that Sichelman has intuitions on patents based on his experiences and has used the data to fit his theories, rather than using the data in an unbiased way to figure out what is really going on with patents and startups.

I make this assertion based on a couple of observations:

1. Everytime he speaks about patents, he begins with the story of his one experience with a startup company and how patents may have helped.  I’ve had dinner with Ted and I’ve heard the story.  I’ve also seen the story pop up in every situation he discusses patents.  A sample size of one does not make a scientific set. 

2. Sichelman’s co-authors are no where to be found when he comes up with his conclusions.  Ted acknowledges that he doesn’t speak for his co-authors, but very easily uses the word “we” when discussing the study and “his” conclusions.  The blog post that I wrote refuting some parts of the conclusions of the study were not all my own ideas – they were the thoughts of his co-author Pam Samuelson who herself said the article really doesn’t say anything about VC attitudes toward patents.

It’s really clear that Sichelman has a bias that was probably preconceived on a data set of one (his startup) and not supported by his fellow authors who have not backed him up publically.

Furthermore if you read his comments on my blog post, his rebuttals don’t hold water as well.  (And you’ll want to read the comments for this part of this post to make any sense).

1. Response rates – just because you are the most comprehensive study doesn’t make the study necessarily any better.  It might, it might not.  I could be the world’s tallest midget and that still doesn’t get me much (no offense to midgets, sincerely).  I never definitively said the sample size was too low, rather it’s not rock solid clear that it was the right size or targeted the right companies.  It’s not an easy thing for them to do, granted, but we shouldn’t just accept the number “1300” being thrown out and assume that this is sufficient.  And per Sichelman’s own admission in his comments, only about 175 of the respondents were VC-backed startup companies.   This is not a large number.

2.  Only 75% answered the patent question and Sichelman says this is acceptable.  This is not.  In fact, others involved with the study have specifically questioned where the answer rate was a piece of data in itself.  Again, I’m not saying definitively this is data, rather the way Sichelman uses data like this as “proof” is not dispositive. 

3. Results biased toward non-venture backed companies.  Sichelman again presents a non-compelling argument.  First, 2/3rd of the sample size, according to his co-author Pam Samuelson were D&B companies, not VentureExpert companies.  Secondly, him trying to convince readers that I only have a sample size of 25 current portfolios is either poor research on his part about me, or ignoring the facts.  I’ve been involved in VC for over a decade and with well over 250 companies, which alone is larger than his sample size of 175 companies.

4. (My Favorite) – Just because we didn’t survey VCs doesn’t mean that we don’t know what VCs think.  To quote him:

“VCs were not surveyed directly – Although it would have been more reliable to survey VCs directly, unfortunately, our time and resources were limited. Nonetheless, there is little reason to believe that the reports of executives at startup firms regarding the views of VCs during the financing process—which is lengthy and involved—are inaccurate. Rather, executives are presumably well-aware of those items that VCs found important during due diligence.

Basically his response is:  “we couldn’t afford to interview VCs, so we just guessed by asking entrepreneurs.”  This is totally bogus and backed up by Pam Samuelson herself in recent remarks at the University of Colorado law school.  This only talks about perceptions that entrepreneurs have of VCs.  This says nothing about what VCs think.  To think that one study group can be substituted for another study group and presented as fact discredits the valid parts of the paper.  This is just bad science.  If it was good science, we’d just ask parents about what their kids really thought about things. 

In summary, it’s been a rough day thinking about what could have been with Bilski.  I’m getting a ton of backchannel about the politics behind the decision, which just makes me more upset.  To try to capitalize on the poor decision with articles like this just makes me more disappointed about the system and the supposed “experts” who pretend to know much more than they really do. 

I was recently introduced to Article One Partners, a crowdsourcing website that is dedicated to uncovering research related to the validity of patents. Just because a patent has been granted by the USPTO does not mean that it should have been – in fact, nearly half of all patents litigated to judgment are eventually determined invalid.[1]

Article One provides a community that researches the validity of patents. Their researchers are often able to discover non-digitized evidence (such as textbooks and plaques) that could be directly related to a patent. They reach millions of researchers and subject matter experts from across the world, who speak dozens of languages. Since evidence that is related to a patent’s validity can be in any language from anywhere in the world, this is particularly compelling. Who knows what exists in Columbia that might directly relate to a patent in the United States?

Article One’s clients post requests for research of specific patents, which then appear on their website. The community of researchers sees these requests and looks for evidence related to the patent. The individual researchers that find the best evidence get paid between $5,000 and $50,000. Clients learn more about their patents and potentially save money, while individuals can make a lot of money. Everyone wins.

I can definitely see Article One being used as an extra layer of diligence in the VC community, especially bio-tech or medical devices.  For software, well I’m just hoping patents go away.

The other interesting use case is around defending against patent assertions which are becoming more common for early-stage, venture-backed companies. This service provides a tool in exploring the validity of the patents that have been asserted and provides quite a bit of leverage.

I have written before about my hatred of software patents, and frustration with the patent system in general. Platforms such as Article One Partners allow the general public to get involved (and be rewarded!) for ensuring that the patents that are out there are legitimate.

[1] http://www.ipwatchdog.com/2010/06/14/pharma-reverse-payment-amici/id=11169/

If you are a regular reader, you know that Brad and I hate software patents.  We’ve worked hard both publically and behind the scenes to try to affect change.  Our general thesis is that the software patent ecosystem (as it stands today) is harmful to innovation – the very premise of the patent system in the first place.

Recently, there has been a lot of press about how VCs value software patents.  The statistic is that “76 percent of startup managers report that venture capital investors consider patents when making funding decisions” and it being used as dispositive that VCs value patents and because VCs understand innovation, software patents are good.  It’s been thrown around by our very own USPTO, as well.

I wanted to vomit when I saw this statistic, because my 12 years in this industry has anecdotally taught me that nothing is farther from the truth.  Informed VCs realize that software patents, at best, are defensive mechanisms from poor behaving trolls and other entities and are an unfortunate expense when one would rather be hiring engineers.**

The statistic is gleaned from the recent paper by Stuart Graham, Robert Merges, Pam Samuelson and Ted Sichelman entitled “High Technology Entrepreneurs and the Patent System: Results of the 2008 Patent Survey”.

I was on a panel last week with Pam regarding software patents, open source and innovation at a conference sponsored by the Silicon Flatirons. While I’ve always found Pam to be very thoughtful and smart, I was prepared to dispute her report which indicated folks like me cared about patents.

I couldn’t have been more surprised and happy with her comments about the subject, namely that the report does NOT say anything about what VCs think about patents, rather the report indicated that this what what entrepreneurs PERCEIVED VCs to think.  (Huge difference).  If you go back and read the quote, it’s technically correct, but it’s being used in public both written and verbally that the vast majority of VCs support software patents.

Now, let’s look into the entrepreneurs that were surveyed about this perception of VCs.

88% of software startups that the study identified and queried (through Venture Expert and Dun and Bradstreet) did not respond to the survey.

There was generally a 1/3^rd 2/3^rd mix of companies between Venture Expert to D&B. It appears to me that none/few of the D&B companies are venture backed. (My proof is that very few D&B companies reported to aspire to be acquired or go public, which most/all VC-backed companies hope for this).

So the actual sample size of the venture-backed software startups is very small.  Pam indicated that they did research on the non-responders (the 88%) and don’t believe that they differ materially from those companies who respond.  But one can’t rule out that selection bias affected the report, as the 12% could have had a bone to pick, or something different about them that could not be picked up in the study. 

Also there is another thing worth considering:  only 75% of the software respondents actually answered the question regarding perceived importance to VCs, which does suggest that the other 25% may have skipped this question because they didn’t perceive patents to be of importance to investors.

That suggests to me that patents were deemed unimportant to financing for close to 200 of the software respondents who did not answer that question, although they answered many other questions more completely.

So bottom line?  No VCs were actually polled to come up with this statistic.  A small number of companies responded and might be over weighted to D&B companies as opposed to VC-backed companies.  So when you hear that stat thrown around, know the truth behind the numbers and feel free to show them the way, if you are one of those fighting the “good fight” against software patents. 

** I realize that there are cases where software patents might be valuable, but the vast majority of the time, they are a deadweight loss on innovation and our economy.  In a coming post, I’ll actually talk about times when I think they are appropriate. 

My friend Jill Bowman is blogging a series about saving money in patent litigation.  In her words:

“I’m going to do something unusual.  I’m going to write from the prospective of a client while using the knowledge that I’ve gained as a patent litigation attorney.  I’m going to discuss what I would do if I were paying the lawyers to win a typical patent case.

My goal is to help companies pick the best attorneys for the job, ask the hard questions and demand the accountability from the lawyers that will reduce litigation bills without compromising the ability to win the case.”

I look forward to the series, as Jill is always thoughtful.

I’ve written about why lawyers frustrate me, why FAS 157 (Topic 820) sucks and why the current state of patent law stinks.  In each case, I’ve tried to not just be a critic, but be part of the solution.

Specifically, I wrote an entire series on how law firms could change their ways to not piss me (and their clients) off and have been very active within the NVCA and personally trying to change the way that software patents work. 

As for FAS 157 (Topic 820), if you can’t beat them, join them.  Today it was announced that I’ve been invited to a “blue ribbon panel” organized by the Financial Accounting Foundation (FASB) to help determine the proper valuation techniques of private companies.  Either I’ll have a positive effect, or I’ll have a ton of fodder to bitch about.

But enough of that – what’s next?  Well, I’ve decided my next target will be copyright law.  There are a ton of things wrong with the current state affairs, none greater than the fact that most of the doctrine was developed before electronic media and what has come since has been a knee-jerk reaction to lobbying efforts by large content owners.

I’ll whet your appetite with  specific cases that want to make me scream:

1. ASCAP has used copyright law to go after royalty fees from girl scouts who sung popular songs around campfires;

2. Book publishers claim that Google copying their works in order to search them is a copyright infringement.  If held true, all Internet search would be subject to copyright law and effectively banned;

3. There is no clearing house for performance rights meaning that I can own a piece of music, but am limited to where I can actually play it unless I negotiate individually with the content holder; and

4. Incidental uses of content subject the user to infringement claims.  A woman recorded her 13-month old son dancing to Prince’s “Let’s Go Crazy.”  The video (all 29 seconds of it) was posted on YouTube and immediately was subject to a DMCA takedown notice.  Google complied.  The mother is now suing Universal (the entity that owns the song) for violation of fair use laws.  (Good for her). 

But these are old news and frankly, there are bigger fish to fry which I’ll get into during the series.  These are just tastes of how the archaic ways of copyright laws have not kept up with the times.  (And no, I’m not going argue that Napster was legal). 

Today, I learned that former classmate of mine at the University of Michigan has started a blog for startups dealing with intellectual property issues.

Jill Bowman is a great person and her blog is not only informative, but is also written in her voice, not legalese.  (Her husband says it’s too “girly” but I totally disagree). 

Jill promises to dish on IP “train wrecks” (her words) that she’s seen over the past decade and hopefully her wisdom can save some folks future headaches.

She also promises to talk about costs savings in IP controversies and expose how some big firms are ripping off their clients. 

Her first post is Ten Smart Reasons to Learn About IP Law.  Jill, welcome to the blogosphere.  We are happy to have you. 

Dear Mr. President,

I feel compelled to write you a letter to express my thoughts and frustrations regarding innovation policy in our country.  While I have modest expectations that you’ll actually read this, perhaps someone in your inner circle will and represent my thoughts.

First of all, I hope that you realize how very fortunate we are as a country to have an innovation and entrepreneurial engine at the heart of our economy.  It is part of our culture and is a pervasive mind set that is the envy of the rest of the world.  Furthermore, it was not created, nor is it (currently) regulated by the government.  If you look at the venture capital industry as a proxy (since many innovative startup companies need some financial backing to prosper), one can see how important this ecosystem is.  The latest report from the National Venture Capital Association called "Venture Impact" talks about the important of venture-backed companies in the macro U.S. economy.  Among the highlights:

- Venture-backed companies employed more than 12.1 million Americans in 2008;
- Venture-backed revenues were $2.9 trillion in 2008, equating to 21 percent of US GDP; and
- Venture backed companies grew jobs and revenues faster than their non-venture counterparts from 2006-2008.

Best of all, none of this costs the government anything, nor does it require any bailouts.  The jobs created in this country are real, high paying and reflect the newest opportunities in the world economy and aren’t shipped overseas.  One would think that you would want to do everything in your power to encourage growth in the innovation sector and make sure current proposals don’t unnecessarily negatively impact this gift that our economy has been given.  So I propose to you some things that your administration should and should not do.

What your administration should do:

1. Reform immigration policy.  My partner Brad Feld wrote a post last week on the "Startup Visa Movement," based upon the earlier writings of Paul Graham.  The basic premise is this:  we should openly encourage and enable people from different countries to move to the United States, start companies and create jobs.  Clearly, there would need to be some limitations and thresholds to ensure that the companies created were "real," but I am frustrated by how many foreign founders are being forced home due to our overly-restrictive policies.  I’ve seen two companies this year in Boulder, Colorado, that would have received U.S. venture funding and stayed here, but won’t be able to.  There are many of such cases across the country.  

Also, we still don’t have a handle on the H1-B issue.  Every year, our U.S.-based investments struggle to hire all of of the computer science talent that they need and their growth is stunted.  It’s time to de-politicize the immigration debate and concentrate on ways that we can make this country’s workforce even stronger. 

2. Enact real patent reform.  There are many points of view out there – from abolishing some types of patents, to materially revising the way jurisdiction is handled in patent cases, but, regardless, the loud chorus from the innovation economy is that the patent process is not working.  Patents are too costly to obtain, are too uncertain in the rights they grant when obtained and then all too often, end up with meaningless lawsuits that amount to nothing more than a tax on innovation in favor of lawyers.  We need to clearly define what is patentable and what should not and re-architect the system to deal with the realities of a connected world.  

3. Push for FASB to "figure out" valuation methodologies.  Over the past few years, venture funds have had to "mark to market" their investments.  This "FAS 157" (or Topic 820, as it’s been recently renamed), has placed a tremendous burden on venture firm managers and their investors.  In short, not even the accountants can tell us how to accurately value our portfolios and there is tremendous cost and uncertainty about the asset class because of it.  I’ve written about the issues, here, in detail.

4. Get a handle on Sarbanes Oxley / help with opening of the capital markets.  The last financial meltdown earlier this decade brought about increased regulations through Sarbanes Oxley.  While some credit the act for deterring and lessening fraud in public companies, it’s easy when almost no companies are going public.  In my opinion, the frauds perpetrated in the most flashy cases (Enron, Worldcom, etc.) were the work of bad actors and lazy accountants.  They were not systemic in the industry and even the rules today can be easily circumvented by two unscrupulous executives with a criminal agenda.

What the effect has been is to stop the flow of companies going public which has greatly hurt venture capital returns and has driven venture firm investors (limited partners) out of the market.  This has severally constrained the amount of capital able to fund new and innovative businesses.  I think a complete review of all of these rules needs to be undertaken, as I’ve had many conversations with entrepreneurs who don’t even want to go public due to all the red tape involved with Sarbox. 

The secondary effect has been a rush to other foreign markets, whether they are in London, China or India and thus the U.S. is losing its market share of new offeringings and further weakening our financial industry.  

What your administration should NOT do:

1. Regulate the Venture Capital Industry.  We aren’t hedge funds.  Nothing we do increases "systemic risk" in the economy.  In fact, the entire VC industry invested a total last year of $28 billion dollars (not an atypical year).  That sum is less than half the amount that Bear Stearns was borrowing every night before its collapse.  Regulating us, in the best case, foists additional costs upon us that smaller, early-stage VCs can’t afford and worst case, materially and negatively impacts the VC industry’s ability to fund new companies.  Lastly, it should be noted that investors in VC funds are of the highest sophistication levels.  This isn’t the case of protecting the average investor.  The WSJ recently had a great opinion piece supporting this position. 

2.  Increase taxes, especially capital gain taxes.  There is quite a bit of research that shows correlations between low capital gains taxes and high GDP growth rates.  I won’t pretend to have a PhD in economics (although I did manage to get an undergraduate degree from the University of Michigan in it), but many of the entrepreneurs I speak to say they specifically take the outsized risk of starting a business because of the potential financial gains.

Additionally, changing the characterization of venture capitalist’s carry is inconsistent with how VCs invest – long term with high risk of capital loss.  I also have a hard time delineating between founder shares and VC carry and wonder if VC carry is changed will founder shares be next?  The reason behind capital gains treatment was to incentivize long term investing and also to help make up losses from risky asset classes that benefit our society in the long run.  This is precisely what VCs do. 

3. Engage in activities that will devalue the dollar.  One thing to keep in mind is that with some of the current issues detailed above, it is harder and harder for VCs to raise money to fund startups.  Small businesses must do more with less.  If the dollar becomes devalued, these companies would effectively have less money to spend on hiring and other activities to make them successful in the global marketplace.

Again, Mr. President, I urge you to consider how your policy makers are taking into account one of the most important drivers of this country’s economic future.  This is not about venture capitalists:  it is about the ecosystem of innovation which venture capitalists spend their lives funding.  We’ve been blessed in this country with a large population of entrepreneurs and we need to foster this culture so that we can maintain our competitiveness as the greatest economy in the world.  To that goal, the government can largely stand out of the way and help on the margins to tweak some things that will benefit all. 

I humbly ask for your consideration. 

For those of you who share my disgust with the current patent ecosystem, here is a great piece from Timothy B. Lee on “Intellectual Ventures.”

I use quotations, because it’s nearly impossible for me to call them “Intellectual Ventures” as I see nothing intellectual about the firm but for their desire to further deteriorate innovation in this country while trying to bilk a buck or two (or millions) from hard working entrepreneurs.

Timothy summarizes Malcolm Gladwell’s expose of IV where he stated that IV

“hires smart people to participate in brainstorming sessions and then has patent lawyers immediately file patent applications for every idea that comes up during the discussion, without bothering to actually implement any of them, or even devoting much effort to verifying that they actually work. IV then approaches firms that are doing the hard work of implementing “their” ideas and demands a cut of their profits.”

If you aren’t disgusted, you should be.  Timothy asks how any of this benefits anyone other than IV and the patent bar.  His take on patent reform?

“a good yardstick would be to look for policy changes that would tend to put Myhrvold and his firm out of business.”

Brilliant. 

One can only hope.  I think it’s optimistic thinking on my part that software patents will one day go away, but until then I can enjoy a GREAT article from the Cato Institute on why they think they should go away.  It’s a must read for anyone thinking about the issue.