Posts Tagged ‘innovation crisis’

Update on America’s Slipping Global Competitiveness– Implications for Intellectual Property Development of Senate Bill 515

ot_logoThis morning I gave the keynote speech at the ICAP Ocean Tomo IP auction in San Francisco.  My remarks explained the relationship between the long-term decline in America’s global competitiveness, the impact of the capital markets crisis on new investment in research and development, and specifically addressed Senate Bill 515, the pending U.S. legislation that will transform the U.S. patent system and broadly impact intellectual property rights in our country.  Some excerpts follow, and you can download the entire speech and slides by clicking at the bottom of this post:

“The absence of cohesion in American public policy can be seen in many areas—with cybersecurity coming immediately to mind.  Mike McConnell, former director of the National Security Agency, recently wrote an opinion piece in the Washington Post on why the U.S. is losing the cyber war, commenting that “The problem is not one of resources; even in our current fiscal straits, we can afford to upgrade our defenses. The problem is that we lack a cohesive strategy to meet this challenge.

This lack of cohesiveness comes from short-term thinking that has become prevalent in many aspects of American society.   The notion that “posterity doesn’t matter” has unfortunately taken root in our country, and this has led to fragmented approaches to public policy solutions across the board, corroded leadership among our elected representatives, and contributed to an entitlement culture and a lack of accountability that permeate much of American society.”

“The key obstacle to moving [patent] reform forward continues to be disagreement between several large high-tech companies, namely the group of Cisco, Microsoft, Hewlett Packard, and Intel, on the one hand, and life sciences organizations such as PhRma, BIO, MDMA, AdvaMed, Universities, several union groups, the NVCA, and others, on the other hand, over the idea of creating a new post-grant review procedure within the PTO and over the proposal on apportionment of damages in infringement cases.

As we consider the broad implications of this polarizing issue, we must first step back and remember that inventors and investors devote time, energy and risk capital to innovate new products and technologies.  Since the drafting of our country’s Constitution and even well prior to the establishment of the United States, it was understood that the greater good was served with a patent system that encourages this type of risk taking by protecting inventions resulting from innovation.  It is also understood, though in our country it appears to have been forgotten, that innovation, and job creation, come not just from large, well-funded enterprises, but in large part result from the efforts of small companies and individuals laboring to make a better mouse trap.

The core principles underlying the patent system have not changed.  We need to encourage and reward those that take risk to innovate new products, services and technologies.  Unfortunately, the patent system that served us so well for so long is under assault.  The cost of filing patents has increased dramatically.  The cost of enforcing patents has gone through the roof.  Injunctions have been taken away except for cases of head-to-head competition in the patented item.  Patents are now easier to invalidate after-the-fact.  A patent holder can no longer offer his/her patents for license without putting himself/herself at risk of litigation that he/she may not be able to afford.  Innovation involving patents has become a rich-man’s game, with an increasingly uncertain chance of return.

At a high level, we need to understand that anything that changes our patent system creates winners and losers.  In general, changes that weaken the patent system hurt inventors and innovators, while benefiting large companies with established market positions (e.g., monopolists) and low cost producers (e.g., offshore companies with lower labor costs, fixed currencies and weaker environmental standards).

Some argue for changes in the patent system based on a claim that non-practicing entities, often pejoratively called trolls, have too much power.  Some extraordinary examples, such as NTP seeking an injunction that would shut down Congress’ use of Blackberrys and some high dollar jury awards and settlements, have been cited by some as sufficient reason to argue for a radical restructuring of the way that patents are filed, challenged and enforced in court.

We need balance in this process, as changes may have the unintended affect of hurting those that we need now more than ever – inventors, entrepreneurs and investors that will innovate and create jobs here in the U.S.”

For a full transcript of the speech, including the slides, CLICK HERE.

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Business Week Report on “Radical Future of R&D” Misses Critical Capital Markets Link in Innovation Ecosystem

imagesThe cover story of the September 7 issue of Business Week reports on the “Radical Future of R&D“, focusing on the internationalization of research and development led by global corporations such as IBM and Hewlett Packard.  The magazine includes a story written by Adrian Slywotzky, “How Science Can Create Millions of New Jobs.” Mr. Slywotzky  is an “author of several books on profitability and growth” and currently a partner at the management consulting firm Oliver Wyman.  While the article makes important points about the sorry state of the American R&D ecosystem, the author neglects to mention that, in order to achieve the goal of new job creation,  healthy U.S. capital markets are essential and intimately linked to new funding commitments to basic scientific research.

The article cites the extraordinary decline of Bell Labs over several decades as an example of the model that we must seek to restore, and he makes other basic points about the decline in our nation’s R&D efforts.  These valid observations may be drawn from primary research sources such as the work published by the National Academies, whose most recent report, Assessing the Impact of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment, was released several months ago.  The article points to America’s innovation crisis along lines that have been articulated in greater detail by thought leaders including Judy Estrin and Norm Augustine.

Unfortunately, Mr. Slywotzky makes an important assertion about venture capital that is incorrect. I believe that, if he understood the reality of the venture capital industry today and its inextricable link to the Initial Public Offering (IPO) drought, his otherwise well-written article would have taken a markedly different direction.  Below, I quote several parts of the article that I found particularly useful, and I point out the error:

First, the positive:

“America needs good jobs, soon.  We need 6.7 million just to replace losses from the current recession, then an additonal 10 million to keep up with population growth and to spark demand over the next decade.  In the 1990s the U.S. economy created a net 22 million jobs, or 2.2 million a year.  But from 2000 to the end of 2007, the rate plunged to 900,000 a year.  The pipeline is dry because the U.S. business model is broken.  Our growth engine has run out of a key fuel– basic research.”

PASCAL’S COMMENT:  Basic research is a key fuel, but, in fact, the part of the U.S. business model that drives job growth in emerging growth companies is IPOs.  More on this below.

“It’s tempting to ascribe current job losses in the U.S. to the deep recessionor to outsourcing, but the root of the problem is the absence of high-value job creation.”

PASCAL’S COMMENT: Correct!

“… in recent years, outsourced software and manufacturing jobs have largely been replaced by millions of low-wage service jobs in fast-food, retail, and the like. . . . Of the roughly 130 million jobs in the U.S., only 20%, or 26 million, pay more than $60,000 a year.  The other 80% pay an average of $33,000.  That ratio is not a good foundation for a strong middle class and a prosperous society.”

PASCAL’S COMMENT:  This is astounding and very bad news indeed.

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Now, the mistake:

“Venture capitalists are sitting on plenty of cash and are good at bringing startups to the market.  We just have to rebuild the upstream labs that focus on basic research– the headwaters for the whole innovation ecosystem.”

FULL STOP.  First, the venture capital business is contracting severely:

From the April 18th, 2009 NVCA/PWC Moneytree report: “Venture capitalists invested just $3.0 billion in 549 deals in the first quarter of 2009, according to the MoneyTree™ Report from
PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters.  Quarterly investment activity was down 47 percent in dollars and 37 percent in deals from the fourth quarter of 2008 when $5.7 billion was invested in 866 deals.  The quarter, which saw double digit declines in every major industry sector, marks the lowest venture investment level since 1997.”  for more industry statistics, CLICK HERE

Second, it’s just not that simple.  Mr. Slywotzky is ignoring the fact that over 90% of job growth from venture-backed companies occurs AFTER their IPO, and this has been the case since the 1970′s.  We have an IPO drought that has killed the small IPO, and it is systemic, not cyclical.  I have been speaking to this point publicly since March 2009.

A new study is going to be released in the next several weeks which will bring to light very important data about the long-term secular trend of declining public company listings in the U.S. Not only does this add tothe mountain of data showing America’s slipping global competitiveness, most importantly, the study develops a model establishing a direct relationship between this trend and American job losses.  Publicly traded emerging growth companies are the most rapid job creation engine in America, and successfully harvesting the long-term economic growth fruits from basic scientific research is tethered to this post-IPO job creation engine.

To be clear, IPOs, particularly IPOs raising less than $50 million, have become largely extinct due to unintended consequences resulting from a series of securities regulations that followed the rise of electronic trading networks in 1996.  The new capital markets study, which this blog will point to as soon as it is released, is written by David Weild and Edward Kim of CMA Partners.  Weild and Kim are also the authors of the important white paper published last November by Grant Thornton, ‘Why Are IPOS in the ICU?’.

Yes, we need to restore the U.S. Government’s commitment to funding breakthrough innovation in basic scientific research.  But we also need to take aggressive actions to protect critical elements of our nation’s innovation ecosystem and stop treating it as a series of loosely connected elements.  Government research centers, university centers of research excellence, corporations, and venture capitalists are commonly bound to the most important element of this ecosystem, the entrepreneur.  It is naive to believe that just promoting basic research will magically ripple though the innovation landscape and restore America’s lost greatness.  Understanding the complexity of this issue requires interdisciplinary and unconventional thinking. It also requires an understanding of how capital markets actually work and applying real world solutions to resolve an urgent problem– the death of the small cap IPO.