Innovation Gone Wrong

Imagine I rob your house, take some of your belongings and return the next day with a promise that you will be protected from such a despicable act in the future by paying me an insurance fee.  Would you describe it as extortion or creative enterprise?

As extreme as this example sounds, it is analogous to the choice with which technology innovators are now faced.  Through innovation, they created patents which became the target of patent trolls: companies with no real operations and non-practicing entities, who would acquire patents with the sole goal of attacking the innovators and extort license fees.  Previously, the innovators had no alternative but to fight the aggressors.  But now an even more elaborate strategy has been devised to extract fees from the innovators: insurance.

Incredibly, some of the same individuals who were responsible for attacking the technology companies on the basis of patent infringement are now behind a new venture to protect technology companies and other innovators from patent trolls.  RPX, headquartered in San Francisco, offers companies the equivalent of insurance in exchange for subscription fees ranging from $60,000 to $6.6 million that are based on a company’s operating income.

RPX, which went public earlier this month, posted revenues of almost $100 million last year with $13.9 million of profit.  And how incestuous is the relationship between the former combatants and the new protectors of the innovating, value-creating companies?  The Chief Executive of RPX was formerly a member of Intellectual Ventures, an investment firm that spent years purchasing patents and then sued a range of companies, including anti-virus firms Symantec and McAfee.

And therein lays a problem with innovation in America.  There are those who innovate and create value and those who prosper by feeding off the innovation without creating any inherent value.  The architects, who masterminded the attack of companies creating value while themselves creating none in an effort to extort fees, have conceived a method of extracting fees from the innovators of value, albeit via a different angle.  The insurance method as opposed to the litigation approach is akin to the parasite proposing to the host body that it will not bleed the host dry in one fell swoop but rather a little at a time if it agrees the parasite can feed provided it will fend off other parasites.

Budding entrepreneurs should reflect both on the opportunity and the opportunity-cost when considering a venture.  Fundamentally, a choice exists between starting a venture that creates value and one that prospers from the value created by others.  The former is the engine of economic growth while the latter bleeds the engine dry.  Choose wisely and carefully.

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