On the surface, Nathan Myhrvold’s Intellectual Ventures fund appears to invest in inventions and make money by licensing those inventions to other companies.

Indeed, the fund has apparently bought over 20,000 patents from universities, inventors and bankrupt companies, many of which it has subsequently licensed to some of the biggest companies in the world. And, like any smart investor, it has specifically aimed to ‘buy cheap, license expensive’.

But there are some who view the fund’s business practices as bordering on extortion. TechCrunch reports that, in reality, some companies effectively agree to pay patent-licensing fees to protect themselves against Intellectual Ventures bringing an action against them.

Moreover, as part of a typical licensing deal, these same companies also agree to invest in the fund so that it may buy more patents. Meanwhile, Mr. Myhrvold’s company commands a 2 percent p.a. management fee and also keeps a percentage of any gains.

Sure, by investing in the fund, such companies get an equity stake… but as Erick Schonfeld of TechCrunch indicates, the upshot is a business built on a patent system that rewards litigation rather than invention.

Source: Erick Schonfeld, “Nathan Myhrvold’s Patent Extortion Fund Is Reaping Hundreds Of Millions of Dollars”, TechCrunch, September 17, 2008

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