Patents: Ocean Tomo ETF May Spark the Trolls?

As our world accelerates toward the connection of human consciousness made possible by the ever-increasing capability of the Internet and the applications that sit on top of this “platform”, the intellectual capital contained within ideas, inventions, new processes and methodologies will become more valuable on a global basis.

If you’ve got the next, great Web 2.0 idea; a process you’ve figured out how to make more efficient; a disruptive or creative innovation you’ve figured out how to take to market; or are trying to understand where you should be investing for the next couple of decades; you really owe it to yourself to understand what the smartest people are doing in the realm of intellectual property and capital…

…or risk missing out on the next great wave of investment or a patent troll suing you for infringement.

I’ve written before about the possible patent troll Nathan Myhrvold (though the jury is still out on his actual troll status). Myhrvold has been working toward “cornering the market” on some aspects of intellectual property by patenting as many ideas and processes as possible…and then licensing them or preparing to do so. Even though he’s expressed that he’s taking the high road where trolls fear to tread, I’d bet that his firm (Intellectual Ventures) will take advantage of what the patent trolls are doing if the opportunity arises (suing a company that might be infringing on a patent they purchased from some other inventor, etc.).

How can you make money on intellectual property and — if you’re an inventor, an entrepreneur or involved in managing your company’s patent portfolio — what do you need to be aware of going forward in a world where patent trolls may prevail?

One example of a way to make money — and a firm that could become a troll themselves — is Ocean Tomo (OT). OT is a merchant bank with a new exchange traded fund (ETF) called the “Ocean Tomo 300 Patent Index”:

The Ocean Tomo 300 Patent Index, the first intellectual property index, represents a diversified portfolio of 300 companies that own valuable patents. The American Stock Exchange recognizes it as the first major, broad-based market equity index to be launched in 35 years, and follows the progression from the Dow Jones Industrial Average in 1896, to the Standard & Poor’s 500 in 1957 and then to the NASDAQ Composite Index in 1971.

The Index, which would have outperformed the S&P® 500 by 310 basis points annualized for the ten years ended September 2006, is a valuable tool for analysts, financial advisors and investors.

Part of me is gleeful that there is such a fund analyzing IP valuation and trading on it. Part of me then lets out a sigh when I think about all the inventors and entrepreneurs I know — or are working with as clients — that are leaping forward with their ideas and building them out with little regard to what might already be filed as a patent or potentially a patent granted. The world of IP is getting murkier and will continue to do so since I believe — as it states on the Ocean Tomo pitch for their ETF — that we’re leaping in to a completely new era of valuation:

Over the last thirty years the industrial economy has transformed to the knowledge economy. Intellectual capital has emerged as the leading asset class.  In 1975 more than 80% of the market’s value was composed of tangible assets: factories, machines, and inventory.  Now in 2006, less then 20% of the market’s value is composed of tangible assets.

Boy….do I ever agree with that statement and my longer term investments are geared toward that reality. At the same time, I recognize that there is a fundamental shift going on globally toward non-monetary and non-barter value exchange that may positively or negatively affect the value of intellectual property over time.

This non-monetary, non-barter value exchange is most obvious as it’s manifested in open source software and the collective input by those deep into the culture of participation in such sites like Wikipedia and the hundreds of others like it. All of this effort, energy and wisdom being invested is free and the value of these offerings isn’t simply equal to the value of people’s input on a 1:1 basis…the value is an exponential one that occurs when non-participants consume or use this intellectual capital (i.e., by just downloading and using the open source software or reading the articles in Wikipedia without ever putting any value back in).

Think about that last sentence for a second. It’s not just the building of something, it’s the use of it that accelerates its value (called the network effect). As companies find ways to unleash the people in the Internet-centric participation culture on its own ideas, inventions and creations — how will the network effect accelerate the value of intellectual property? The answer is patented intellectual property will explode in value!

Capitalism and profit will prevail and free is the enemy of the investment and value…or is it? My belief is that more and more of the baseline, inefficient and redundant stuff ought to be free and will be. If the stuff that should be owned by us all is…then more of us can get more focused and embark on extreme specialization and build ever higher, more complex and more valuable creations.

So it’s clear that I think IP valuation and assets will grow in value and pretty quickly as the Internet connects us all. I also understand that our Patent and Trademark Office needs a major overhaul (and probably significant investment by the government) since too many patents are issued that shouldn’t be.

I should also toss in a disclaimer here that I’m probably going to invest in this OT ETF after I complete my due diligence. At the same time, I’m taking steps to get smarter about the murky world of intellectual property law in order to be aware of possible pitfalls as I innovate myself as well as work with clients doing the same.