Patent litigation; Now the cost of doing business?

According to Forbes, patent trolls now account for the majoity of  patent lawsuits in the US. It's clearly been a growth industry as the percentage of troll induced suits grew from 45 to 62% in the last year; more than ten new troll suits evey day. Of great concern to me is that 55% of troll defendants earn less than $10mm in revenue (per Collen Chien, Santa Clara University Law School). My experience is that these firms already have enough roadblocks to success and IP suits, no matter how far fetched, have huge potential to disrupt progress, if not the sustainability of young companies. I am confident that, given the uncertainty of ligitation, and the huge exposure in real dollars, many a financing or potential exit needs to have these matters settled before a buyer proceeds with the transaction. Regardless of the settlement, the cost of litigation, in the many hundreds of thousands of dollars, plus the management distraction are huge issues for all of us.

Below is a chart (credit RPX) showing the marketshare growth of the trolls. This only happens when a business, no matter how nefarious is profitable. In fact, per the PWC report cited below, the annual median damage award was $5.3mm. It's significant that when these cases are heard by juries, the rewards to non-practicing entities tend to be many multiples of those awarded by judges. Therefore, there is a peverse incentive for NPE's to not settle, but to push an average of 2.5 years, for a jury trial. Based on performance, the odds are stacked against the defendants


*non- PAE are non practicing entities, usually corporate shells whose only assets are patents


The present administration is trying to help with the reintroduction of the SHIELD Act and hearings are being held by the House Judiciary committee on the topic. The key provision in the Act is for losers in these suits to bear the costs of both parties, akin to the British system of torts. I am not sure this is a good solution as it always favors the 'deep pockets', but something has to be done.

For more information, here's an excellent PWC report on the topic from 2012.

I applaud the efforts of one of our industry associations, the SIIA  (links to their relevant activities) to help. It would be great if they were joined by the NVCA and others too.

When to Sell Your Company

In the past few months I have been busy helping with the sale of one investment, am navigating the sale of a second, are comtemplating a public offering of a third, and saw a  fourth receive an expansion funding round.  Funding and exit events are never far from the center of conversations for venture backed companies. As such,  it caught my eye when a recent acquaintence kindly sent me this really insightful post from EV Williams, co-founder of Twitter.  

Enjoy

When to Sell Your Company

On October 30, 2008, I wrote an email to Twitter’s board of directors, which started:

It seems to me, there are three reasons to sell a company. Any of them will suffice:

This email was in reply to a thread in which we were briefly discussing an overture we’d received from a much larger company. Of course, in 2008 Twitter was much, much smaller than it is today. We were fewer than fifty employees, had raised “only” $20 million or so, and probably had fewer than ten million users. We were still having a lot of technical issues. And while growth had been good in general, it wasn’t yet consistent. (The ridiculous growth curve started in 2009.) Who knew what the future held? Acquisition wasn’t an obviously dumb idea.

After thinking about it a bit, I offered to the board these “three reasons to sell”:

1. The offer captures the upside

Every business has natural growth limits. If someone offered you $10 million for your coffee shop that does $250,000 a year in sales, it’s pretty clear you should sell—from a purely financial perspective. Finances are only one perspective, but if you have many shareholders, it’s one you are obligated to take seriously.

In 2002, Google reportedly turned down a $3 billion offer from Yahoo!. That looks like a no-brainer in retrospect, because Google is such a behemoth. And it was probably clear to Larry and Sergey at the time that if they were successful, the company is worth many, many times more than that.

However, not every company is chasing a Google-sized opportunity. At the time, I cited Photobucket selling for $300 million to MySpace, which seemed like a huge win for that service. Had I been given an offer like that for Blogger a few years earlier, I would have logically said yes.

At the time, the offer we had on the table for Twitter—though a heck of a lot of money and a huge win for investors and anyone else involved—didn’t seem like it captured the upside. Even though we weren’t huge, and there were still a lot of doubters, I believed our potential was unbounded.

But there are other reasons to sell…

2. Imminent threat

There’s potential, and then there’s risk. And there’s always risk, even in the best situations. But there are cases in which your chances of reaching your potential are slimmer than normal and maybe even totally out of your control.

Consider YouTube’s legal issues or PayPal’s fraud challenges. Both companies had huge outcomes, but seeking a corporate parent at the times they did had safety, as well as financial, benefits. Perhaps they would have held out for much longer and grown to be strong public companies of their own otherwise. They were certainly in big enough businesses.

Sometimes the threat is internal—an inability to execute on one’s opportunity. Friendster might be an example. When they turned down $30 million in pre-IPO Google stock, it was not a dumb move from a “capturing the upside” perspective if you consider they were the first big social network, and they had no real competition. It’s not clear how obvious the internal threat was, though.

In Twitter’s case, one could argue we’d had an internal threat similar to that of Friendster’s at one time. There was a while where our technical issues made us quite vulnerable. But by the time of this email, we felt we had moved past that. (We hadn’t quite, but this was eventually true.) We had competitors who were larger and paying increasing amounts of attention to us, but it didn’t feel like we were in real trouble.

But there might be another reason…

3. Personal choice

Sometimes the founders or other key people may just be done. This is actually quite common and drives a lot of small acquisitions. It doesn’t apply as much as companies get larger, because everyone is (eventually) replaceable—especially if the company is doing well.

Back in 2003, I struggled a lot about the decision to sell Blogger to Google. The financial win wasn’t clear (it was for a small amount of private stock—again, before their IPO). We had tons of room to grow and didn’t have any real threats. And I even had a term sheet for more funding on the table. But I was compelled ultimately because I felt like Google was the best home for this thing I’d built to reach its potential. I also knew I wanted to start another company and thought I’d come out of a couple years at Google smarter and better. I also knew the team was going to be happy to join Silicon Valley’s most esteemed company.

In the Twitter case, we had no desire to sell. I had actually just become CEO and was raring to go—as was the team. Additionally, the company we were having the discussion with didn’t seem like one in which we’d fit particularly well or the team would be stoked about.

---

That email put the discussion amongst the Twitter board to bed—pretty much forever. Since then, I’ve walked through this framework with friends when they faced the acquisition question to help create clarity. If you’re faced with one of the biggest questions you can be posed as an entrepreneur, hopefully this will be helpful to you, as well.

Minimal Viable Product MVP (ugh)

I have been informally advising an entrepreneur who I have a great deal of respect for. He's a second time founder, one who had a great exit in the 'enterprise' world, and is now building an innovative mobile application. Surprisingly, I found us having a debate over his intent to create a minimally viable product for his first release. He's a really smart guy, and his intent is to use the initial few thousand users as live market research. He hopes the 'good enough' feature-set will help prioritize future releases and validate the market potential. I hope he's right. Yet, I was troubled by the approach and thought I would share some background.

The combination of costs steadily declining for designing and launching products, coupled with a social embrace of entrepreneurs has led to a bevvy of start-ups creating things which are only limited by your imagination. Despite declining development costs, many, if not most of these thousands of new ventures are capital challenged. So much so that it's now common to hear an entrepreneur explain that his team is building a 'minimally viable product' with the objective of gaining enough market traction (happy users) to then raise subsequent expansion capital. Heads seem to nod that this is a prudent course of action. I'm not one of them.

Limited capital, though painful, can be harnessed to be a great asset for young companies as it forces the team to make the hard decisions about what is 'really critical' vs 'only important'. It's really essential to do the really critical and to do it well. Often the 'only important' turns out to be not so important after all. My concern with the MVP state of mind is that companies are creating cultures, and producing products, where mediocre user experiences are acceptable as a result of hard product decisions not being made. It's a responsibility cop-out to produce bad product, and it's irresponsible to the stakeholders to think that the market opportunity is so great that bad/mediocre product will instantly gain sufficient momentum to attract capital to support the next phase of growth.

If you don't have enough capital to do the job, or are not in a position to use your team's 'sweat' as a substitute for money, then it just might not be the right time to start this company.

New York, New York, it's a Hell of a town

Over the past 5 years, I have been continually testing my thesis that the best way to make money investing in technology companies is to invest in companies which have the potential to be market leaders; in a market worth caring about. Around ten years ago the folk at Morgan Stanley (at least that's where I recall they were from) did a great piece of research showing that the overwhelming majority of any market segment's capitalization rests with a scant few, mostly public firms. The message was compelling, if you are not in the top three market share spots, an investors risk/reward ratio goes so sky high that you would be better off playing the lottery (the risk increases, while the reward simultaneously decreases). 

Though you may make the right call to invest early in a burgeoning market, unless you execute towards a leadership position, it's going to be a problematic investment. Choosing the right market is a necessary, though not sufficient ingredient for success. It's essential that the management team, supported by investors with sufficient capital and drive have a common objective. 

To paint with a broad brush (exceptions abound) I think it's fair to say that there is a distinct difference between East coast and West coast investors and management teams. I believe that West coast investors and teams have been far more market share driven than their right coast sibling and believe that the preponderance of technology  market share leaders being in the Valley is a direct result of this culture.

The Boston to NY corridor does have its share of companies which are showing great signs of success. Some look really great and have the potential to be market leaders, such as Tumblr, Payoneer, Etsy or 10Gen. But it's also fair to say that since the heyday of Doubleclick and AOL, we may not have a critical mass of companies which are hell bent on being market leaders, in markets which matter.

Mobile company building statistics

Despite having more than 1 billion mobile devices in use and tens of thousands of companies selling and giving away mobile based applications, the number of  successful 'mobile first' companies is still suprisingly small.  Here's some statistics from an end of the year report by Flurry which should help set performance benchmarks for companies to compare their performance and plans against.

For those unfamiliar with the Gartner Magic Quadrants, the upper right corner is where you want to be; clients with high retention and high frequency of use. These can be really fast growers as the churn is so low. The next best place to be is the upper left corner, with intensive use, but high(er) churn. Tough to build a subscription or successful freemium business here, but advertising may work quite well.



 

Social Media explained (image)

From my friends at Tracx:

De-cabling

The other day I realized that we have too many cable connections in the house. Our TV's are just not being used the same way they were in the past and using systems such as AppleTV and Tversity, coupled with a new generation of HD indoor antenna (I purchased a Leaf Plus for $69), we can revert back to an enhanced free TV model where we have access to all the basic channels, libraries of movies on demand, and streaming from our PC's.

Sure, we are keeping a couple of 'cabled-up' sets for viewing, but it's becoming the exception, not the norm in our house.