Nathan Myhrvold’s Intellectual Ventures on Patent Hoarding, Mosquito Lasers, and its $5 Billion Arsenal

Earlier this week, it was announced that TerraPower, a startup with a design for a next-generation nuclear reactor, had raised a $35 million round of funding from Charles River Ventures, Khosla Ventures, Bill Gates and others, after raising what the company is calling a first round of (undisclosed) “tens of millions” of dollars in 2008.

Its vision is ambitious to say the least. To power its reactor — which will take another 10 years and billions more dollars to get built — TerraPower expects to use the depleted uranium waste created when uranium is enriched to run in conventional power plants. Not only would doing so dampen the risk of nuclear proliferation, says the company, but there is already enough depleted uranium in the world for its reactor to power the whole planet for 100 years.

Indeed, given the scope of TerraPower’s plans, it isn’t surprising that it’s the first spin-off of Bellevue, Wash.-based Intellectual Ventures, the 10-year-old company of Nathan Myhrvold, Microsoft’s former chief technology officer.

Brainstorming ideas, patenting them, then spinning them off into standalone companies is half of Intellectual Ventures’ reason for being. The other half, of course, is buying up tens of thousands of patents to protect its royalties-paying customers from being sued, including, reportedly, Cisco, Intuit,  Verizon, Google and Apple. (Theoretically, Intellectual Ventures could also start creating infringement lawsuits. It hasn’t done so, but according the The Recorder, it has begun selling some of its unneeded patents to organizations that aren’t afraid to sue.)

Yesterday, I talked with Intellectual Ventures’ executive vice president, Eben Frankenberg, about TerraPower, what’s likely to come out Intellectual Ventures’ next, and what he makes of accusations that Intellectual Ventures patent hoarding is increasingly counterproductive to innovation.

First, what’s your role at the company?

As executive vice president, I work on a variety of things, including the business side of the spin-out opportunities we have. TerraPower is the first spin-out. And so I’ve been involved in its fundraising, and early project work, along with hiring [TerraPower CEO] John Gilleland.

And how big is Intellectual Ventures at this point?

We employ between 650 and 700 employees, with our headquarters in Bellevue and offices in Austin and Silicon Valley, and in China, Korea, India, Japan.

I’ve read in numerous places that Intellectual Ventures has raised millions if not billions of dollars, including from Bill Gates. Do you disclose who your other backers are, or how much money Intellectual Ventures has to deploy?

We’re funded by corporate investors that are a who’s who of the high-tech industry, as well as a bunch of financial investors that are private endowments, university endowments, venture funds, and the like. We now have over $5 billion that we’re deploying on a combination of two things. One, we spend money coming up with ideas, but we also spend money buying existing patents from other people, including universities, corporations, garage investors — all with the intention of aggregating those patents and re-licensing them to different players in the market.

Obviously, the company has been characterized numerous times as a “patent troll.” How would you frame what you’re doing?

From a customer’s perspective, we help them mitigate risk. So for people who are subscribers to our portfolio, we buy up assets that might end up counter to them, so they get access to a whole bunch of IP that they have use for, at a better price for trying to get access to it individually. So a big component of what we do is risk mitigation.

And we’re beginning to package up other services around that portfolio. For example, if one of our clients is being sued for patent infringement, we can transfer some of our patents assets to them in a lawsuit. So if one product company is suing another, and they need some additional assets to defend themselves, we can provide them that. So we’re bundling up a bunch of new services around risk mitigation. 

What’s in your portfolio at this point?

We cover everything bits and bytes related, wireless, semiconductors, software, ecommerce, those kinds of things. We also do energy; we work in medical devices, implantable devices, diagnostic devices. We also do a little work in agriculture — not plant or biological patents but in other areas, like engineering.

Then we do some investing purely for the good of mankind, not for commercial purposes. We’ve invented lasers that shoot down mosquitoes to help reduce the spread of malaria. We’ve also invested resources in malaria diagnostics and in an area called cold chain that’s delivering drugs that need to be stabilized at high temperatures to remote locations through a whole system of coolers and trucks.

Are your LPs expecting some sort of return on that work as well or do the royalties give IV enough of a cushion that it doesn’t matter?

When we’re investing purely for good, that work is being funded by particular people who appreciate that there might not be a particular return, like Bill Gates.

And what about TerraPower? What’s the exit strategy there?

The business is really centered on the engineering aspects of the design of this new breed of reactors. Our goal is partner with other companies that will do additional engineering, then we’ll sell the reactor design to utility companies. It’s not dissimilar from GE selling its reactor, or Westinghouse’s reactor that’s been sold in a bunch of places. So we want to be a reactor design and engineering company with a variety of exit possibilities, including corporate M&A, an IPO kind of an exit, or maybe a sovereign nation that wants to invest and take out some of TerraPower’s existing investors.

But from what I understand, each of those scenarios could be 10 years out or further.

Our investors recognize that we’re on a longer timeline. Patents last for 20 years. Our goal, especially on the pure invention side, is to look out past the normal product life cycle of a traditional R&D organization, which can be 1 to 3 years and, at the outside, three to five years. We’re looking more at 5 to 10 years out. So they realize that the money they invest today will go toward us investing in things that will come to fruition five to 10 years from now, and then, after that, we have to go and make money off it. Still, they’re expecting IRRs that will be competitive or potentially advantaged over other types of private equity investments.

And to be clear, TerraPower raised its own financing. Why, when Intellectual Ventures has so much capital to invest?

Because our charter is to invent and to invest in invention with the idea of monetizing that invention by working with commercial partners who will bring the invention to market. With TerraPower, we did the invention work, and when it got to a point when it was beyond invention and getting into engineering work, we said, “That’s beyond our charter.” We come up with the brilliant idea, then we come up with third parties.

In this case, we thought we could take the reactor idea and try to license it to some big nuclear player but decided that it was a big enough idea that we should maybe find people who wanted to invest in it and set it up as standalone with a potentially larger exit later on.

How capital-intensive is TerraPower expected to be?

Reactors typically cost between $2 billion to $5 billion, and our reactor is in the middle of that range. But investors like Bill [Gates] aren’t interested in funding plants; they’re funding innovation. It’s securing the land, pouring the concrete, doing the monitoring systems, putting in the generators and the rest that’s in the $3 billion range. TerraPower is doing the engineering work and that’s more in the few hundred million dollar range. So we do think we’ll need to raise more money. This [$35 million funding] will take us through the end of 2011; I wouldn’t be surprised if we’re out raising money again later next year.

Sounds like a very risky proposition as a venture investment.

The VCs were extremely excited about the opportunity. They said it was one of the biggest ideas — with more opportunity to change the world — that they’d ever seen. There are lots of clean energy plays but frankly none has the potential to change the world energy situation the way nuclear energy does. And there is enough depleted uranium sitting around behind enrichment plants that we could power the whole planet for 100 years without another ounce of uranium. So there’s a tremendous amount of potential.

Can you share when we might see Intellectual Ventures’ next spin-out?

What might come out next is another big-idea company that we hope to do early this year or later this year. We’re also looking for partners in a variety of other areas to do more traditional IP licensing to get them some new products to get to market.

Can you be any more specific?

I’m afraid I can’t right now.