Reinventing Invention

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Welcome to the Harvard Business Idea Cast. I'm Sarah Greene from Harvard Business Review, and I'm talking today with Nathan Mervold, the CEO of Intellectual Ventures, which is a company that makes a business out of invention, which is what we'll be talking about today. He's the author of the article Funding eureka in the March 2010 issue of the magazine. Nathan, thanks so much for joining us.

My pleasure.

So what's wrong, in your opinion, with the current way we invent things?

Well, it's not so much that there's something wrong in how we invent things, it's that we as a society put very little effort into inventing things. We don't fund it, just to be blunt.

So when you talk about us not funding, inventing things and putting less effort into that, do you mean something different than innovation? Because we talk a lot about innovation.

Well, I do mean something different than innovation. Innovation has many characteristics. Innovation includes, for example, taking somebody else's idea and applying it to your product. That may be new and interesting and innovative, but it's not something that you invented that was new. Or maybe it was an invention to the extent that the application was novel. But we live in a society where technology is a very important force in business, in our daily lives. And all technology starts as a spark in someone's brain, in an idea of something that didn't exist before, that once they have invented it, brought it into existence, could change everything. And that activity is generally one that's not very well supported.

Well, what about all the money that the government spends on invention?

So the government spends essentially nothing on invention. The government does fund basic research. And research is a different task than invention. Research is about increasing mankind's knowledge. It's about understanding how physical systems work or our bodies work or other things like that. It's perfectly feasible to be a researcher with government grants, or even a Nobel Prize winner without ever having invented something new. Instead, you get the Nobel Prize or you get the academic accolades for understanding new things about the world. Newton didn't invent gravity. Newton came up with a mathematical understanding of it, as one example, and similarly with Darwin and Einstein and others. So academic research is sometimes a spark for invention, but often it isn't. And so it's not really fair to count the money that is given in RD for invention.

So how do you know then that it's not just that. The problem is that maybe there's just not that much stuff to invent.

Well, look, there's two answers to that question. The first one is, hey, maybe you're right, but there's only one good way to do the experiment. And so let's try to stimulate invention and see if that happens. And if I'm wrong, you can write an article 10 years from now or 20 years from now in Harvard Business Review and say, he was wrong, there was no, nothing else to invent.

Well, tell us about your method for fixing some of these problems and maybe finding out if there's tons of stuff to invent that we just haven't gotten to yet.

Well, here's a good analogy for that, which is the world of venture capital today, there are literally thousands of venture capital sources around the world. Those venture capital sources will fund entrepreneurs, and they literally fund tens of thousands of brand new companies every year. Thirty years ago, that whole activity was a tiny fraction of what it is today. Infinitesimal fraction. And 30 years before that, it didn't exist at all. So if we were having this discussion about creating new companies, you could have said the same thing you said to me about invention. You could say, hey, we seem to have plenty of companies now. Yeah, there's a few more ideas out there, but there's not that many. We don't need to invent this whole venture capital thing, do we? And even if we do have venture capital, it doesn't have to be really big. It turns out that people did say that, but a set of folks decided, no, there really was an opportunity here. So they pioneered the concept of venture capital and they created a professional community of folks that funds new companies. As a result, the rate of creating new companies is up dramatically over the course of the last 30 years. Many of those companies failed, by the way, but that doesn't matter. The companies that succeeded from that include Microsoft, Apple, Cisco, intel, ebay, Google. It's impossible to go through a day of modern life without being touched a dozen times with companies that were enabled by the venture capital community. So before all of this, you could have said, hey, we have enough companies. It turned out we didn't have enough companies. We didn't know that at the time. Because if you've lived in an era where that's always the way it was, you think, well, that's the way it should be. But in fact, the creation of a professional venture capital community, which allows a simple, direct way for people to go apply for funding for their idea by creating a business plan and going to see the venture capitalists, that has been a dramatic boost to the economy. And I don't think anyone who observes modern technology economies would really disagree with that. What I'm saying is the same thing can happen for inventions that inventions, if we put more money towards inventions, we would find that there are more inventions created, that many of those inventions would fail, just like many of the companies that venture capitalists fund fail. But this is a situation where you don't count the failures, you count the successes. And even a few successes can change everything. So the simplest way to put it is we think that the world should fund inventions in the same way that it funds companies.

Okay, so in this scenario, one piece of this would be to have as venture capital is to entrepreneurship, this system would be to inventions. Now in the article you mention something else. You float the idea of patent backed securities, which I really hope that they are better than mortgage backed securities.

So if we look at the way companies are funded, we discover that there is a whole food chain of different layers. And it's very much like the food chain in nature. Companies are born by venture capitalists or entrepreneurs with angel funding who then seek venture funding. And the venture capital community focuses on that company formation area. Well, there's also, as the company grows, there's private equity, one of the other sources that it can do. Then there are both debt and equity markets. Now you mentioned mortgage backed securities. Of course, every share of stock is a company backed security and every bond is a company backed security. And bonds and stock certificates have differences in them, but they're both incredibly important for how you fund the ongoing creation of capitalism. If we took any one of these parts of the food chain out of financing companies, we'd discover the system wouldn't work as well. So if we took the public stock market out and companies couldn't raise money by selling stock in a public market, they'd be hurting for capital if they couldn't float bonds. Same thing would be true if there was no private equity. And of course, 30 years ago there was very little private equity. That's another market like venture capital has grown up over this period of time. You discover there was some inefficiencies that would remain in the economy because there was no one to finance the transformation, which is what private equity folks do. Now if I look at inventions, I would say, you know, ultimately I'd like to see each of these kinds of financing and assistance available to inventions. So basically I'm an invention guy who's Jealous of the fact that companies have all these different ways of raising money and inventions guys have essentially none of. Now one form of that, which would be a very late stage form of that, but it's certainly one that you can imagine, is to issue securities directly backed by inventions. And we sort of have examples of that today. Qualcomm to a large extent is a company that is founding Bedrock is its intellectual property portfolio. And I would say the same thing is true of Pfizer. In Qualcomm's case it's patents on cell phone technology. In Pfizer's case it's patents on Lipitor and drugs like that. But without that intellectual property protection, you couldn't have either one of those companies. Now of course those companies do more than just have those patents, but they are the bedrock. And I could envision a situation where universities or other large holders of patents could issue securities which were backed by the royalties that those patents would generate, which would wind up being either something like a Qualcomm or something like a Qualcomm with fewer people. There's a group called mpegla which is a consortium of patent holders that licenses the patents that are in DVD players and most cable set top boxes. It's a private group, so the world doesn't know exactly how much money they make, but it's reported that they make billions of dollars a year collect royalties from those consumer electronics goods. You could easily imagine MPEG LA as a public company that had that activity which would make it effectively an invention backed security.

Well, we've talked a lot about the big picture and I would like to bring it down a little bit to some of the interesting cool inventions that you guys are making a business out of at Intellectual Ventures. As maybe a way to give us an example of the way some of your techniques that you're advocating in the article can actually bring these ideas into the world. So can you tell us about some of the stuff that you're working on?

Sure. We work on a very wide range of inventions and that's by design. One of our principles is that any individual invention is pretty risky. It may succeed or it may fail, and it's very hard to tell up front. But if you have enough of them and if they're in enough different areas, you're much more likely that you're going to get some successes. So one area we're very active in is medical devices. And there we try to come up with new kinds of medical devices and we have all kinds of them. We have some that are designed for the third world. We have a vaccine container that can keep vaccine cold for months without any power. That's very important in delivering vaccine to a place like Africa or remote villages in Africa.

You say it keeps vaccines cold for months?

Yeah.

Okay.

Wow. Hey, if it didn't sound like magic, it wouldn't be much of an invention now would it? But literally it's possible to keep them cold for months without any power. We also have inventions that are designed more towards medicine, as you'd find in the United States other than a developing country. And there we have a variety of things in, say, advanced kinds of stents. We have a number of different surgical devices. We have some very interesting inventions that we think would dramatically reduce infection rate after surgery, for example. That's medical devices. At the another extreme, we have invented a new kind of nuclear reactor. And that's really quite a different thing than a stent. A stent is this tiny little thing that goes in someone's blood vessel here. This is a giant machine that produces gigawatts of electricity. The reason we got into that is that we have a focus on the climate problem the world is facing. We think that we're not really going to get that problem solved without a bunch of new ideas. And so we're doing our part to come up with some. And this new kind of nuclear reactor is very interesting because it addresses a number of the issues that plague current reactors, reactors cost issues, but particularly the waste issue because we can take nuclear waste and burn it as fuel. And that gives you a tremendous opportunity to take something that's costing society money and is kind of a problem which is a waste. Existing reactor is great and turn it into something that could give us clean, carbon free electricity.

Now, when you want to come up with something like a new kind of nuclear reactor, do you have a systematic way of sort of encouraging that or do you just sort of hire all these smart people and hope that someone thinks of something?

Well, somewhere in the middle, actually. I mean, yes, we do hire a bunch of smart people. And besides the people that we hire on a full time basis, we also bring inventors in for sessions. An inventor might do one session with us, they might be here every month. We try to fertilize with lots of different ideas. And then we have a systematic way that we try to encourage invention. I say encourage because remember, all invention is about asking someone to do something unprecedented, never done before, and something that might even seem impossible. And so when you ask people to do impossible stuff, you can't get mad if they don't do it right away. What you can do is remove as many barriers as possible to make it more productive and easiest for them to actually produce the inventions you're looking for. Now, sometimes you succeed, sometimes you fail, and that's okay. If you're afraid of failure, don't try to be an inventor. Because anytime you try to do something hard like this, you're going to discover, oops, you have a problem, and it doesn't quite work.

Nathan, thanks again for talking with us today.

Okay, well, thank you.

That was Nathan Merville, the CEO of Intellectual Ventures. The article is funding Eureka. For more, Please go to hbr.org and, as always, send your feedback to ideacast@hbr.org.