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Technology's Invisible Currency

Written By Brian Hicks

Posted August 25, 2014

The youngest person to ever receive venture capital funding was 15 years old.

He took a simple idea that hadn’t been done before, brought it into being himself over summer vacation, and soon had investors from Hong Kong in his parents’ home in London signing seed funding documents.

A little more than a year later, Yahoo bought his start-up for $30 million.

His start-up used an algorithm to analyze news from all over the web and summarize it in 400 characters or less. It’s since been used in a Yahoo app called News Digest.

The app didn’t have a lot of users, and it had no monetization strategy or revenue.

But the craziest part?

According to the company’s own website, this $30 million app wasn’t even built by the teenager, but instead by London’s largest mobile marketing agency.

This massive chunk of money wasn’t spent to acquire a brand name, a business, or even a company with a whiz kid as CEO. It was spent on intellectual property and computer code.

These are the two most important invisible currencies in the technology world.

They can be bought, sold, traded, or hoarded. Some companies have hundreds of millions of dollars’ worth of them in their stockpiles. But you can’t invest directly in them.

Or can you?

Go Where the Patents Go

There are plenty of public companies that you wouldn’t know have any value at first blush. But if you dig deeper than stock charts and earnings reports, you uncover troves of hidden currency.

The paper trails almost always lead you through the fearful world of regulatory filings and court documents, but at the end, you learn what the secret wealth is…

Maybe it’s a business process. Maybe it’s a method of manufacturing. Maybe it’s a fundamental patent that looks like nothing at first but is actually the source of billions of dollars in licensing fees.

This is why I bought stock in Nuance Communications (NASDAQ: NUAN) when its price was pushed down in the market contraction of 2008.

I knew all about its private gold mine.

You might know Nuance as the company that makes Dragon Dictation, but it also holds some extremely valuable fundamental patents for text completion algorithms. Its intellectual property is rooted in the original T9 text completion and gets licensed to literally every cell phone maker on the market.

Even if you looked at every earnings report the company published, you’d still never know the broad licensing value of its IP portfolio.

Microsoft (NASDAQ: MSFT) is another company with a dense portfolio of valuable licenses that’s particularly resistant to changes in the market.

Geeks love to blast Microsoft for all its shoddy operating system builds since Gates left as CEO and for its sad attempts to break into the smartphone and tablet space. But you can’t deny the company’s solid-gold patent portfolio.

Heck… Microsoft is so confident in its patents that it has already set them up in a CSV document you can download.

Spoiler alert: It’s over 28,000 patents.

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Now, a lot of libertarians don’t have the most favorable view of intellectual property rights, but even Ayn Rand herself approved of their limited application as long as they weren’t held for all time.

Rand’s concern was that patents could end up being anti-innovation if every invention based upon previous ones must be licensed.

Fortunately, the concepts of prior art and obviousness are well woven into the U.S. patent system to prevent Rand’s nightmare scenario from occurring.

Libertarianism and aggressive technology investing don’t have to stand on opposite sides of an ideological fence, but there’s still some progress to be made.

Another Overhaul

In 2011, Congress passed a patent reform law called the America Invents Act. This act was the largest change to the U.S. Patent and Trademark system in more than 60 years.

Among other things, it changed us from a “first to invent” nation to a “first inventor to file” one. This fundamental aspect changes how patents are granted and defended in court.

However, it did not address “patent trolls” — companies that simply acquire patents so they can sue other companies and force licensing agreements where they do not already exist.

The legal system is jammed with these lawsuits, and they’re often against some of our genuine innovators.

Dozens of America’s biggest tech companies, including Google and Microsoft, demanded Congress crack down on these companies, but Senator Patrick Leahy, one of the co-sponsors of the America Invents Act, shot down a bill that would fix patent trolling.

But another bill is expected in Congress’ next session.

As an investor, you want companies to have both a robust patent portfolio and an actual product specialty. There are a couple of public “patent troll” companies you can invest in, but I strongly advise against it — not only as a matter of smart investing, but also as a matter of tech ethics.

We want you to profit from innovation, not profit from killing it.

Good Investing,

  Tim Conneally Sig

Tim Conneally

follow basic @TimConneally on Twitter

For the last seven years, Tim Conneally has covered the world of mobile and wireless technology, enterprise software, network hardware, and next generation consumer technology. Tim has previously written for long-running software news outlet Betanews and for financial media powerhouse Forbes.