This post originally appeared on The Combine blog.

Fortune 500 companies earn thousands of new patents every year, because they view patents as a measurement of “innovation.” It takes years and thousands of dollars to earn a patent, but earning a patent is just the beginning. The cost of maintaining each patent is not insignificant. Patent maintenance fees are due at three points following issuance: 3 ½ years; 7 ½ years; and 11 ½ years. Current patent maintenance fees total $8,710 per patent. Those fees are just the money patent-holders pay to the USPTO directly; however, the legal fees and administrative costs for patent maintenance are much higher. Are Fortune 500 (and other large enterprises) spending more on patent maintenance than they might spend to spin out and fund a startup based on an unused patent?

IBM Received 24 Patents PER DAY in 2016

As an example, we looked at the leader of leaders in earning patents, IBM, which has earned 89,594 patent awards in the last 20 years. We added up all the maintenance fees for the last 20 years of IBM’s patent dominance: $780 million! That number is an estimate (our math, not theirs) based on the last 20 years of IBM’s patent mastery, and assumes that IBM maintains all of its patents.

Where is All of this Innovation?

Most corporate patents fall into one of the following general categories:

  • Sword: Active, in market patent that is making money for the organization
  • Shield: Inactive patent that is preventing competition from gaining ground
  • Trophy: Inactive patent on a byproduct of R&D, sitting on the shelf

IBM and other Fortune 500 enterprises use their patents as either swords or shields. If one of big blue’s 89,594 patents is not a sword or a shield, it’s gathering dust on a shelf. Yet IBM is spending a large amount of money maintaining patents that they will never use. I say “large amount” because fewer than 2% of all patents ever get monetized. We understand why, and we’ve previously explained why enterprises like IBM don’t put money into every innovation they create. When you spend $6B per year on R&D, the innovations you take to market have to be multi-billion dollar innovations. Most patents are not billion dollar ideas.

Startup Spinouts Instead of Patent Maintenance

Instead of maintaining unused patents (and other latent, orphaned IP), what if IBM and other Fortune 500 enterprises performed the following annual exercise:

  1. Evaluate the IP & Patent portfolio for items that are “non-core” to their business operations, meaning even if it were a billion dollar idea, it wouldn’t make sense for the company to get into that line of business.
  2. Identify the five most interesting of these non-core patents, and spin them out as startups. By “interesting”, we mean that it solves a massive problem within a very large market and the potential audience is ready for such a solution.
  3. Stop maintaining those patents that that are non-core and not in the top five.
  4. Invest the cash that would have been spent maintaining unused patents into the five startups or into a fund that might capitalize future spin-outs.startups

Monetizing the Innovations

IBM would not be fulfilling its fiduciary duties by spending its own resources growing startups into $10 – $100 million businesses. However, a seed investment in five startups would be far less than the maintenance on thousands of trophy patents. Furthermore, the exercise would shift the expense (be it ever so relatively small on IBM’s financials) from the P&L to an asset on the balance sheet.

Innovating means more than obtaining a patent, just like growing a startup means much more than getting VC funded. IBM has won the patent war for the last two decades, but how many of those “innovations” are dust-covered trophies?

What do you think about that?

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