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Russ Krajec: Investing in IP for Fun and Profit

by Patents Integrated
July 14th 2021
00:30:35
Description

Strong intellectual property is one thing, but patents also have to make business sense. Too often, however, patent attorneys are more interested in billing their time than helping build profitable... More

Hello and welcome to the novel and non obvious podcast where we discuss the intellectual property topics impacting the startup world. My name is jerry Komori to the host of this podcast and founder of patents integrated today we welcome longtime friend Russ, Craig Jack who is the founder of Blue Iron I. P. And we're gonna be talking about the business aspects of patents. So welcome Russ. Thanks for being here. It's been a little while since we've actually seen each other in person. For those of you who know Russ Russ likes really dive breakfast places like dive diners, truck stops. Yeah the connoisseur of the greasy spoon breakfast in any case that's different from the I. P. Side that we want to talk about today. So Russ tell our audience a little bit about what your background is and how you ended up doing Blue iron. I. P. Well I was an engineer for I don't know 13 years or so and I had been through the patent process as an inventor at Hewlett Packard Mac Store and a couple other companies Water pick for example and I had experienced what it was like to be on the inventor side of the patent process but it was always part of a big corporation.

The corporation owned the patents and they'd hire an attorney and talk to them. I'd sign the documents and things would go off into Neverland but I had an invention I wanted to license myself and you know it's outside of work and I go to this patent attorney was on my hockey team and the conversation wasn't very productive. I kept asking him, well, okay, I don't really know what I'm doing here, what's the best thing for me to do. And he wouldn't give me any advice. He'd say, well, you could do provisional application, you could do a non provisional, you could do a search, you can do this like, well you tell me what should I do? Well, I don't know, I mean some people do this and some people do that and, and I was so frustrated with that whole interaction that I took the patent bar, became a patent agent and then wound up working for the guy for three years or so. And it was kind of when I started, you know, working behind the curtain that I found out that he wasn't giving me any advice. The reason was, was a liability issue.

He, you know, he didn't want to be responsible for telling me what to do and then I go back and sue him for it and turns out, you know, when, once I started working for him, he told me that independent inventors are walking malpractice suits and you don't tell them anything. And so, you know, I, that's when I first started sensing that there was something weird going on between, you know, the agent attorney and the client and you know, I, I learned the trade from the sky and then I went to law school, opened my own shop as a solo patent agent started doing a bunch of work for Microsoft and it was nice for a while I had the opportunity to do a startup company out in Seattle and be in house counsel, which meant I had to start thinking about do these patents have value? How do I create value out of these assets that I'm writing?

And through that whole time I started thinking about how do I change the relationship between me and the client? How do I align my interests with the client? How do I get rid of the inherent conflict of interest? You're asking the barber if you need a haircut when you go to a patent attorney and you know what you're going to get one. And so is that always the right thing for you? Well, you know if I change that relationship, I can have a different impact on the company. So I started doing this bit where I finance patents for companies. I'll pay all your fees, I'll do all the work or I'll hire somebody to do all the work and you pay for the patent after it issues and you can walk away and stick me with it and I'll take it, I will take that patent and try to find a way to monetize it, sell it or whatever. And in doing those deals, I started buying patent insurance and so if I financed your patent, I'd buy a half million dollar million dollar enforcement policy so that you the startup had the ability to enforce your patents and that kind of got me into this insurance bit.

Well, how come nobody knows about patent insurance? How come people aren't talking about it? And so I became an insurance broker and I have wholesale and retail insurance brokerage that you know, we do a lot of I. P. Insurance now and a couple along with that and I'm gonna wrap this up here. The third thing that we do and financing the patents, we ensure them, we can do loans using patents as collateral. So think of a startup that is going for, going to raise money in a series A series B and they have a decent patent portfolio, a little bit attraction of revenue. We can do 20-$50 million dollars of debt financing? That's non dilutive, it's a lower cost of capital than equity. And we can use that ip totally as collateral to fund the company. So that's the short history of how I got to what I'm doing right now.

So then, you know, to go back to what you said at the beginning that independent inventors are walking lawsuits, walking malpractice suits. Yeah, yeah. Walking malpractice suits. So are you working well, it sounds like your business has evolved beyond independent inventors. So what sort of clients come to you and what sort of people for what kind of people or for what kind of companies your services make sense? Well, it's typically I'm gonna give you a long winded answer to a simple question. I look at patents as kind of call options on technology. They're our future option that we hope the invention is novel and non obvious. So it's never been done before. It's not in the market. And then we're hoping at some point in the future that the market adopts it and the market says, oh yeah, that's a great idea. And people start buying the product and the best way to make the patent have value is to execute a business.

If you're selling product, the patent has value. If you're not selling product, the patents just an idea written down on paper. And so when I'm looking at an investment either to finance a patent or as an angel investor or whatever, I want to see an operating business whose got either a track record or a business plan to bring the product to market, then we'll do the patents. I kind of have this mantra of The first patent is always the worst one. The first patent is the worst one because we don't have data. We haven't built the product, we haven't worked out the engineering issues. We haven't optimized it for high volume production, but we also haven't got in front of a customer. We need to know what the customer value. I sell this product and I tell people to use it one way it turns out. They all use it upside down and backwards for some other use like well I want to know that and incorporate the feedback from the customers into the patent. And so to answer your question I want to talk to people who are really working through the business, making the business work and then I want to do patents alongside them.

In order to do that though. That entrepreneur would have to have a pretty darn good idea. Be really well on their way to vet it and be out there selling product shouldn't the patent or the I. P. Protection part. Thinking at least the I. P. Strategy come before that maybe um I suggest this a lot of people Tim Ferriss in the four hour work week. You know the books got to be 20 years old by now. The one thing he did when he had a new idea is he did not build the product, he did not build a prototype. He didn't do all that nonsense. The first thing he did. He did he did the customer discovery part. Exactly. He did a landing page ransom ads on it and found out if the customers actually wanted it. And that just screams statutory bar on sale bar to me. So I'll answer that two different ways. One is true. There is a statutory bar. Yes you're gonna lose your international rights but in the US we have a one year grace period.

So use it. The other thing is if you're just starting out And you have one idea that's pretty good. I'm betting that you're gonna have another one right? I'm betting that, that there's more good ideas here that, that you're not gonna bet the farm on this one idea all the way through it. I often encourage first time inventors two go through the whole process, try to get this product to market, but use it to learn what you want to do the next time to get good at that marketing, bringing product to market, you're going to learn how to do your supply chain more blah blah blah. But get good at that and the chances of you being successful on that first one are being kind relatively small. So don't bet the farm on it, like don't go broke. You know that I wrote a post on this just recently that I look at a lot of foreign filings as a big vanity project.

Oh well we can file a patent in Indonesia and in Zimbabwe and South Africa and looked in Stein and you're like, why? Oh because someday I might do business there. But and I think a lot of patents just in general are vanity projects that make you feel good, make the inventor feel good, make the entrepreneur feel good. But they're stealing precious capital away from the company. The capital. The beginning of the life cycle of the company is the most expensive capital you're ever going to have at the beginning and then capital gets cheaper over time as the company evolves and improves. So I'm a nay Sayer on virtually everything including going into fancy restaurants for lunch. And this is just one thing, you know, just kind of pushing on that a little bit. Do you? You know the best pattern is yet to come. So then that so that's an interesting point. I think there is a conflict between when you say most IPI is crap is what you're implying.

I know that you've used stronger words. I haven't said that yet, I know that you've used stronger words in some of the writings that you've done. Um and for those of you who are listening definitely go check out Russ's blog posts and writings and his own episodes and that kind of things. They're great. It's non conventional though because you started off with your career when you went in house when you have to start thinking about creating value out of I. P. And now you're saying that a lot of I. P. That early companies create our crab. So then how do you bridge the gap? How do you make as a startup company as an entrepreneur? How do you make sure that the I. P. Assets that you're creating and you're protecting and however whatever mechanism that you have, how do you make sure that it has value for your company. Well from my standpoint, like if I'm going to get in and finance the patent or whatever, it's a ton of due diligence.

Yes, I am taking a risk. I am hoping that this technology, this idea will mature and bloom into something that's commercially valuable any time we're just writing the patent, we're hoping that that happens. And so part of the due diligence is does this entrepreneur have capital to do that? Are they well enough funded? Do they have a good team in place? Do they have the right skill set? Do they have the right connections to make all that happen? And you know, I'm evaluating the company even more so than the value of the idea. You know, to me it's more of a business problem than an I. P. Problem, that makes sense. It does. But ultimately, for your particular business, if the company fails, you are left with the patent assets, right that you wrote, you created you control at that point then what happens then?

Do you become a patent troll? I have no interest in the litigation end of things. I'm more interested in. My typical exit strategy is to go to a patent broker and let them sell the assets and this is kind of where the rubber meets the road. If you have un infringed patents, they're almost impossible to sell, You might be able to get $10,000 for a patent if they run infringed. Even if you can show infringement, even if he can show Apple and google and Samsung and Microsoft and huge companies are infringing, You might be able to get 100,000 for them. When people look at their patents, especially people haven't been through the kind of the sales patent brokering process, They think oh my patents worth $243 million dollars or whatever. And you're like, you know, the reality is it's worth what somebody's willing to pay.

And if you can show evidence of use developed claim charts and really show that the iphone is infringing every single one of my patents, then you might be able to get somebody interested in buying that patent and They're going to buy it at a severely discounted rate because somebody has to invest $5 million dollars in enforcement. That's a huge investment. Apple is going to defend and try to challenge it. So you gotta, there's gonna be a lot of legal fees that gets you to that and there's a lot of risk in that one bad word and 11 little office action or bad word in the claim and boom the whole thing dissolves in front of your face. So there's a lot of risk. So on a risk adjusted basis, even if I could get $200 million dollars of royalties, Nobody's going to pay me that. So they're probably going to pay me 100,000 for the patent if I can get that. So go ahead because of your particular business model you have to think of all of these things in your I.

P. Due diligence and you are writing for you are outsourcing the writing but you're supervising the writing of the actual patent applications and the prosecution and all of that. How do you evaluate how do you predict the future like that? You know it's a guess it's um come on we're hoping that this happens and it's not so much that oh here's the formula that works. It's here's the list of things that you know screw you up. You know here's a list of problems. You know we're going to happen and you try to avoid that and you hope at the end that your batting average is going to be higher than average But you just don't know. You know we're talking about an asset that has 20 years of life in it and you think back you know what did life look like 20 years ago compared to now? Well it's a lot of things change. And will the assumptions that we're making today about the market, about pricing, about what customers want is all that going to be around?

Is that going to be true 20 years from now? Is there going to be something else that pops up that eclipses everything we assume? Who knows? And so a lot of it's pure speculation and we haven't even talked about case law. Oh gosh no. Yeah how the course change the courts changed, how patents are interpreted. So that's another that's another total thing of speculation there. But all those are unknowns. And when I'm evaluating them, I'm thinking does this person, does the entrepreneur have the skill set to navigate more so than anything else? Can they make good business decisions? And if, if I'm comfortable that they are, well then that's the best horse I could ride right, they're going to be good at that. There's two women entrepreneurs that started a company called Goodbye Gear here in Aurora and they were the absolute best entrepreneurs ever because you sit down with him brainstorm him, oh, hey, what about this?

You can do this, you can do that. And they had two responses for every suggestion. One is, oh we already did an experiment on that and this is what we learned. The other one was, oh well we could do an experiment on that and figure out if it's right or wrong. And they had a methodical step by step process that they were going to use for every business decision and you take an entrepreneur like that and you just give them a pile of money, they're going to do well with it eventually. You know, they're going to test their way to make something that's successful and somebody has that level of skill set. You know, they're going to be successful at some point. Maybe not on this one. Well that I think brings up a different point though, is you are in the patent business for us. So you deal with patents, you write patent applications, you finance patent applications and that kind of things. Some of those businesses you might have the best entrepreneurs ever, but they're not particularly suited for patent protection.

How do you deal with situations like that? I know that you're also a very active angel investor. So then is that just another arrow in your quiver that you might use or how do you, how do you determine things like that? You know, the the two things that I kind of push in the angel groups or, or you know, whatever is, is the idea detectable. Could I tell that somebody's infringing my claims, you know, you think some machine learning ai Blockchain algorithm nonsense. Absolutely undetectable. Because I'm never gonna have access to my competitors source code, I'm never gonna have access to deep down into the bowels of google's data center to see if they're deploying this thing. I just, I'm not So I should keep it as a trade secret. Now, a lot of times angel investors will listen to the pitch and then they say, oh, do you have a patent And the entrepreneurs?

Uh, I'll go get one. And so the angel investors force kind of bad habits like that a lot of times. The angel investors don't allow the entrepreneur to say, you know what I got this machine learning algorithm, It's super tuned, It's super efficient and I'm not telling a soul about it. It's a trade secret and that's what it's going to be. But they feel pressured by the angel investor too. I got to run out and get a patent and by doing so they give away their trade secret, they give away everything they work so hard for and they get something undetectable in return, which is unfortunate. I think angel investors are every bit as gullible or culpable of promoting some of this bad behavior that, and so you talk about strategy, well what's the right strategy for a company that has a lot of algorithmic based stuff? Well keep it a trade secret, you know, that's appropriate.

Okay, so you're an entrepreneur yourself. Blue Iron has gone through a lot of, you know, you and I have had lunches where we talk about all the different things that your latest business model that you want to try. So what have you learned in this entrepreneurial journey where you, yourself are an entrepreneur, you invest in entrepreneurs and you work with entrepreneurs, What are some things that you've learned over that process, the biggest, that I no longer do goals. I don't have, I'm, I'm, I'm a convert from going from goals of, hey, you know, it will be cool when my company does this thing and whatever. I quit believing in that and I'm more about the process, I'm more about, I don't know you can call it living in the moment or whatever but I remember getting out of college and there's all these listings for jobs at the patent office and I thought how stupid is that?

Like I don't wanna be examining I don't want to do anything with you know I want to be inventing making cool stuff and like you know a few years later next thing I know I'm taking the patent bar and then insurance like what you know that's worse than real estate right? And I already went to law school so I'm already scum of the earth and below that is you know all the rest of these you know like what am I? I never would have thought that insurance and providing financing for companies especially in the I. P. Space is enormous and it's untapped it's an untapped market that nobody is talking about and there's so much potential there. You know to me it's about the journey, it's about you know you learn something you you kind of master it and you know look for the door that's open and then walk through it and see what's there and you know I get this all the time where people schedule a time with me off my website to talk about doing alone using their patents or whatever and I'll look at their patents, I'll pull up prosecution history or read their website and do all this stuff before they and there's some that I think oh, this is going to be the best one ever.

And you know, I'm excited about their stuff. I'm just in love with it. And then I talked to him and start asking them questions is a complete disaster. Okay. And like, and then there's the other one that I think, oh gosh, you know, this is gonna be awful. I can't, you know, I don't like the idea, I don't like the business plan or you know, whatever. But then I talked to him and it turns out that they really have their act together, that they're tapping into this huge market that I never thought about. And I'm just, the problem is I'm always wrong right? Like I can't pick them and I gotta just see what, what's out there and try this stuff and and see what works and the same thing about doing the business and entrepreneur part. I'm trying a couple of things. You know, we're looking at closing a few loans this year. That would Probably do hopefully 20-50, maybe even $100 million dollars in loans this year using patents as collateral.

That's kind of cool. I never thought I'd be doing that. I'm doing this wholesale insurance bit because people who are selling commercial insurance don't understand intellectual property is not their forte, but I could be the expert that helps them close some really valuable insurance products for their customers and I'm trying, I'm seeing where it goes and who knows, you know, I was doing all that work for Microsoft, that wind up meeting Bill Gates's technical advisor who's starting a company and he's like, well I kind of need a patent attorney, you want to do that like, oh yeah, sure. Let's do it. You can't ever forecast that stuff or look for it or planet. So don't try. It kind of goes back to what you said at the very beginning of our conversation, you know, your first idea, it's probably going to fail, but that probably won't be your last idea. So keep trying again and you're totally embodying that. I appreciate that. One last question for you.

What is the one thing that you could use right now to take your company or your business to the next level? What could I use? I think when you try anything new, getting a taste of success early keeps you motivated to keep moving forward. I started a wholesale insurance agency, which means I can help any independent insurance agent who's talking to a customer and I'm going through the process of building that business up and you want to know that you're not spinning your wheels or you want a little taste of success to kind of keep you going in that direction or you want to fall flat on your face and pick up and move on to something else, which is totally acceptable to. But the hardest part about doing the entrepreneur bit is that you just don't know, you're like, huh? You get, you get a taste, you get a little sliver of, oh this thing might work and then you're, you're in this fog, this no man's land, you know, it's that, that age old question of, did I remove enough of my, the hair conditioner?

Like is it supposed to feel that way or should I rinse some more? You know, you just don't know, you never know. That's funny. Yeah, I had a, well, he's a client now. He's a longtime client that I've known for over 20 years and he went through multiple very successful exits and for a while he was listing his lengthen profile as leather Rinse repeat because that's what he was doing. He was coming up with new ideas, that's awesome, turning that, turning that entrepreneurial wheel the way that he wanted to thank you Russ. That was really fun. Any last words you like our audience here. one thing, I'm always always interested to hear entrepreneurs stories or talk about patent strategy, that kind of stuff is kind of my kind of geek out on that kind of thing. People should feel free to reach out to me on linkedin or blue iron I. P dot com or my insurance website, which is I. P dot insure and feel free to schedule time on my calendar and you know, we can chat and I'd love to hear people's stories.

It's, it's always good to connect with people and beat some ideas around and and get a different perspective. So, I'm always happy to have those conversations. Always happy to talk with you Russ. You've always been a great sounding board for me for many years now. Good luck with your ongoing business and hopefully you'll get that little taste of success to give you an indication of which way to go. Thank you. Thanks for having me to. This has been a lot of fun. We hope you enjoyed this episode of the novel and non obvious podcast. Our guest today has been less critical of Blue Iron I. P. You can find info about this company at Blue Iron I P dot com. That's spelled B L U E I R O N I P dot com. Feel free to send us comments or suggestions for startup and I. P related topics you'd like us to discuss on this podcast at info at patents integrated dot com. Our producer is Joel Davis of analog digital. Our marketing specialist is Tim Sprinkle of Lay of Content. Our theme music used with permission is the Workday Takata from a Life in a Day, composed by sri slider and performed by Michelle Stanley on flute, Jeff le Quattro and guitar and yours Julian cello.

Here is our obligatory disclaimer. The content of this podcast is informational only and not intended to be legal advice. The novel and an obvious podcast is a production of patents integrated and all rights are reserved. See you next time.

Russ Krajec: Investing in IP for Fun and Profit
Russ Krajec: Investing in IP for Fun and Profit
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