We also have a great panel coming up next Thursday night, Jan. 17, on “How Investors Are Increasing Their Returns Through Collaboration and Technology”.   This is another joint event between HBS Angels of NY and the HBS Club of New York.

Preqin and LexisNexis Enterprise Solutions just released a report on “CRM Systems and Private Equity Deal Sourcing”, based on a survey of 63 private equity funds.

They report that 84% of respondents claim to source over 20% of their opportunities through proprietary deal flow. Based on our research, I think that these respondents are taking a very liberal view of what constitutes “proprietary deal flow”.

The study also found that, “80% of participants stated that they already use a CRM system for relationship management, or would use it for this purpose if they were to invest in one.” I suspect that this is a very liberal definition of “CRM system”. EquityTouch found in a 2009 survey of 61 PE funds that 37% were using no formal CRM application; instead, they were typically using only Microsoft Outlook and Excel. I don’t consider those CRM.  The most popular CRM tools were: Salesforce.com (17%); Act (15%); Saleslogix (7%); and Microsoft Access (7%). We should highlight another provider, Gust (formerly Angelsoft), which is by far the leading deal-tracking application for the angel network community, and also has over 100 VC clients. 

Given the congenital weakness of institutional investors in inputting and updating information, we think you should automate as much as possible the process. We have identified five ways in which investors can systematically add data to their CRM systems:

· Employee networks. One of the most powerful ways to get data within the CRM system is to use a relationship capital tracking tool, such as ContactNet’s Enterprise Relationship Management platform. These tools automatically spider through the emails, IMs, and other tools of a firm’s employees, in order to identify with which people the firm has relationships. Mike Ahearn, human resource partner at Boston-based VC firm Greylock Partners, reports that he finds these tools are a good way to find IT people who aren't actively searching for work and may not otherwise come up on his radar screen.

· Business cards. We recommend using a card scanning tool such as those sold by Cardscan, IRIS, Neat, or Presto to incorporate this data into your CRM system.

· Data from email and files. A number of vendors sell tools which automatically suck in data from email signature files, web pages, etc., into your CRM system. This speeds up data entry by obviating retyping. Vendors include eGrabber, Gwabbit, GrabText, and Broadlook.

· The cloud. We recommend setting up an automatic synchronization with some of the major public contact databases (LinkedIn, Spoke, Plaxo), which allows you to get current contact information.

· From the company directly, e.g., via a web-based application such as Angelsoft.

Most important is culture.  I know one PE fund where the manager has said that he evaluates the contributions of his team based on their activity in the CRM system.  If there’s no data in the CRM, that implies they’ve done no work, which implies no bonus.  Use of the CRM system at his firm is, understandably, very high. 

(Graphic courtesy of Gauravonomics)

We recently hosted an idea dinner on "Disruptive Companies in the Asset Management Industry". 

The most attractive industries to disrupt are highly profitable ones, and asset management is traditionally a highly profitable industry.  IMHO, the most successful disrupters in this area to date have been Vanguard (who popularized index funds) and the ETF industry.  We thought it would be interesting to brainstorm about what are the next great ideas and companies that will/can disrupt this sector, based on the ideas on Clayton Christensen's "Innovator's Dilemma".  The dinner included a cross-section of senior finance executives and experienced tech entrepreneurs.  I've attached below the notes from the dinner in slideshow format. 

For this who don't flip through the slideshow, here are the highlights:

What Do Investors Value? (What Jobs Does the Investor Want Done?)

.Returns

.Investment Team Stability

.Relationships with other investors and investment teams

.Visibility

.Capital preservation

.Job security (of the investor)

.Tax minimization

.Social welfare

.Exposure to target sector (e.g. China, commodities)

.Networking

Examples of Disruptive Innovation in Asset Management

.Index funds

.ETFs

.Structured products which minimize downside

.Investing in new asset classes: domain names (Oversee.net), equity-like student loan instruments (MyRichUncle), litigation (Law Finance), patents (RPX), etc.

.Credit Default Swaps

.Crowdsourced financing: Indiegogo/Kiva/Kickstarter

.Discount Brokerages

.Expert Networks

Examples of Sustaining Innovation in Asset Management

.Quant hedge funds

.Private company markets

.Motif Investing

-Allows exposure to investment themes (eg, "I want to invest in African oil expansion"

New Asset Classes in Which Some Are Investing

.Domain Names

.Patents

.Human Equity

.Litigation

.CDs

.Virtual Currencies

-Facebook credits

-Frequent flyer miles

-Carbon Credits

I enjoyed participating in last week's Capital Roundtable Private Equity Masterclass on "Best Practices for Sourcing Quality Deal Flow & Developing New Business" (May 26^th, 2011). Our star intern Adam Kalamchi took detailed notes, below.

View more presentations

Chairman's Keynote: How to Win -The Five S's of Successful Deal Sourcing

Richard J. Fitzsimmons, High Road Capital Partners

(Presentation included above)

Notes:

Most funds have ~7 deals total, or about two deals per year. Finding the right deal can make or break that particular fund.

Sources: identify the right places out of innumerable sources

Companies
Of 5 million companies registered with the IRS, 4 million are S corp. pass throughs (individual owners); 1 million C corp (shareholders)

Owners
They prefer deals represented by intermediaries because it signals the owner is willing to sell. Otherwise, private owners tend to have unrealistic expectations or an arbitrary sale price expectation.

Intermediaries

Banks, brokers, Advisors
They have the confidence and trust of the business owner

Deal aggregation websites
Increasing in popularity, trying to increase market efficiency.
He thinks it's a tool, but will not displace traditional M&A
PE-Nexus, AxialMarket, CapitalSphere, DealMarket, MergerID, etc.

Fundless sponsors
Good at finding unusual opportunities at good prices

Estimated 100 - 200 total entities
Friends & family - basic networking

Strategies: how do you generate returns
He doesn't believe you can build sustainable proprietary deal flow; they believe in pro-active, outbound deal sourcing effort

After you've applied all of your filters, surprisingly hard to find under-priced assets, especially when intermediated

Signature: what makes you unique and how do you get people to recognize that?
Must build and promote your reputation / expertise

Flow is a function of reputation and share of mind in target market

Signature and messaging will vary by market and audience, but must be internally consistent

Spreading the word: gain awareness of your firm; define and spread your message
Email is quite effective at keeping top of mind. Build and maintain large email database.

Phone is slower and less scalable, but good quality and intimacy

Industry events have good value for face time in such a personal business

LinkedIn is increasingly effective for companies in addition to individuals

Statistics: must quantitatively measure your deal flow process in order to improve
Use statistics to test anecdotal hunches

Benchmark yourself to overall market activity

Panel 1: Creating The Right Deal Flow -- Creating & Managing Sustainable, Replicable Strategies

Moderator

Richard P. Prestegaard, High Road Capital Partners

Panelists

Robert P. Bennett, GroundSwell Capital LLC
David C. Glickman, Resilience Capital Partners LLC
Luke Johnson, Platinum Equity LLC
Robert B. Landis, The Riverside Company
Robert E. Michalik, Kinderhook Industries LLC

Notes:

Brokers tend to show deals to the people that are top of mind / they have seen recently, so staying visible and in touch is important
Being responsive to brokers respects their time, especially when you are not interested in a deal so they can move on to a higher potential buyer

Question: How are you organized? How do you align incentives?
Larger funds tend to have industry-specialized sourcing, but less so at the smaller funds due to lack of scale
Riverside shares deal-based compensation, so that the sourcing team works together and it's not zero sum in terms of hoarding contacts

Question: Where do the panelists want to improve their current sourcing?
Social media

Having flexible, searchable databases accessible on mobile devices
Move from partner- or people-oriented function to more institutionalized, systematic, and scalable

Question: How do you handle in-bound emails?
Platinum has a single individual who receives and sorts through inbounds, uses discretion if and how to react
Resilience responds every briefly to all credible emails to maintain their brand.

Question: What portion of your deal flow is proprietary?
Panelists do not believe there is sustainable truly proprietary flow (though I think they are defining this too narrowly as sales with only 1 buyer)
Platinum looks at as direct- (20%) and indirect-sourced (80%), not proprietary vs. non-proprietary. They are looking to improve self-creation of deals.
Riverside defines proprietary as any sale less than ~3 buyers involved
Kinderhook looks for the "broken" auctions that didn't get the right attention of the PE community

Question: What fee structure do you use for proprietary deals?
Truly proprietary deals have no fees - you are interacting directly with the seller
No negotiation on fees if there is an intermediary
Kinderhook pays 1% or a book and 2% for a phone number under the assumption that if there's a book created there are other buyers

Question: Thoughts on how to use social media to generate deal flow?
CareerAmp
Branch Out

The feeling is that they've started, but recognize there is value they are not tapping
Some are skeptical, especially how to drive quality vs. just more quantity

Question: If you are starting a business development group, what are the top three things you should do?
Focus, don't be all things to everyone, focus on key markets

Know what your company wants so you can speak as a decision-maker and not just a broker

Panel 2: Positioning Yourself to Win - Four I-Bankers Explain How to Compete for the Good Deals

Moderator

Richard J. Fitzsimmons, High Road Capital Partners

Panelists

David Deutsch, David N. Deutsch & Co. LLC
Thomas P. O'Connor, Berkery Noyes & Co. LLC
John L. Tye, Edgeview Partners LLC
Harold J. Williams III, Dickinson Williams & Co. Inc.

Notes:

Question: When you start a process, how many buyers do you reach out to on average? Most? Least?
Start with a hit list of several hundred strategic and financial buyers. Articulate thesis for each counterparty, then run ideas and work with clients to narrow the list. End up approaching 20-30 strategic and 50 financials.
To maximize value and sale price, wider net is better
There is a lot of un-invested capital sitting in funds and outside-in it is hard to tell the internal dynamics, so casting a wide net increases chances of a good outcome

Question: How many PE firms are in your databases?
Several thousand---- then narrow down based on objectives and focus etc.
Don't be "Just Another Middle Market Buy-out Fund (JAMMBOF)"
Opportunistic, no focus

Question: How do generalist PE funds differentiate and get in the advisers list?
Good funds pro-actively stay in touch with bankers
Understand what each bank's coverage model is. How do they prioritize and assign responsibilities? Then develop personal relationship with whoever is covering you.
Staying on the buyers' lists is based on how well you conduct yourself in the diligence processes, "beauty contest"
Banks are aware of your funding situation and your portfolio / investment thesis. More likely to attract deals if you have a good specialty / strategic thesis vs. being just opportunistic.
"Strength and length of relationship"
Show enthusiasm, ask questions, express interest directly that this is one of the deals in your sweet spot
PE funds can reach out to companies directly, but you need to manage and related personalities this carefully. Certainly has upside if the business owner through these communications develops a preference for a specific PE fund. Once the process starts officially, need to follow protocol through the bankers; it really ticks off the bankers if you interact directly with the CEO.

Question: How do PE funds differentiate in the LOI phase?
Bring substantive content and 'meat on the bone'
Everything you have done until that point builds your credibility
Show that you have fully leveraged the data room
Having unanimous buy-in from your own investment committee is important. Do not want surprises, as deal gets closer to closing, and then suddenly the investment committee reads the documents more closely and asks questions that should have been asked earlier.

Question: What is the discount you get for being the preferred buyer?
Don't really give discounts, but call the preferred buyer and tell them the terms they need to match to close the deal.

Question: Which corporate deal sources have the most effective pipelines?
Many, many approaches
Apple's lead is overly friendly and kind
Some have interns periodically call to check in
"I believe there is proprietary flow, since he's seen buyers who consistently are single-bidders."
If you are known as someone who is truly helpful, you will always get calls with an opportunity or just for advice

Teten question: What will the impact be of deal aggregating websites (Axialmarket, MergerID, PE-Nexus, PEGBASE, CapitalSphere, DealMarket, BizBuySell,) on the investment banking industry?
Tye: they are still evaluating and thinking about how to make it value-creating
Some of the others haven't seen them impact their markets
They will get calls from banks if they develop trust not to front-run processes

Panel 3: Finding Hidden Gems - Four Proprietary Deal Flow Experts Discuss How They Advise Their Clients

Moderator

Richard P. Prestegaard, High Road Capital Parnters

Panelists

Zubin Avari, Charter Oak Equity LP
Christopher A. Gebelein, Private Equity Growth Advisors LLC
Sven A. Kins, Cook M&A Advisory Services
Matthew S. Wells, PE-Nexus LLC

Notes:

Question: When clients reach out for help, what are they asking?
PE clients don't know whom to call within corporations to discuss something like a divestiture

PE funds get busy and sometimes periodically reach out and then fail to follow up. Advisers can help by rounding out their contact list and then having a consistent cadence of following up and messaging with business owners. Many middle market firms don't have enough business development capacity.

Question: In divestitures, which comes first, the buyer or the seller?

Private Equity Growth Advisors:
Focuses on the corporate client who has the need to sell. It's very hard to just call corporations and just ask what they have for sale. These communications are largely ignored. The better approach is to try to solve the problems of corporate development people who want to grow their businesses.

It takes corporate executives a long time to decide to divest. Even once the decision is made, the business have been neglected and getting a healthy auction going are quite low. There are lots of risks that the business deteriorates during the sale process. So, there is a sense of urgency.

They try to have a 60-90 day process. Much of this is done for quarterly earnings management reasons. This can be proprietary since there is just no time to run a process.

Accounting and incentives systems drive behavior within the corporation and you must be aware of this as a buyer (e.g., the manager won't realize the loss which will affect their business unit's reporting and therefore their personal bonuses).

Question: In the above, how do you convince potential corporate seller not to engage in a full process with bankers and advisers?
Many times there is not enough time due to quarter end or the business itself will not last throughout a protracted sales process

Of course, the larger the deal, the high the chances the corporate seller does hire a banker to be able to justify price to their board

They stay close to corporate development officer to understand all of the non-price items that are important to them. This is important for getting their clients into the final bidding round.

Question: What are some issues with divestitures?
Financials (e.g., balance sheet) are not held at the business unit or asset level

Sellers may not be as sophisticated in terms of understanding how PE funds think and operate

Question: How does PE-Nexus work?
This is a technology-enabled solution to compliment the existing, traditional process

Casts a wider, more efficient net than existing channels with a more robust database and a more detailed search function

Question: Is the PE-Nexus platform for all market segments?
The platform is really for the middle market, not KKR / Goldman Sachs

Question: How does Charter Oak Equity source their deals?
They are a sponsor and they act as if they were investing their own capital

Certainty to close is critical before they take deals to the PE groups

They are also so aligned with the PE group in terms of reputation and returns that they like repeat business with the same groups

Question: How do each of the panelists get paid?
Charter Oak Equity LP
Fee at close
Part of management fee
Part of carry

Private Equity Growth Advisors LLC
Some clients pay a monthly retainer which gives PE fund credibility with corporate contacts
Success fee

Cook M&A Advisory Services
Nominal retainer
Success fee upon closing
Hope to be part of the add-on process if part of growth plan

PE-Nexus LLC
Straight subscription fee from buy-side clients
No success fee
No charge to the sell side, their currency is the data

Keynote Presentation 2: Virtual Handshake

You can download the slides at teten.com/deals .

Presenter:
David Teten, CEO, Navon Partners LLC

Notes:

People are increasingly online and connected, but we are still at the very early stage of social media having a material impact on how we do businesses
Our kids are the future business leaders and they carry the habits they are developing today into their future business habits
There is an incredible amount of data leaked online
Need to stay top of mind
Diverse networks have much larger value than more focused networks
Social media is a low cost way (time and money) to extend the reach of your network
Leverage multiple media formats - this increases trust. More likely you hit their preferred channel. Also allows people to do diligence ahead of time rather than a cold meet.
Online communities are great sources of free consulting services

Five next steps
Google yourself and see what people are saying about you
Be a data hound
Reduce email use: move communications to thinks like wikis that are better stores of information and less re-emailing (social text is a good corporate wiki)
Find people to meet online - zoominfo aggregates all publically available information.
Join the right clubs

Question about companies that help manage email / contacts :
rapportive - pulls in all publically available data when you email someone from gmail
xobni - gives you insight into frequency of interaction

Panel 4: Alternative Deal Resources - Four Other Advisors Discuss the Value They Add to the Process

Moderator

Robert J. Fitzsimmons, High Road Capital Partners

Panelists

Howard M. Berkower, McCarter & English LLP
Jake E. Lilie, Dynamic Data Inc.
Nadim Malik, Sutton Place Strategies LLC
Roland W. Tomforde, Broadgate Consultants LLC

Notes:

Question: How can firms use their technology to improve deal flow?
Excel is a way of the past, everyone is using CRM now, generate reports for Monday morning meetings
Deal Dynamo
Salesforce - lower priced option
TheNextRound
Equity Works

Social media is a great way to personalize your firm
LinkedIn, Twitter, Facebook

Question: How can firms use data to improve deal flow?
Know your market penetration, share of target market

Know the details about what is falling through the cracks - which deals did you miss and why?

90% of their effort is to understand how the buy and seller get / got connected

Question: What are other ways firms drive good deal flow, especially since some are publicity shy? Should they be shy?
Roland agrees that PE firms are shy

There are ways to create localized branding e.g., in your industry

Each opportunity must been a seen as an opportunity to underscore your key messages

Question: What is an ideal level of email traffic?
Don't wear out your welcome, but hard to pinpoint a specific number. Need to avoid people instinctively reaching for the delete key.

Congratulations to Business Connect China, which is merging with my old company, Evalueserve Circle of Experts, and Tribeca Insights to form a new consolidated expert network, Advantus Global.  Integrity Research reports, "At the high water mark, there were over 45 expert networks.  By our count, the number has shrunk to 37, of which 7 cater exclusively to non-financial clients." 

A number of research and data companies have acquired expert networks: Evalueserve acquired Circle of Experts; S&P acquired Vista Research, which it later sold to Guidepoint Global.  In addition, quite a few large companies have started expert networks: Goldman Sachs Vantage Marketplace (shut down); Reuters Anian (shut down); Bear Stearns' Primary Insight (spun off). 

The pattern is fairly clear: I'm not aware of any significant expert network focused on financial clients which is owned by a company not in the expert network space.  Expert networks, by the nature of their business model, can easily create conflicts of interest with other entities.  For example, what could Vista Research do when one of their experts was critical of one of S&P's major corporate clients?  What happens when a major S&P client complains that one of their employees is participating as an expert?

So I suggest that the traditional expert network model works best in a stand-alone format.  Guidepoint Global's acquisition of Vista for a (rumored) bargain price has apparently worked out well, and I'm very optimistic about Advantus's prospects, given their strong base in China.  I expect that some of the larger expert networks will continue to roll up some of the smaller players over the coming 2 years.  In particular, I expect that someone will acquire the assets of Primary Global, which was a reasonably successful firm until they ran into legal difficulties.  Their database of experts, and to a much lesser extent their client database, have significant value to another expert network player.

It's been very exciting to see such a strong response to our recent research study on "Best Practices in Private Equity and Venture Capital Deal Origination", published in the Winter 2010 Journal of Private Equity. 

To our knowledge, this is the first systematic study on this topic; we have not found any other in-depth research on origination by either academics or practitioners. In leading this research, we are leveraging our experience working with a wide range of top-tier investors and our proprietary dataset of the origination practices of over 150 institutional investors globally with whom we have conducted in-depth interviews. We also have presented on our research to dozens of conferences, funds, and investment banks globally, gaining additional insight from audience feedback.  My coauthor Chris Farmer of General Catalyst provided critical insight, particularly on the venture capital industry.  Our research associates, Yujin Chung (Andreessen Horowitz) and Neha Kumar (Anklesaria Group), provided invaluable quantitative and analytical support.  I also want to thank my former colleagues at global research firm Evalueserve for their help in conducting approximately 1/3 of our surveys, and for additional background research.

A wide range of publications has now featured our research:

- 3/29/11: Business Insider, Five Best Practices In Sourcing Investments

- 3/29/11: Axial Market Blog, Where the Deals Are - Best Practices in Sourcing Investments

- 3/14/11: Bloomberg Radio, Teten Discusses Private Equity Deal Origination (Audio file)

- 1/13/11: Pensions & Investments, Study: PE firms spend hours on investments they'll avoid

- 1/3/11: Global Corporate Venturing, Chasing the rabbit: deal origination best practice

- 12/6/10: Financial News/Private Equity News, Four Ways Buyout Funds Can Increase Dealflow

- 12/10: Mergers & Acquisitions, Where are the Deals? Private Equity Funds' Best Practices in Sourcing Investments

- 10/5/10: Institutional Investor, Where Are the Deals?

- 9/6/10: Buyouts News, Need to Meet: David Teten

- 6/10: Harvard Business Review, Time for Investors to Get Social

I've embedded below the sanitized slides from a presentation we've made on our research to some investor conferences and privately to various private equity funds and investment banks.

Image via Wikipedia

I took fairly detailed notes at last night's panel on 'The Future of America's Innovation Economy Progress and Challenges at the USPTO'.  It was sponsored by The Gibbons Institute of Law, Science & Technology; Seton Hall University School of Law; and the New Jersey Intellectual Property Law Association .

The speakers were:
David Kappos, Under Secretary of Commerce for Intellectual Property and Director of the USPTO, and

Q. Todd Dickinson, Former Director of the USPTO and the current Executive Director of the AIPLA


Dickinson:

Almost out of the blue, 28th Feb., Senate is going to take on patent reform.

Kappos:

It's taken 6 years to take S-23 to the floor of the Senate. We assume it will be a 2-3 day discussion, but may be much longer, because of the CR (Continuing Resolution) to fund the government overall.

This is 1st chance to update patent law since 1952. It has funding, change in fees to make them more rational, movement to make US into compliance with global patent standards (get rid of best mode , and move to 'first to file').

Dickinson: I thought the theme was jobs, jobs, jobs. Why bother with patent reform now?

Kappos: This is jobs legislation. Note the Harvard Business Review article on "The Little Jobs-Creating Agency You've Never Heard Of". We have zero Budgetary Authority (i.e., we're totally funded by User Fee), but could create lots more jobs if we processed more apps that people send us. If we move us to global standards that creates more jobs.

Dickinson: A lot of the debate lately has been litigation issues, e.g., injunctive relief. Then we spent a lot of time on damages. Where does that stand?

Kappos: Before that we spent a lot of time on obviousness, then KSR, then willfulness, then Seagate, inequitable conduct, venue (TS Tech and its progeny in and around 5th and 3rd circuit). These have all made progress towards fixing the law of venue. The courts have fixed some of the hardest problems. Judge Raider (Ithaca) fixed the damages issue. Willfulness can also be dropped out of the legislation (per Feinstein's modification to S-23). I think venue can also away; that's fixed. Supplementary examination provision is on its way to being addressed thru the Therasense case.

Dickinson: So what's left? What's controversial?

Kappos: Post-grant challenges are the main bone of contention.

Dickinson: Are you going to charge a fee for that? (laughter)

Kappos: The current fees ($10-$15K) are way below our real cost ($30-$40K).

Dickinson: We hear the argument regularly that the USPTO can't handle this with current staff, from a standing start.

Kappos: No inventions are needed to manage the post-grant process [i.e., we just need more funding].

Dickinson: 3 amendments likely to be offered:

1) Financing

2) Schumer, at request of financial services sector, is thinking of bringing an amendment to the floor re: business method patents.

3) Change to 'first to file'. Feinstein or someone else may offer an amendment to strike this term.

Dr. Tom Coburn's proposed amendment would end fee diversion [away from the USPTO] by creating a reserve fund.

Kappos: Schumer will likely offer a tactical, time-limited pilot of a post-grant process. Will direct the USPTO to handle Bielsky and post-Bielsky issues in patents that might be called business method related.

Dickinson: Any tax lawyers in the room? Good..[laughter]

Kappos: There's a tax patent provision: for patents that involve compliance with tax laws, the agency can't consider tax-related portion of the claims with regard to patentability. This is likely to go thru.

We instituted the first direct-ordered re-exam, to look at a tax strategy patent I thought had been incorrectly granted.

Dickinson: This started as an amendment to 101, which should never have been modified ever.

Kappos: The patent code is not the tax code---it should not be modified often.

Kappos: I view 'first inventor to file' as essential to moving US to the 21st century. The current system is arcane, and an incredible trap for the unwary.

Dickinson: Small inventors want a patent to grow their business, and want to be able to do that outside of the US.

Kappos: When I wanted to challenge a patent, I would always use a 131 when possible. This forces the inventor into a 102G contest. If you have a small inventor in 102G, you've got him where you want him.

In the last 7 years, there were 2m patent filings. There were just 16 instances in which small parties (with small inventor status) had been 2nd to file but won in a priority contest claiming to be 1st to invent. Exactly 1 of these were independent inventors. You have a better chance of being bitten by a grizzly bear and a polar bear on the same day.

Kappos: We have to fight very hard to get access to the fees you're filing, so we can run our agency. Every month, 10s of millions are being diverted away from us. I expect $240-$330m/yr (a new record) to be diverted unless we change something.

Dickinson: I don't have a senator; I live in DC. But you should all be lobbying your senator.

Kappos: We're starting to make some progress against problems that we have .  If we don't have access, the backlogs will start building up again.

Dickinson: If government shuts down, only political appointees can work. So you'll be the only person working.

What prognosis on workflow issues we dicussed previously?

Kappos: This year we kicked back some of the stack of applications. Our models are we'll be at 655 by end of this year, despite the fact that filings are up 7.5% this year.
Our plan is to nose those numbers down over next few years.

Dickinson: I used to get a lot of heat for allowances. Now it's way back up.

Kappos: We added 5 new metrics with guide on how to use them on the site.  While allowance rate has gone up by several percentage points. I'm comfortable with it going wherever patent apps take it.

Dickinson: House oversight hearing was other day. Congressman Chappins said, "We've given $1b from IT over the past 9 yrs. What have you done with it?"

K When I started at USPTO, the first thing I did was Stop, Look, and Listen. I put on hold millions of dollars of IT spend that were underway. We've revectored to an agile development methodology. We're using modern programming languages. We're making some really good progress on upgrading patents.

Kappos: Over time we're going to have to reoptimize to use the new Detroit office. We'll try to bring in automotive experts. People in Detroit are very excited about this. Some people are asking, 'can we select Detroit to evaluate us?'

D: there are a bunch of new personnel changes. What's the update?

Kappos: You'll be impressed by the quality we 've assembled.

Dickinson: Why is that important?

Kappos: Backlog of the board is up to 20,000 cases. Our process to process appeals is particularly bad; # appeals not yet heard forms a vertical line if we graph it.

I just signed an S-152 to approve the hiring of some external lawyers who want to join us to become judges.

We got new leadership coming in.

Dickinson: You've gone from being corporate lawyer to being a public figure, being bashed by lawyers. How do you feel about that?

Kappos: No other department is as much a fishbowl as the USPTO. People feel empowered/that they have the right to comment on what USPTO is doing.

Dickinson: You've got 3 local Public employee unions (patent office professionals, and the national telecommunications industry association-two chapters). How's the relationship ?

Kappos: 95% of our employees are union members. We have done a lot to forge strong and productive ties with our 3 unions. The union leadership have been stewards and team players. Todd said the most important thing you can do is reach out to the unions and repair broken relationships. I've negotiated on working conditions: sizes of examiner's offices, carpet colors, maintenance schedules for washrooms, how many printers we have on each floor. No substantial decision fails to get the unions' input.

Dickinson: A story: I redecorated the carpet and the union board was split 50-50 about the carpet color. They finally brought management in to break the tie.

Kappos: We have legislation that came in thru last congress on teleworking. New legislation allows them to live anywhere in the US. We are required to set up a council with representation from unions to manage this.

Dickinson: You do a fair amount of international work; you're the senior member of the trilateral group: EPO, JPO, USPTO.

Kappos: Turnover is very fast-I'm the most senior person after 18 months! Trilateral attempts to work on lightweight harmonization issues. We're under well-deserved pressure from IALPA to consolidate the IBS forms. Industry associations banged our heads together to have just one form. Seems reasonable. We're finally getting it done.

Dickinson: What about bigger international issues: PCT search. You said you'd guarantee a "world-class PCT search".

Kappos: I want to be doing as good a job as EPO, JPO, and KEPO (Korea) on this. Team PTO has done a good job on this. We're now best of class on timeliness and our quality is excellent. We're now driving those search results to the national stage.

We had built into our contract with the vendor of our PCT search a term that says, they should stop the search when they find the first applicable work of art. That's not our internal standard, which is to do an exhaustive search. This was a contractual guarantee of inferior work. So we went back and renegotiated it.

Dickinson: Track 1 is the answer to a lot of your problems: 3 mos. to first action, 12 mos. to final disposal. This is "Fedex meets the USPTO". You pay a premium for this. Only a small percentage request our acceleration (10,000/year). We are charging full boat: what it costs us to do the work.

Only 7% of EPO request their fast track, even though it's free. There are a lot of theories as to why the figure is so low.

The SMB sector (Small/Medium Businesses, filing under small entity status) values super-fast processing the most, and EPO doesn't have as big a SMB sector. We charge $4000. USPTO doesn't have statutory authority to set our own fees, or we'd change that to $2,000.

Before we instituted Track 1, we told Congress we needed their help to do this.

We examine patent applications according to the current state of the law, not as preferred by the Acting Solicitor General.

Kappos: a prominent practitioner says that when we move to first to file, US patent system will finally be "TOPS", i.e., transparent, objective, predictable, and simple.

Rigorous 112 disclosure will scope out the differences between two similar claims, and then whoever has the first date wins.

Teten: How has and how should the PTO respond to the trend of securitization of patents, e.g., Intellectual Ventures, Acacia Research Group, etc.?

Kappos: You could think of this as a downstream issue, but that's too simplistic. When you have securitization of any instrument, it's fundamentally dependent on the quality of the instrument. Our job at the USPTO enables this securitization. We want to enable people to buy & sell IP in the same way that buy & sell cars. It will happen over time as our processes get tighter.

An impediment to securitization is understanding who is the true owner behind the piece of property. In the current system, where we don't have a good way of tracking patent assignees, where we don't get notices of patent reassignment , there are a whole host of issues---e.g., confusing I.B.M., IBM, International Business Machines, etc. There's a project underfoot to work with other parts of government to get unique numbers that assignees can use to identify themselves. That would be the number that Citi (for example) uses with every patent it files. That will help find the real party of interest.

Dickinson: In our recent economic history, one of the challenges is putting in safeguards for bounds of securitization process. People make an analogy to the mortgage market.we see what happened there. People lose the paperwork, don't treat the instruments the way they're supposed to.

Kappos: We've hired Dr. Stewart Tate, a tenured Georgia Tech econ professor. He's involved in this project to sort out unique identifiers for owners of IP (e.g., IBM, I.B.M., etc.) He's working on other projects to link patents to job creation, economic opportunity, etc.

Audience question: Average pending time for a patent application used to be 6-9 months. This allowed the attorney to make an enlightened decision re: foreign filing. Now it's 2-3 years. How can clients today make an enlightened decision which will keep their priority and determine if it's worth their while to undergo foreign filing?

Kappos: The problem is funding.

Dickinson: You need to get on your local politician to end the funding diversion.

Audience: one of my problems was making sure patent wasn't issued too quickly, so you can sync it with marketing.

Kappos: that's why our target for First Action Penancy Target is 10-20 months.

Kappos: We've had 7-8% growth in applications and flat in RCEs, so we're making progress on that.

We're coming out with a 117 practice, which will address this problem.

Dickinson: We traditionally say something nice about trademarks.

Kappos: New trademark commissioner Debbie Cohn is 'the little engine that could and does'. They're dialed in on first action penancies 1.5-3.5 mos. The "trademark bully study" (which we refer to as the 'Aggressive Acts Study") was to research whether there are issuers that are overly aggressively bullying others about trademark ownership. You can email a box on our site to make suggestions on this. Report is due at end of April.

Dickinson: Another hot issue: whether new TLDs are allowed at ICANN.

Kappos: That's a worrying issue. If you create a defensive requirement for small & large businesses to spend millions/billions to register entirely new classes of domain names, I just think it's not needed.  And to go thru a contested proceeding is not a cheap thing.

Andrea Cammage, President, NJIPLA:

We are awarding Jefferson Medal to Exec. Director of the NJIPLA. Mar. 9 is annual litigation seminar. David Kappos is returning on Apr. 27, joint with NY and CT intellectual property association meetings.

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Expert networks have been in the news a lot for the past few weeks, due to the SEC's attempt to look for insider trading amongst hedge funds, following on their Galleon investigation (Raj Rajaratnam of Galleon is in the photo shown).  The best source of information on this topic is as usual the Integrity Research blog.   I wholeheartedly agree with the thrust of their commentary: expert networks replace social capital with financial capital.  Investors have always  sought out primary research; expert networks just make it easier.  They also add a significant compliance layer, making it much easier for a fund's compliance officer and/or the SEC to see with whom a fund spoke, and on what topic.

What's striking to me is that the SEC is clearly investing serious firepower in looking for wrongdoing: subpoenaing many hedge funds and most of the major expert networks.  However, as I said to the Globe and Mail in their piece on the topic, U.S. financial probe digs into a murky industry, "So far there is exactly one person [Don Chu of Primary Global] who works for an expert network with any specific allegations against them."  Noteably, the complain against Don Chu looks like black & white insider trading. 

(UPDATE: Authorities have arrested one other employee of Primary Global, James Fleishman, and several other technology company employees for allegedly leaking information.  another technology company employee pleaded guilty and is cooperating with investigators. . The information allegedly leaked is in clear violation of the employee's employment agreements and agreements with the expert networks; it doesn't undermine the basic logic of the expert network model.)

To me this lack of more accusations against expert networks is striking.  If the SEC subpoenaed 15 New York restaurants, I'm sure they'd find more evidence of health code violations than they've found in all their recent investigation of hedge funds and expert networks.

As a more general comment, this reminds me of an old joke:

A drunk loses the keys to his house and is looking for them under a lamppost. A policeman comes over and asks what he's doing.

 

"I'm looking for my keys" he says. "I lost them over there".

 

The policeman looks puzzled. "Then why are you looking for them all the way over here?"

 

"Because the light is so much better".

The US financial regulatory apparatus looks terrible now because of the Madoff scandal (which was not a hedge fund) and the 2008 financial meltdown (caused by the large banks/mortgage companies, bad regulation, quasi-government agencies like Fannie/Freddie, and consumers who took on too much debt).  So now they're focusing their investigative energies on hedge funds and expert networks, whom everyone agrees bear no responsibility for the 2008 crisis.   Why?  Mainly because those are two groups who do not have the regulatory sway and lobbying budget of the large investment banks.  This seems like a misuse of our taxpayer dollars, to put it mildly.  

I've given a number of presentations to senior executive groups on expert networks; below are two slide decks:

How to Earn More Consulting Revenue from Gerson Lehrman and Other Expert Networks

How Executives Can Work with Private Equity and Venture Capital Portfolio Companies..and Buy a Company with Private Equity Backing

I have spoken periodically to private equity funds on this topic also:

It's the People: Improving Portfolio Company Valuations by Working with Operating Executives (discusses expert networks and other ways to tap outside operating executives)

Lastly, I've blogged frequently about expert networks.  For my notes on some panels on expert networks (some of which I participated in), see:

Investorside 

World Hedge Fund Summit
New York Society of Security Analysts Panel
Investorside conference
Harvard Business School Club of NY Investment Research Panel

Also, for background, see
MIT Enterprise Forum of NY: Collaborative Investing Startups
Software & Information Industry Association Panel on Content and Community

(Image by Getty Images via @daylife)

Chris Farmer and I have an article in today's Institutional Investor, summarizing the key findings from our research on deal sourcing:

Would you invest in a company that only sold to 1 out of 80 leads?  Or a company that typically took one year and 3 professionals just to close a single client?

In fact, you've already invested in that company: your private equity fund.  According to our data, the median investor in private companies reviews over 80 opportunities in order to make 1 investment.  The median private equity fund required 3.1 investment team members to close one transaction in one year.  By the standards of most traditional sales processes, private equity origination is a very inefficient and labor-intensive process...despite the fact that an effective deal origination process is fundamental to successful investing.  This is particularly surprising given that private equity funds who employ a pro-active origination strategy have consistently higher returns, driven by both greater quantity and higher relevance of incoming investment opportunities. 

Get the full story.

We're in the last lap of editing our research study on best practices of private equity and venture capital investors in originating new investments, which has a particular focus on use of social media.  We plan to publish this in a major private equity journal.

If you would like to review a copy of the 12,000-word report, please contact us.  We would greatly value your feedback.

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