Before we get started, I know that Mike Novogratz left his life’s work years ago, but who else am I going to put up there to represent Fortress?
Now, I have to admit I was ready to poke some fun at SoftBank for this one. How can a conglomerate, with telecom, semiconductor and robotics interests allow one of its portfolio companies to be an outright patent troll? How can SoftBank, who has $195B in committed capital for it’s tech-focused investment vehicles, allow Fortress (“FIG”) to shakedown the very companies in which they seek to invest? Well after a while, it hit me: whether purposeful or not, this is probably a great way to hedge a tech-centric private equity portfolio. Outside of proper due diligence, managing FX / rates exposure or structuring capital calls to meet specific milestones, there aren’t many ways to manage the downside risk of making poor investments in the first place – especially when deploying capital into intellectual property-heavy tech industry.
Odds are, you’re investing in a tech company because it claims to have a new technology that can streamline business processes, enhance end-user experiences or is simply a brand new class of product. With new technology comes the prospect of a high adoption rate and, of course, multiples of invested capital. It’s not all glitz and glamour though, and there are real risks to investing in the tech space, more so perhaps than any other industry. The costliest mistake you can make in tech investing is, by a wide margin, not conducting the proper diligence around a target’s intellectual property / patent portfolio. Does the company really own this IP? Are they infringing on someone else’s IP? Who’s line of code is this, truly? Are there any outstanding lawsuits? What about imminent filings? Tons of these lawsuits are filed every day around the world by what are known as “patent trolls” – individuals or funds that buy random portfolios of IP and lawyer up to shakedown other tech companies for infringement. Rarely do the lawsuits reach a decision as they’re usually settled outside of court, which is exactly what the patent troll wanted. It’s a pretty scummy industry, but it’s also pretty lucrative – which is why FIG wants a piece of it. If a respected NYC asset manager raises $400M with the intention of suing nerdy Silicon Valley idealists into oblivion, the nerds will pay up to settle. Cash burn is fine when it serves whatever “mission” the unicorn de jour says it has, not when it’s being wasted on lawyers.
That brings us to the impact of this new FIG vehicle on its parent, SoftBank. Taken at face value, it seems like FIG is raising two birds toward everything SoftBank has built it’s reputation on – investing in and building out new technologies. If you take a forest vs. tree view, though, a successful patent troll investment platform can hedge against IP-related losses SoftBank portfolio companies may incur. Obviously a $400M investment is an irrelevant hedge for a $195B portfolio, but it’s a start. It’s not unthinkable that were this initial foray to be successful, that FIG would double or triple down to target more or larger targets. I also wouldn’t discount the idea of SoftBank seeding a larger IP strategy within FIG were they to succeed with this initial vehicle – that would be something special. This will be an interesting story to follow in the next few years and, no matter what happens, it’ll be a great exercise in thinking outside of the risk management box for SoftBank.