Lies, Damn Lies and Statistics

statistics

Indus TechInnovations sent me the following “informatic” for publication: Patent trends – Israel. It is very gung-ho and positive. The problem is that last year’s statistics have published and are less positive. See my article from February. Since the 2013 statistics have been published, ignoring them does a disservice. Particularly where they buck the trend.

There was anArticle from Idiot Achronot last Friday, by Sever Plotzker (טור ששי) that claimed to provide the true facts behind the propaganda in various areas, one of which was patents and innovation. Dr Esther Luzzatto, managing partner of the Luzzatto Group, one of the big five accountancy firms [sic] specializing in technology and IP was quoted. Now, we can argue whether or not the Luzzatto group is one of the largest patent attorney and law firms in Israel, but it is not a large accountancy firm and I am sure that Drs Kfir and Etty Luzzatto would be the first to acknowledge that.

The article included a number of interesting statistics and theories.

Briefly, the points raised were:

  1. A drop in PCT filings of 30%
  2. Significant drop in investment in start-ups
  3. Privatization of technology incubators
  4. International companies opening R&D facilities in Israel
  5. In 2013, there were 780 start-up companies registered, where the general average is about 650 a year.

The drop in PCT filings was considered a reliable indicator of innovation in general, and patent activity in particular. It was linked to the drop in funding, which was linked to the privatization of incubators and venture capitalists wanting a quick exit and to international companies creaming off talent by opening R&D facilities, where the patents were registered in name of international holding company.

I would not be surprised if the original research by the Luzzatto group resulted in a coherent report. What was clear was that the journalist who extracted the data and summarized it in a column and a half didn’t have much of an idea about the subject matter.

Nevertheless, the article made a few points worth considering. The first one was that there is apparently a drop in PCT filings by Israelis of 30%. This statistic is worrying, but I am not convinced that Dr Luzzatto is correct that this is a representative marker of innovation or even of patenting activity. The underlying assumption that this statistic clearly shows a drop in patenting, but it actually only shows a drop in PCT filings. There is an inherent assumption that patent filing is always reflected by use of the PCT mechanism. I suspect, however, that a lot of activity is going on in telecommunications and software, particularly in developing mobile phone applications. In these fields, many start-up companies have filed PCT applications only to run out of money 18 months later. With the speed at which these fields change, it is a reasonable to file in US only. The calculation of the company’s value may be based on US market only.

Some medical device companies also only file in US. Here it is less easy to justify, but with a limited budget some companies are perhaps more careful where and how widely they file, but are, nevertheless, innovative and may be able to bring a product to market. of course, sometimes the invention is only patentable in the US. I’ve had that with medical methods, for example.

One of my clients makes industrial digital printers. The company’s market is world-wide, but competing products are manufactured by companies based in Israel, the US and recently Italy. The company has traditionally filed in Israel and then in US under the Paris Convention, and recently also files in Europe. There is little justification for them to file PCT applications. One of my client makes game changing computer hardware. The company files in the US and immediately afterwards in the Far East under the Paris Convention since their competitors are all in Asia. It may make sense or them to consider filing a PCT application for the more critical applications to keep their options open, or to file in India and Europe just in case competing factories open up there. Client considers the $100 million required to set up a fab rules out this possibility. So there you have it, start-ups, small Israel manufacturers and a large company all actively patenting, but not using the PCT mechanism.There may indeed be a drop in inventing, but it is less severe than the 30% discussed in the article.

There is a drop in venture capital. However,  in the past there have been bubbles where venture capital invested has been out of all proportion to real worth.  This is a world-wide phenomenon, not one exclusive to Israel. With low-interest on safe investments and now some govt. intervention in the property market, one imagines that venture capital will grow again. Recently investors have been looking to buy existing patents in order to sue infringers. This model is diverting funding from research, but won’t last.

Privatization of technology incubators may result in investors being short-sighted and focused on a quick return for investment. However, it is doubtful that this is related to the drop in PCT filings. One needs a first filing, maybe a provisional application, to solicit funding in the first place since investors want to see that there is something allegedly patentable. The Paris Convention Deadline, or PCT filing date, comes around a year after the provisional is filed. Private investors may want a quick return, but it won’t be that quick that the money’s run out before a PCT application can be filed.  The preference for private vs. govt. funding models are more tied up with political ideology than with anything else. Generally capitalist economics assume that the private market will do a better job than the government in creating new industries. Whether or not this us true, State funding of basic research in universities makes sense, but I am not sure that the tech transfers should be funded by the government.  Certainly some government-funded start-ups should never have received funding since the basic concept was obviously wrong.

As to International companies opening R&D facilities in Israel, this as generally positive. It is preferably for Israelis to work for large corporations such as Intel, Microsoft, Google, GM, etc. in Israel, than that they go to Silicon Valley to work for them.  The large companies offer a reasonable salary and conditions, but the entrepreneur willing and able to try to establish a start-up will forgo the salary and conditions to take the risk of starting up something of his own, if he can obtain funding. It is unlikely that the existence of R&D centers makes obtaining funding for a new venture less likely.

The drop in start-up companies from 960 In 2013, there were 780 start-up companies registered, where one would expect 650 when taking a longer perspective.

Many patent firms are keen on clients filing PCT applications. It generates income. Perhaps the hesitancy by inventors reflects a greater sophistication and realization that funding is difficult to come by, and companies are filing less widely but not necessarily less first filings?

My problem is with the article in Idiot Achronot. It is unclear to what extent it reflects the views of the Luzzatto group in general, or of Etty in particular.

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