At one point during our interview,Michael Edelman goes silent, incredulous and a violent shade of purple. That is when I suggest that American venture capitalists are a soft touch compared with Britain's crusty investment bankers.
Edelman thinks not - and he should know. He is the European head of yet2.com a venture-backed e-marketplace that allows large corporates to trade their surplus intellectual property rights. He was also part of a venture-backed spin-off from ICI and is a partner in Neppen, a vehicle for venture-funded management buy-ins.
The yet2.com exchange is backed by global players like DuPont, so yet2.com had to think globally from the start.
"We started building this globally from the very beginning," he says. "I set up Europe at the same time as my colleagues set up the USand Asia. We're building one global marketplace for people to buy and sell intellectual property rights (IPRs): companies, corporations, SMEs, lone inventors, universities, governments. The idea is that they buy and sell technology confidentially and anonymously."
Edelman and his colleagues were engineers first and dotcom pioneers second. "We all came out of industry and we were frustrated by the fact that there are trillions of dollars a year being spent on R&D, most of which is not patented."
"The stuff that's never patented we call know-how. Let's take, for example, the formula for Coca-Cola. If Coke had patented that formula, everyone in the world would know the formula by 1980. The patents would have expired and we'd all know: there wouldn't be a secret. If you really want to keep something secret, you don't patent it. So there's a lot of great stuff hidden away in manilla folders. And we reckon, talking to the various companies, that there's as much as 90% of this stuff that does not get utilised.
"A company like Siemens, which maybe spends $5bn a year on R&D, is only using a small fraction of that in their commercial activities. It's not a great return on investment. So more and more companies are saying well, if we can't use it ourselves, let's try and sell it or license this technology to somebody else. How do we efficiently do that? We're creating an e-marketplace to do it."
Taking a cut
Last year, says Edelman, the world's corporations spent $105bn on licensing technology, so taking a cut of that - the dream that drives all B2B exchange players - is a heady prospect.
"A lot of that licensing has been focused on what we might call 'stick licensing'. You have the patent; someone else starts using it without telling you; you come out after them with a big stick. That's stick licensing - and a huge amount of technology is licensed that way."
Edelman says companies are starting to become more pro-active, using the carrot rather than the stick. They are looking to gain added value out of the intellectual property inventory, and employing sophisticated knowledge management to help them "know what they know".
All B2B exchanges sound good in theory, but Edelman agrees we are at the start of a massive shake-out of start-up e-marketplaces, due to the simple fact that so few transactions are being done on them.
"I think there's going to be - and we are seeing it now - a major consolidation. You're going to have clear winners who are going to dominate their sector. I think number one is a great position to be in. Number 2 is going to be OK if, perhaps, you have a niche position. The rest won't survive. And we're seeing the shake-out now. They are calling it 'AA' - as in AD and BC - it means 'After April'.
"After April 2000 there's been a lot more sense in the market. The crazy period of throwing money at start-ups has ended. People are starting to run the numbers. VCs [venture capitalists] are very clever and they're not going to throw their money away when they don't have to. Over the next six months, you're going to see a lot more people go out of business - just run out of cash and close their doors. You are starting to get a natural selection process - the strong ones with cash, who've created cash or who can still raise cash: they are going to survive."
Alliance of equals?
We discuss the example of Covisint - where the car giants got together and formed their own B2B exchange, simultaneously raising a no-entry sign to any independent e-marketplaces and putting the fear of God into the firms in their supply chain. Suppose someone came along and did that with intellectual property.
"In a way they've started to do that through us," says Edelman. "The big companies are behind us. We had the idea to do this in advance - but the reality is all the big corporations were all thinking about it. Our timing was good. For the Siemens, the BTs and the Glaxos they just needed a few things putting into place."
Edelman insists that, in the IPR marketplace, every buyer is also a potential seller, and vice versa. So it is more an alliance of equals across different markets than a power structure dominated by a few big players.
"You have engineers that need a solution. So ultimately they're the ones that execute and make it happen. The actual deal is getting done licensing officers, business managers, a whole range of people. But what you're really allowing, is for two to three million engineers in the world to start collaborating with each other."
"Proctor & Gamble, for example, wants all of its scientists and engineers to use the exchange. They want to make sure that before they spend the next chunk of money on a project they had better go look at this to make sure they can't buy something first to bring it in at lower cost perhaps and bring their product to market faster."
B2B exchanges, at their best, create an efficient market where there was not one before. Edelman is convinced that, for the big players, it is worth the transaction fees
"If the deal happens, we take 10% of the revenue, capped at $50,000. We came to a capped arrangement because we didn't want to put up barriers to people. The average deals that we're looking at are about $2.5m. So for a good introduction that you didn't know anything about, paying yet2.com $50,000 was not significant.
"When you think about the traditional way of this business, it's all done on an old boy's network: ie who do you know? I have a technology, I have my contacts in Japan, in the US, and so I call them up and they say yeah, come and see me, so I fly to Japan, then you fly to the US and you've now spent three months of time, and a lot of money, and you still don't have a deal. You pretty soon could rack up $50K trying to make the deal. So the e-marketplace starts to make life a little more efficient".
Yet2.com is not taking the $105bn market and transferring it onto the Web. "We're talking about adding to it. The market is expected to grow just because more and more people are excited about buying and selling intellectual property,"says Edelman.
What excites Edelman about the potential of Internet technology for B2B e-commerce?
"Marrying new Internet technology with old economy companies. I don't necessarily believe that the Internet is going to just start ruining them, that all the old economies are dead and that the Internet is going to take over. I don't think that is going to happen. I think what you have here is a powerful tool that delivers, if leveraged correctly, huge efficiencies.
"And not only for huge companies but small companies - even inventors. It's a great way of bringing people together; it's a great way of pulling cost out of things."
One of the biggest ironies of the era of neo-liberalism and deregulation is the creation of potential cartels out of the B2B marketplace alliances. Is Edelman concerned about that?
"I think it's a concern that is mentioned often if you look at the chemical market exchanges, where you have the biggest chemical players in the world all sitting around the table together."
How do you prevent them from dividing things up?'
"It's a concern that the marketplaces, I know, take very seriously. They have competition lawyers who come and sit in on those meetings that happen. The reality is, if companies are going to meet together in a cartel, they don't need a business to business marketplace to make it happen.
"You've seen cartels for as long as there's been business. Some fear that the Internet and these consortia coming together is going to encourage that. I don't. It's too visible, it's too obvious."
What about the effects lower down the supply chain? Many smaller firms fear that participation in e-exchanges will just lead to them being squeezed.
"If you take Covisint as an example, and look at the reality of supply in the automotive industry, you as a small company are going to jump through a lot of hoops before you start supplying Daimler-Chrysler. You might actually welcome something like Covisint, which allows you to get approval much faster.
"The way the system is set up today is not biased towards small SMEs. It really is tough. Being a small company in today's market, you're right off their radar: you're just not going to feature, they won't talk to you. Maybe the Internet allows you to get closer to them quickly."
"Take Philips as an example. All of a sudden, a small inventor, a SME or an inventor can develop some optical lens or some switching gear, which may be of great value to them. Normally they would never connect: Philips would never see this guy. If that guy came with that technology to Philips, it would take him five years to get through the secretaries, through the door and up to the person who can pull it through the system. Now you have a market where the person can post the technology on the site. If it's meets Philips' search criteria, the Philips R&D guy gets an e-mail on his desk about it."
When I spoke to Edelman the Napster and MP3.com court cases were still in full swing. Doesn't the Internet pose a massive threat to intellectual property as a concept, I ask?
Edelman admits to being a keen user both of Napster and Gnutella, the distributed file sharing platform that is getting IPR people very worked up.
"I think they're amazing business models - but I can understand the concern. How do you protect the intellectual property on the records? The problem that those companies have is you have stuff that's in the public domain, that's easily accessible. How protectable is it? The answer is only defined really by the courts.
"You can only define how good and how strong your patents are on a technology when somebody challenges them. Dyson knows its patent is strong now because the courts decided that Hoover owes them so many millions of dollars in damages. Before that, they didn't know.
"Gnutella and Napster are pushing the boundaries of our ability to police IPR. And if you can't police it, it's not of value. If I can bat you over the head with a stick and get money, then it's got value.
Edelman has been involved in organising management buy-outs in the chemicals trade and in raising venture capital - so I ask for a view from the coal-face of the financial climate for dotcoms. DuPont was the "angel" for yet2.com - the CEO of the start-up is actually an eighth generation DuPont. The chemicals giant is one of three main backers together with Proctor & Gamble and Honeywell. 3i and Venrock - the VC arm of Rockerfeller - make up the financial heavy-weights behind yet2.com.
What does Edelman say to people with really good ideas who are currently bitterly complaining about all the finance drying up. Have we reached the end of the VC phase, or are there not enough good ideas out there just now?
"A lot of VCs have been burnt because they got silly and they started throwing good money after bad ideas. And the people that have great ideas need to work hard, they need to spend a lot of time talking to a lot of different VCs. There is a huge amount of money out there looking for investments.
"These people have funds: they've raised funds these are in some cases $1bn funds. Their investors didn't give them the money to sit there and not invest it. VCs are coming under pressure. You've got a 10 year fund and I want investors to see a return; you need to invest it. So there is money there. And there's a lot of money in the UK and there's more and more money throughout Europe."
What does Edelman say about the idea that American VCs are "dumb money" chasing dumb ideas, and that they will be a soft touch for canny UK start-ups?
"The Silicon Valley boys have been playing this game for a long time. They know all the tricks, they know what they're looking for, they're very very experienced. It's not dumb money, it's very smart money. They will analyse the risk of things - so much that sometimes you wonder why they're called venture capitalists because they're not taking the risks."
But the same is not true of the large financial institutions that have tried to jump on the VC bandwagon. "A bank, or an insurance fund or a large equity fund that decides let's put a half a billion dollars there, could be easier to convince."
Next week: we profile Labour's "e-Lord" - Parry Mitchell
Started career in England with ICI Chemical & Polymers, progressed via the management buy-out venture Brunner Mond and spent last three years as commercial director for Colloids. Edelman is also a senior partner in Neppen, a vehicle for venture capital-funded management buy-ins. He has a BSc from Tufts University in Boston, Massachusetts, and a PhD in chemistry from the University of Sussex in the UK. Edelman holds dual US/UK nationality.
Yet2.com allows companies to post details of their unused R&D on an internet exchange. Once they've established a level of interest they can move on to one-to-one negotiations and the site takes a cut of the transaction, up to a limit of $50,000.
This was first published in November 2000