Oral arguments in the Bilski patent case were recently heard at the Supreme Court of the United States (SCOTUS).  The line of questioning from the justices suggests to me that they have an understanding of computers and software that could be very problematic for those of us designing software and trying to protect that intellectual property with patents.

Their understanding seems to go something like this.  1) You can’t patent ideas in the abstract, they must be embodied in some concrete form.

 2) Softw are programs

are embodied by running them on a computer.  3) But, since the computer is already capable of running the program, simply saying that you run the program using a computer doesn’t make it patentable, because what you’re really patenting is the abstract idea expressed in your software.  4) Abstract ideas are not patentable.

Ergo, software is not patentable.

I think a re-framing of the computer/software relationship could help explain why it seems obvious to programmers that their work can be novel, non-obvious and useful (the tests for patentability).

Consider the analogy: a computer is like steel.

 Many inventions are made of steel.

 That is, steel is the medium in which the idea (say a uniquely shaped tiller blade) is expressed.  Steel is an expressive medium<

/span>.  Now, SCOTUS has no problem upholding patents for ideas expressed in steel if they are novel non-obvious and useful.  That feels right.

 SCOTUS also has no problem upholding patents for new methods of making steel, for alloys, for ways of hardening steel, etc.. That is ways of improving the expressive medium.

 That also feels right.

The analogy I’d like to draw is that the computer is an expressive medium for software in the same way that steel is for tillers and many other useful things.  So, many inventions are made using steel as the expressive medium, and I would argue that many inventions are made using a computer (and display and inputs etc) as the expressive medium.  SCOTUS seems to be grappling with the idea that you don’t create a “special-purpose computer” to express a particular piece of software.

 That, to me, would be like saying that a new tiller design would have to be expressed in a new alloy specially made for the purpose in order for it to be patentable.

When thought of this way you realize that the very purpose of a computer, that is, a device designed to be programmed to perform new functions, is as an expressive medium for software.

 So, just like new alloys, new, faster, lighter, lower power computers are invented all the time.  You’ve improved the expressive medium, and it feels right that these inventions are deemed patentable.

Computers are “ductile” like steel, and creating software is analogous to hammering the computer (the expressive medium) into a functional shape.

 You still need to ask if that shape is novel, non-obvious and useful just as you would when someone hammers a new tiller blade out of steel,  but the use of a computer as the expressive medium does not make all software the expression of an abstract idea.

The problem I believe we’re trying to solve is that in some (many?) cases simply claiming that simple (obvious, not-novel) ideas become patentable simply because they are expressed on a “machine” known as a computer.  These are the “trivial” software patents everyone decries.

I’ll say two things about that.  First, if these ideas really are “trivial” then they should fail the novel, and non-obvious requirements.  No need to develop a new set of legal tests for that one.  And second (and with only a trace of sarcasm), the definition of a “trivial” patent is the one that you’re infringing. (i.e. I never write a trivial patent myself, but every patent that I infringe is a “trivial” patent that should never have been granted in the first place.)  Let’s not rewrite the patent law to handle cases that it is already equipped to deal with.  If the patent is truly “trivial” it should fall under the most basic test of patentability, novelty and non-obviousness, and if it’s not, then you should negotiate a royalty and get on with your business (it’s what you expect the licensees of your patents to do).

Wha t

follows are some thoughts about a recent Mass Hydrogen Coalition meeting on CleanTech financing.  The meeting was packed, with maybe 100 people crammed into a conference room at the Foley Hoag Enterprise Center in Waltham.

The presenters were VCs or investment bankers.  Most of the attendees where consultants, like me, or small businesses looking to get into the CleanTech space, a small handful of larger players were there.

My general comment is that everyone’s saying that the world has changed for this sector, but most of the rhetoric sounds more like  lessons learned than any real philosophical change among investors.

Of special note was the repeated claims that with the current stimulus plan’s emphasis on CleanTech, the government is now the largest CleanTech VC investor.  That seemed like an opportunity to reconsider how to build businesses in this space, but the rhetoric from the VCs and the small companies sounded like a colloquium at the Rush Limbaugh institute for economic theory.  ” Anything the government does is bad.

 I don’ t wan

t them choosing which technologies will win in the renewable energy space.  They’re idiots and they don’t know what they’re doing.”  (I’ll note parenthetically that nobody thought that an incentive that helped their specific sector was ill-conceived or stupid.)

Now, is this any way to talk about the largest new entrant into the CleanTech finance sector?  I think not (at least if you’re looking for money to fund your startup).  What will be required, however, is a change on the part of businesses to understand what “return” means to a government program funding a small early stage company, and how to distinguish this from the purely monetary return that VCs have trained entrepreneurs to discuss ad-nauseam in their business plans and pitch decks.

Here’s a new thought.  When pitching your business to a government funding program, make a thoughtful attempt to calculate not just revenues and EBITDA (as you would for a VC), but the number and kind of jobs that will be created.  Ask a typical chief executive how his (<- intentional gender choice) company is performing and he will likely offer financial performance numbers.

“Profits are up!  We’ve cut costs and our margins are bigger than ever!”  I doubt you’ll ever hear “we’ve expanded our workforce by 10%” or “we’ve raised wages by twice the cost of living this past year.”  But if the government is your funding source,

these are exactly the kinds of metrics, the kinds of returns that they

are likely to be seeking.

The government has no real interest in picking technology winners.  They’re interest is in maximizing the political capital that can be achieved with a given amount of funding.  Putting people to work in stable high-skill good paying jobs is the kind of thing that gets politicians elected, and it’s the kind of thing they’ll fund.  Make that case and you’ll get the money (of course you have to have your technology worked out as well).

The loss of quality jobs is a generational problem for the US.

 Paying for low-skill “shovels in the ground” will only delay the broader problem.

 Creating and training a new workforce to make things and to engage in continual retraining is the name of the game.

CleanTech provides that opportunity, and finds a ready and willing partner in the newest big VC in town: the government.

some random snippets from the evening’s presentations (words and ideas you may want to be familiar with when talking with the grown-ups).

• CleanTech is a systems field (you must consider the end-to-end consequences of any new technology)
• It’ s hard to do
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  something capital efficient on the generation side. This is the lesson learned by the early stage investors.  Creating a fuel to replace gasoline requires enormous scale, and thus enormous capital before achieve a return (the same is true for large wind and solar).

• Because of the above, most new projects are on the demand side because they are less capital intensive (efficiency is an example)
• VCs looking less for end-to-end and more for innovation licensing.
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   This is a business model question, and mirrors the biotech model, get the technology to the stage where it can be scaled, and let one of the big-boys scale it (they’ve already made that investment).

• Water is a hyper-local issue (it is the new oil).
• “The game is not worth the candle.” Definition: what we would get from this undertaking is not worth the effort we would have to put into it. The saying alludes to a game of cards in which the stakes are smaller than the cost of burning a candle for light by
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  which to play.  (<- a nice piece of jargon to impress your VC friends, though I believe the actual quote was the “candle is not worth the game,” which makes less sense to me).

1. moving and making making water
2. dealing w/CO2
3. create more distributed electricity
4. large scale energy storage
5. electric vehicles
6. design and build sustainable products
7. IT to manage energy use
8. smart grid, smart consumer
9. efficient land use
10. what to do with waste

Interesting Statistic

• US Navy is largest purchaser of renewable energy (cost of moving fuel is 60% of cost of war).

I’ve posted a link to a recent review and comparison of alternative energy sources

that seeks to rank the various options, including allied choices we can make about transportation.

 The study includes many factors for each

energy source,

including

energy security and mortality risks, attempting a cradle-to-grave analysis for each.

  This kind of study is required to really understand the implications

of choosing a p

articular energy source.

 For example, while Nuclear is “non-emitting” at the stage of power generation,

the study analyzes the impacts of emmissions throughout the process from mining to waste disposal.

 The study also includes the resource and terrorism risk associated with each competing technology, and nuclear scores near the bottom when all of these factors are tallied.

Like every study, there is much to debate (a nicer word than argue), but the study is well done, well referenced (so you know where the conclusions are coming from), and well worth referencing in any business plan that seeks to discuss the strategic merit of particular renewable energy technologies.

The bottom line: Wind and solar thermal, in combination with battery-electric vehicles are at the top of the list from a technical, environmental, and energy security standpoint.

  At the bottom

?  Clean Coal, Nuclear and photovoltaics (the current generation anyway).

The review can be found at the Journal of Energy and Environmental Science:  Review of solutions to global warming, air pollution, and energy security.

I am just coming back from a meeting of the MIT Enterrprie Forum SIG on digital media.  The session was on consumers social network, and an interesting discussion took place concerning ad-based revenue models in this space.

The question was asked: “If your companies are so successful then why is an ad-based revenue model the kiss of death for investors?”

1) Mass-Marketing is Dead (and the internet killed it).

Part of the answer is that ad-based revenue models have been given a black eye by general audience sites that do not form a focussed user community.  In other words “mass marketing is dead.”  If you are serving banner ads to a mass consumption site then you have a very low likelihood of serving anything useful to any particular user.  Combine that with the fact that people will “turn-off” your ads by simply ignoring them and your actual conversion rate will be very low.  That’s why $/impression is usually so low for these sites.

Google gets around this problem (and achieves relatively high ad-rates, by focussing the ads based on the search terms.  Social sites provide an answer to this problem by creating a focussed audience.

 If the ads can be tailored to that audience then ad-rates can be 10 times higher (according to the panel).

2) Facebook (yes, facebook).

The facebook problem is a question of what Hangout.com’s President and CEO Pano Anthos calls the “modality” of the site.  Why are people there

? For facebook people are there to catch up with freinds not to buy things.

Because of this re banner ads on facebook have a notoriously low CPM.

Pano’s gave a hilarious analogy to men’s room advertising.

 ”I’m just not there to buy things at that moment.”  So the modality of your site is important as it relates to what kinds of ads will work.

 An example was given from the mobile platform mocospace.

 People are on the site to interact with

their friends much like facebook in the mobile setting.  In this context the best form of advertising is not to advertise products, but rather to inform users about brands.  Forget click-through, you just want to inform, and support the site and the environment where the users are spending their time.

 So their most effective ads are album releases, movies etc, where they’re not expecting people to actually make a purchase, but just

to become aware of the brand.

3) What kind of ads are they anyway?

Finally, there was the great point raised about click-through and click-to-purchase advertising on the web.

 The largest and most well understood form of brand advertising occurs on television.  This is not a click-through or click-to-purchase medium and it has done quite well with advertising and vice-versa.  The same is true of print media.  The ads inform you of something, and that is their purpose, not to get you to make a purchase while you’re watching or reading.  The web need be no different.

 In other words, everything old is new again.

The name of the game is creating an audience that will be receptive to the information in the ad, presenting information that the audience won’ t immedia

tely ignore.

 The rest is old-school.  Everything old is new again.

We started writing “Friends” updates, and decided that blogging the progress of the project might be a good

form of PathMaking in its own right (that is, until we change the world).

Dear Friends of MakeThePath (FoMTP):

I’m sending this update to keep you in the loop on the progress of the MakeThePath project. In spite of the economy (or perhaps because of it, see below), cool things are happening, and I see an increased interest in community-building projects like ours.

Here’s what’s been up (in mini-blog form)

1) SBIR-grant

Just yesterday we submitted our SBIR (Small Business Innovation Research) grant application to the NSF’ s Software Engineering divi

sion. If we are successful, the grant will provide funding for the first phase of project development and will get us to an alpha-testing stage (which I hope some of you will want to try). Grant writing is always a bit of a chore, but it turned out to be a useful exercise in refining the technical details for how the algorithms will actually work (the precise details didn’t exactly make their way into the proposal, of course). Naturally, we are working on the alpha-version while the NSF deliberates,

2) Investors’ Circle Conference

I attended the Fall conference of Investors’ Circle, a group of investors (including angels) in the socially responsible investing space and made some contacts that should prove useful for

the project going forward. These investors face an interesting problem th at was the topic of much discussion

at the conference. The idea behind socially responsible investing is to maximize social returns as well as monetary returns. The problem is that monetary returns are simple to measure and compare between investments, whereas no standard exists for measuring social

return. In the past, socially responsible funds have employed so-called “negative screens” to screen out businesses that were involved in gambling, producing weapons, cigarettes, alcohol, etc.

However, the current phase of socially responsible investing is directed at funding companies that not only “do no harm,” but actually create social good.

The tricky part is defining “social good,” and measuring it in a way that allows different investments to be compared. Several “ratings organizations” were in attendance, and you can already see a battle of social metrics brewing.

It’s important, I think, because until investors can compare funds on some reasonable metric, they (we) will simply sort the choices by 5-year or 10-year returns, and choose on that basis.

A second theme that will be of more interest to the legally-minded among the FoMTP was a discussion of how fiduciary duty norms can inhibit directors from considering anything beside financial return in their role as directors.

Socially responsible investors are in an interesting position since they may have a seat on the board, and are concerned about their duties under Revlon when it comes time for their exit (e.g. sale of the company). There is a group working on creating what they term the B-Corporati

on, which would be a legal entity somewhere between the traditional C-corporation and a non-profit. The idea is to structure the company as a C-corp from an ownership and tax standpoint, but allow the company to explicitly include in their charter and bylaws directives to the board and management to consider other forms of shareholder value in addition to economic return.

Some states (including Massachusetts) already allow such considerations and the B-Corporation group is working to amend other state corporation laws (Delaware especially) to make such a structure possible. Green-Arrow is proud to be a Massachusetts corporation for just this reason (though we are aware that this will be a “challenge” down the road).

3) Are we out of our minds?

Finally, as the economy continues its slow melt, I have this motivational article from FoMTP Drew Fitzgerald.

I may have been out of my mind for leaving my job just as this was all happening, but at least I’m in good company.

Thanks Drew.

http://www.wired.com/culture/culturereviews/magazine/16-12/st_essay

Well, back to making the path, as we say around here.

Thanks for your support, and we look forward to getting something fun for your browser soon.

Best,

Scott

People often ask “isn’t oil at $40/barrel (or fill in your favorite number) going to kill all this CleanTech investing?”  The subtext is that we’ve been through all of this before in the 80s, when oil prices came down and consumers went back to purchasing large cars without regard to mileage.  The easy answer would be “yes, the same thing wil happen this time as happened in the 80s.”  In this post I’ve listed some of the major arguments that have been presented for why the current situation is different and why history will not necesarrily repeat itself.

1) Oil prices are currently low because global demand is low, and when the world economy begins to expand again, oil prices are certain to rise as they did during the 2000s. 

This is a simple supply and demand argument, the price has gone down not through an increase in supply, but because of shrinking

demand.  This was not the reason for the fall in oil prices in the 1980s.  When demand returns it will press up against supply limitations and the price will likely rise sharply.  

2) There was not a global concern about carbon emissions in the 1980s.

You can believe what you want about the causes of global warming, man-made, sunspots, planetary expansion, martians or any combination.

 The fact is that the world has reached a  consensus that human emission of greenhouse gases is a significant cause, and world governments, including the U.S.,  are working on greenhouse gas legislation and treaties that will provide a significant incentive to CleanTech businesses.  Any CleanTech executive who does not accept this proposition is leaving money on the table (a very un-businessman like thing to do).  By the way, if you have a non-man-made theory I’d love to hear it, I’m collecting them as a sort of hobby.  Leave a comment and don’t forget your primary references.

3) Energy Security = Economic Security = National Security.

A country that consumes more energy than it produces becomes reliant on others for a vital component of their economic well-being.

 This presents a basic strategic problem and students of history will know well that governments pay mightily to maintain ready access to needed resources.  In an increasingly crowded world, securing resources becomes more expensive thus making domestic production, reduced consumption and increasing GDP per BTU (i.e. efficiency) the obvious strategies in response.

 This was not a consideration in the 1980s, in part for the reason listed next.

4) The developing world is developing which means more global competition for energy.

When developing nations begin to create a middle class, energy consumption in these nations increases dramatically.  As the middle class gets a taste for meat and cars

and more modern homes and amenities energy consumption per capita rises.  In the c ase of Indi

a and China, the standard of living has a long way to go for a large number of people, and

the increased energy demand will be enormous.  These new market actors compete in markets for oil, and form relationships with oil producing governments to supply oil, in some cases removing it from the broader market.  This increased global demand was not in place in the 1980s.

5) Green jobs

are the acknowledged future for labor and national competitiveness.

CleanTech companies create more that new gadgets.

 They create industrial jobs.  These are the jobs of the future industrial base of the global economy, and the in-coming U.S. administration has pledged $150B over the next ten years to creating companies and thus jobs in this sector.

 No such job-creation incentive existed in the 1980s.

 P.S. $15B/year, that’s a lot of money.

6) A corollary to #5, economic stimulus = funding green-collar jobs.

The current economic crisis

has led to increased unemployment, with the U.S. auto industry and the many skilled jobs it creates teetering on the brink of collapse.  Every economic stimulus package currently being discussed to deal with the crisis contains as a primary goal, the creation of the “green jobs of the future.”  CleanTech companies should position themselves as the engines of worker retraining and redeployment that is necessary for us to emerge from the other side of this crisis.  Again, this was no the situation in the 1980s.

This still begs the question, will the nation ignore all of these strategic and economic reasons for avoiding a repeat of the 1980s response to lower oil prices?  Only time will tell.

I attended an MIT new ventures competition (the $100K competition) last night, and the mixer afterward I was asked the following question.

after describing the link I see between biotech and energy production.

“Do you think the energy density of plant-produced biodeisel will be high enough to really replace fossil fuels

?”

My answer was that as a liquid, biodiesel has a very high energy density, and is also very convenient for stora ge

and transportation (certainly when compared to hydrogen gas). However, I realize that the question is deeper than that (as, of course, is the answer).

The energy density question is not only about the final fuel produced, but incorporates aspects of how efficiently that fuel was

produced. This is where I think that growing crops in order to convert them into fuels may have serious efficiency problems. What a crop does is convert solar energy into carbohydrates, proteins, nucleic acids, fats, and all the other components of a plant. These molecules are in turn converted into liquid fuel. How efficient is this process?

One gets a small number of harvests per season.

Thus, the solar energy that lands on the field day in and day out, at roughly 1 kilowatt per square meter, is converted into the plant matter that is in turn harvested.

Forgetting about the process of turning the plant into useful liquid fuel (which requires some energy), let’s just imagine that we take all of the plant matter that grows on one square meter over the course of a 3 month growing period. Let’s say that’s 4 tall corn plants.

Now, let’s combust these plants in their entirety, capturing all of the energy possible. How much energy do we get

? How many calories? How many Kilowatt hours? I don’t know the answer to this, but it’s probably possible to figure it out. However, consider how much solar energy has fallen on that 1 square meter of land during the time these 4 corn plants were growing. Every day, this 1 square meter of land would produce about 5 kilowatt hours

of electricity per day if in the sunbelt. 5 kilowatt hours per day times 90 days = 450 Kilowatt hours. That’s about half of what the average family uses each month, so each energy user would require approximately 6 square meters to produce enough electricity (by this as yet imaginary 100% efficient process).

But, that’s not the point. This one patch of land can produce a half-month’s electricity use for the average American family. That includes running the fridge, and the TV and all those battery recharges, etc. etc.. Does it seem plausible that burning (again at 100% efficiency) 4 corn plants could produce that much energy

? I find it extremely unlikely. (I’d love to find the actual answer to this question.

How much energy could you possibly get out of 1 square meter’ s worth of corn plant

s? I highly doubt it would be 450 Kilowatt hours.)

So, growing plants as a means of capturing and storing solar energy for later conversion into a biofeul seems an extremely inefficient process.

Not only that, it’s got other problems, it takes water, and fertilizer (which takes energy to produce). As an important energy source, plant-derived fuels will presumably be grown by the most intensive processes possible, thus increasing use of fertilizer and pesticides (since no one’s goind to eat the corn, who cares if it’s poisoned). Not to mention the costs of planting harvest and refining, which must be added to the cost of each crop. The current ethanol market shows that corn for energy can in fact displace corn grown for food. That’s a good thing in the sense that it forces people to equate the different forms of energy we are capturing from the environment. But it is obviously bad if it’s merely a consequence of an inefficient process.

So, why not just cover the same farm with solar panels

? Not a bad idea, except the output of solar panels is electricity, which is not nearly as easy to store and transport as is any liquid fuel.

This is especially problematic if you want to capture solar energy in the areas where it’s done most efficiently and transport the energy elsewhere.

A solution? A continuous, in-line, solar energy capture process that produces liquid fuel directly.

Photons in, Biodiesel out (or at least something easily converted into biodiesel). The system would be a hybrid, photosynthetic oil producer. Some companies are looking to do this with algae which take in light and CO2, and convert it largely to fats in a continuous bioreactor. There are lots of engineering challenges here, of course. How to keep the algae alive under a variety of conditions, how and what to feed them under optimal conditions (it will take more than CO2 and photons), what is the maximum energy intensity that these organisms can withstand. But the principle is sound. Photons in, bio-fuel out.

These are challenges that can presumably be solved. However, another approach is to take a totally in-vitro approach, developing systems of purified photosynthesis proteins, and fat synthesis cascades in order to create a wholly bio-catalyzed process without living organisms. This will be much more difficult, but will presumably

be more robust. Robustness may not be that big a problem, since as it produces a liquid fuel, the facility can always be placed where conditions are most suitable, the liquid fuel stored and shipped (as it is now from say the Middle East).

This is the intersection of biotech and fuels production. Going beyond the genetically engineered plant, all the way to a bio-process for the direct conversion of photons, water and CO2 into biofuels.

Of course, this process won’t be 100% efficient either, but even if it’s only 1% efficient, it’s probably still better than growing corn for fuel.

Mention the word “regulation” to most business people and they will usually wrinkle their noses as if they’ve smelled something bad. For many this is understandable.

A manager’ s job i

s relatively complex even in the absence of regulation. Managing the various forces and constituencies while trying to maximize shareholder value can be tricky indeed.

Add to this “regulation” and now there is just meaningless red-tape and bureaucratic hurdles. For the majority of managers who believe that they would have obeyed the principles of the regulation even without being compelled to do so, it is just unnecessary cost. Understandable.

But their are two aspects of the situation worth pointing out. First, one bad apple doesn’ t spoil

the whole bunch. If a single b

ad actor violated social norms in running their business, say for example releasing industrial by-products into a river, conventional nuisance law would be up to the task. The very existence of regulation shows that the problem is wide-spread enough for people to bother with the overhead of getting the

regulation approved in the first place.

It’s like those signs that say, “No Loitering” an obvious sign that people do loiter here.

Or the signs on hair dryers that say “do not use this while in the bathtub.” Someone definitely used a hairdryer in the bathtub. We need the Clean Air Act because without it people pollute the air (not you, of course, but other people). We need the Clean Water Act because people really do fill in fragile wetlands, and pollute rivers (not you of course, but other people). We need the Endangered Species act because people really do destroy critical habitat that causes species stress and extinction (again, other people). For those who bristle under the weight of regulation, it is a sad fact, other people do things that spoils it for the rest of us.

There is a second aspect of regulation that is often missed by business managers, and I think this is partly because of the heavy burden placed on them by regulations they can never see themselves violating in the first place.

This second aspect is that every regulation is in fact an incentive for someone.

Regulations create and structure markets, and in so doing, result in a wealth transfer. In every wealth transfer there is someone who gives and someone who gets. For the person that gets the benefit of the regulation, it is an incentive. For example, before the Clean Air Act, there was essentially no market for smoke-stack scrubbing technology. The regulation was an incentive for investment in this technology, and the companies that had formed around solving this problem were the beneficiaries. Climate regulation will do exactly the same thing. Business managers are more accustomed to thinking, how can I limit my exposure to this new regulation? They have been missing the opportunity to ask, how can I capitalize on the market created by this incentive

?

Regulations directed at climate change are going to have sweeping economic effects, just like the economic effects of the negative externalities they seek

to avoid. There will be losers in this, those that have struggled against the regulation, and have attempted to debunk the science. But the objectors are dwindling now, perhaps primarily because they’d rather be at the table, then fight a futile battle against the coming regulation.

But even that approach misses what is perhaps one of the greatest business opportunities of our time, the opportunity to be the beneficiary of the incredible wealth transfer that will take place. The transfer will be from old technology companies (old-school power production for example) to new technology companies (carbon sequestration, alternative energy, energy efficiency etc.). On the horizon, Congress is preparing to pass some of the most significant business incentives in years.

There will be winners and losers.

I know who I want to work with…..