RPX Corp. (RPXC), the patent aggregator and provider of patent risk management services, recently made a $5 million debt and equity investment in a digital security startup called Tyfone, which CEO John Amster said may be a precursor for future deals.
Amster said on a conference call with investors on Wednesday that as part of its goal of pursuing new uses of the $381 million on its balance sheet to generate new business, San Francisco-based RPX invested in Tyfone.
“They have a very high-quality patent portfolio and the logic of our investment is twofold,” Amster said. “One, by providing asset-backed financing, we are enabling Tyfone to use its patents to raise growth capital without litigation or monetization through an NPE. This clearly mitigates risk for our members. And two, it gives RPX a chance to participate in the upside of a promising growth company.”
Portland, Oregon-based Tyfone is an 11-year-old startup that develops software and hardware security solutions that help clients in industries like finance, healthcare, and government securely manage data and digital assets in the cloud. The company was founded and is run by CEO Siva Narendra.
“Tyfone’s Secure Transaction Platform is powered by our patented, The Connected Smart Card security hardware for the client side endpoint and Tyfone’s proprietary U4ia software,” the company says on its website. “The secure transaction platform and its rich set of software APIs, available on all major mobile platforms and personal computers, enables strong authentication, secure access to sensitive information and enhances transaction security for all use cases.
Narendra couldn't be reached for comment.
“We believe transactions such as the Tyfone deal represent a good use of our capital that is in line with our strategic focus of bringing efficiency to the patent and broader legal market,” Amster said. “We are consistently assessing a variety of internal and external investment opportunities that can leverage our capital position, as well as our technical and operating strengths.”
Allen Whitescarver, a spokesman for RPX, declined to comment.
The investment in Tyfone appears to mark the first time RPX has made a direct investment in a startup, though it spent $5 million on a patent license in 2012 from WordLogic (WLGC), a Vancouver-based startup that today holds patents that cover technology to turn a smartphone keyboard into a web browser.
If RPX uses its balance sheet for more such asset-backed deals it won’t be following in the footsteps of former RPX co-founder Eran Zur, who runs the secured IP investing business of Fortress Investment Group (FIG).
New York-based Fortress led an $11 million investment in TriPlay Inc., a privately-held cloud-based computing company in April.
Fortress also invested $15 million in Marathon Patent Group (MARA), and pledged to invest up to another $35 million to help Marathon expand.
Fortress also made smaller investments in Inventergy Global Inc. (INVT), SITO Mobile (SITO), Netlist Inc. (NLST), Crossroads Systems (CRDS), Document Security Systems (DSS) and Andrea Electronics (ANDR).
All those public companies have seen their shares decline since they accepted financing from Fortress. Some including Inventergy and Crossroads have had to raise money to repay Fortress early because of the drag the secured funding is on their monetization efforts.
Zur couldn’t be reached for comment.
RPX also owns a minority stake in patent monetizer Spherix Inc. (SPEX), acquired as part of the purchase of patents from the Rockstar Consortium.
“Fortress is investing to sponsor patent litigation,” said Rob Kramer, managing director of Altitude Capital Partners in New York. “I don’t think RPX is trying to compete with Fortress. This is just another clever way of buying assets. They’re structuring it differently. They clearly have the balance sheet to do it.”
RPX gets the bulk of its revenue and growth from subscription fees paid by its clients, which include major technology companies including Apple Inc. and Samsung. They rely on RPX to acquire portfolios of patents to keep them from falling into the hands of patent trolls who will pursue infringement actions.
Earlier this week, RPX posted a 14.8% declined in net income to $8 million, or 14 cents a share, on higher costs and expenses. Revenue rose 5 percent to $67.6 million from $64.3 million.
When RPX purchases a patent portfolio it automatically licenses it to its members.
RPX also brings petitions for inter partes reviews (IPR) to invalidate patents.
“I view the filing of IPRs as just another service offering to their clients,” Kramer said. “They were smart to do it.”
The filing of IPRs to invalidate patents also may give RPX a synergistic way to avoid having to pay insurance claims, he said.
For his part, Kramer added that although RPX’s insurance business is currently losing an “immaterial” amount of money, the business is growing faster than expected.
“It could turn into a real business for them,” Kramer said. “The people they’re selling insurance to aren’t the big companies, they’re the small- to mid-sized companies. The holy grail is finding out how to sell insurance to the big guys. That could be bigger than their core business.”
Shares of RPX fell 78 cents or 4.8% to $15.33 Wednesday in trading on the Nasdaq. They’ve traded between $11.94 and $17.31 over the past year.
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