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30% ROI Anyone? (8) – Real Numbers
Continuing from the last post, my long-time followers might know that every year, I try many new approaches, essentially “R&D,” using my own funds to experiment and learn through trial and error. Out of around 50 approaches I’ve tested over the years, costing at least seven figures, I have only been able to find about 5 sustainable ways to generate steady passive income. This time, I’m writing this series because I’ve completed my testing of patent litigation financing myself and have real numbers to share.
According to their disclosures, the return rates for the first phase case groups over the past five cycles within 12-18 months were 16%, 26%, 25%, 25%, and 30%. Now, the returns are generally stable at over 30%. Thus, in all conversations, they confidently cite a return rate of around 30% as a future guideline.
Initially, I planned to invest in the first phase fund just to test it out, but I happened to invest right when they were preparing for their first trial. According to them, the timing was perfect and much faster than the first phase fund, with the trial starting in two months. They predicted a high likelihood of settlement since the damages exceeded $100M, and they would accept a $60M settlement, expecting to recover both principal and profit within 30 days.
I was a bit anxious and asked about the case details. They said the first trial case wasn’t a patent case but a commercial one. What happened? The plaintiff’s lawyer, who had known them for years (the lawyer community is indeed small; all the lawyers involved in my recent lawsuits know each other and have worked together before), had already spent several million bringing this case to its current stage. However, the shareholders of the plaintiff, a large company, no longer wanted to spend big money on the lawsuit, even though the chances of winning were very high (according to the fund, the evidence was overwhelmingly in their favor, making it almost impossible to lose the case 😂).
Why didn’t the plaintiff’s shareholders want to continue? Because the plaintiff is a tech company, and as everyone knows, the valuation method for tech companies in each financing round is based on multiplying recurring revenue (a very simplified explanation here). In other words, investing cash to win a lawsuit and receive a large compensation is one-time income, not recurring revenue, and doesn’t help with their valuation or future IPO. If they invest the same cash into the business to increase recurring revenue, the valuation would increase, aligning with the shareholders’ core interests 😂. So, the shareholders wanted to find a litigation fund to take over the case.
Since the fund’s lawyers and the plaintiff’s lawyers were long-time friends and had followed the case for years, when the situation changed, they quickly made a deal, and the fund took over the case.
At this point, all critical work was completed. According to the other party, even during the deposition stage, employees and managers of the defendant company provided evidence of how they were given orders by their management to manipulate sales data to avoid paying the plaintiff a significant amount of sales commissions. In short, they couldn’t see how they could lose this lawsuit.
I said, if the risk is so low, it’s worth a try. What’s the expected return? They showed me the model. If the defendant agreed to settle for $60M before the trial, the return rate would be about 300% in 30 days 😂. I was skeptical and asked what if the lawyers passed away?
They said each case has a legal team, not just one lawyer. They laughed, saying they had encountered a situation where a lawyer got hit by a car, but another lawyer continued, so there was no risk of disruption.
I asked what if they win but the defendant refuses to pay? They said they conduct an asset search for each case beforehand. That’s why the defendants are usually well-known multinational companies, ensuring they have enough assets to enforce the judgment. After the judgment takes effect, the defendant has a certain period to appeal. If they don’t appeal and delay further, interest accumulates daily on the multimillion-dollar judgment. So, for the defendant, the smartest move is to pay early; otherwise, the investors end up with more money and higher returns.
I said okay and also checked data from other litigation funds. External data suggested an average lawsuit return rate of around 20%-30%, so I decided to try a small investment.
They said this case could accept small investments since the amount needed wasn’t too high, and there was an investment limit per person 😂. Normally, such a small amount wouldn’t be possible for patent cases. I agreed to try this out. If their judgment was accurate and the model proved profitable, I’d invest more each year.
Then came the trial, the verdict, and the 30-day waiting period. Did we win? Who got paid? What really happened? Let’s just say, everything you see in the movies happened 😂. More on that next time!