A very experienced (and wealthy) technology investor once told me "if you want to make a small fortune in technology start with a large one." Same advice as every week we see professional and part time investors that have put millions into tech ventures that have gone wrong. It often falls to us to deliver the reality check: not only will this venture not deliver Scrooge McDuck like wealth, but more critically, it was never going to.
What is surprising is often it is possible to tell in advance that a venture will not succeed. The secret? Get all your IP ducks in a row by undertaking proper intellectual property (IP) due diligence before investing.
Why is intellectual property due diligence important? If you're investing in a technology based deal (which could include acquiring a tech business or concluding a strategic alliance, development agreement or joint venture with one) then most of the value is likely to be in intangible rather than tangible assets. You are after all investing in technology not a landscaping business, residential property or the corner dairy! Consequently if most of the value is in the intangible assets, then those intangibles will be central to the venture's ultimate success or failure.
A few of the investment train wrecks we've seen:
• A ground breaking tech with "bullet proof IP" which basic due diligence revealed had been publicly disclosed decades earlier rendering the IP essentially valueless.
• A technology with "broad patents" which on closer inspection were actually very narrow given a competitor owned earlier IP, which the investee venture was now infringing; and
• Genuinely valuable IP that regrettably was not owned by the venture at all but by a disgruntled former contractor.
The reality is that in any of these situations the venture is highly likely to fail, or at the very least generate returns that are significantly lower than it would otherwise, had the intangible assets been strong and clean. In short, if the intangible assets are stuffed, the venture is stuffed.
IP due diligence not only reveals threats, it also provides valuable international market intelligence in the process: who is developing or using similar technologies, the state of development in the segment, potential opportunities etc. This becomes a target list of future customers, development partners, collaborators and further investors.
A few rules of engagement for effective intellectual property due diligence:
Intellectual property due diligence is not "does it have a patent?" Yes I No, tick ...· move onto "IT due diligence". If that's your idea of intellectual property due diligence well then a fool and his money.
Don't ask the venture's patent attorneys for their take on the IP, they are unlikely to suddenly "mea culpa" and admit the intellectual property they've been paid to protect is flawed.
Don't only look at patents - Intangible Assets frequently include trade secrets, copyright, design rights, brands and other assets - focusing solely on patents blinds you to other opportunities and threats.
Don't assume the chain of title is clean - who actually owns these intangible assets? Is it already encumbered, if so how?
Do investigate whether the intangible assets are actually aligned with the technology itself and the venture's longer term development strategy.
Effective IP due diligence should at minimum include a comprehensive, international, multi-lingual prior art search, an in depth analysis of those search results to establish IP position, technology alignment and any infringement issues plus a detailed chain of title examination.
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