When the opportunity comes along to invest in a technology company the pressure can be on to secure the deal - at the right price, of course. Before signing on the dotted line however, an investor must complete the appropriate level of due diligence to understand the hidden risks.
Importantly, investors need to verify the company they are planning to invest in has both the IP rights and the IP strategy in place to drive its business plan through to a financially successful exit. To do that, investors need an approach that looks beyond a list of IP assets and takes into consideration the company’s IP strategy, which is rarely an explicit part of the stated business plan.
A good analogy for the importance of IP due diligence is the iceberg – the risks are largely hidden and potentially destructive and, in order to see them, you must look beneath the surface. For a commercial and objective view of the IP involved in any investment opportunity, there are 6 key questions every investor should ask.
1. DO THEY HAVE THE IP STRATEGY TO DELIVER THE BUSINESS PLAN?
The presence of a solid IP strategy that shows an understanding of how the IP rights will help to deliver the business plan should reassure an investor. It demonstrates that the company understands its commercial objectives and responsibilities, including how their investment will be safeguarded during future funding rounds or at exit.
2. DO THEY HAVE THE REQUIRED IP RIGHTS TO SUPPORT THEIR BUSINESS PLAN?
An investor needs more than a long list of IP rights owned by the business. An effective due diligence process will map these rights against the products and commercial opportunities described in the business plan to determine if they have the necessary rights to support the longer term objectives.
3. WHO OWNS THE IP?
Innovation, especially in start-ups, can occur before commercial relationships and business processes have been formally defined, which can make determining IP ownership less clear-cut.
4. HOW DO THEY MANAGE THEIR IP?
The way an organisation manages its IP can provide an indication of their commercial ambition and how serious they are about maximising the value of their innovations. It is always encouraging to see IP being discussed at board level, as well as a disciplined approach to processes such as innovation capture and evidence of an internal IP register. Is the company ready for subsequent rounds of IP due diligence?
5. HOW DO THEY PLAN TO DEVELOP AND MARKET THE TECHNOLOGY?
An investment prospect may have an exciting plan to collaborate with one or more third parties to develop and market their innovation. Under these circumstances, it is important to understand whether such collaborations have been factored into the IP strategy and, if they haven’t, how far such relationships have progressed. In certain circumstances, a company may have inadvertently weakened their IP position.
6. WHAT IS THEIR ATTITUDE TO RISK?
An effective IP due diligence process will examine how thoroughly the company has explored its freedom to operate (FTO) position and what steps they have taken to mitigate for any risks that may have been identified. FTO is not an issue that can be left until an opportunity to exit presents itself.
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