How can investors use IP due diligence to minimize the risk around a potential investment?
As an investor you know no one will ever cover their weaknesses and worries in their pitch. They will accentuate their strengths. They’ll enthuse about their products, their plans, and the profits they’ll generate with you onboard. They’ll do everything to paint the most attractive picture possible in the hope it will persuade you to take the plunge. The only problem is you need much more than just their word for it.
As an investor, you need to establish that everything you are being told is not only true but also in place before you can even consider closing an investment. An increasingly important part of this process is IP due diligence. With so much value hidden the intangible elements of an investment, you must be sure any business you plan to invest in has a solid IP strategy in place to protect the future of your investment from IP-related risks at the exit or during further fundraising rounds.
The only problem is, traditionally IP due diligence has been a predictable exercise with very narrow parameters. You will undoubtedly have seen IP due diligence become far too detailed and far too expensive in the past, delivering little more than a long list of IP rights that offer little if any insight as to the value those rights contribute to the business.
What is valuable IP due diligence?
As an investor, you need a commercial view of the IP. You need to verify the company you are planning to invest in has everything in place to drive their business plan through to the exit you want. This is a very different exercise and an exercise that should involve:
Thoroughly reviewing their business plan from an IP perspective, including the technology roadmap.
Stress-testing the IP strategy they have in place to deliver that plan.
Checking whether the ownership of their IP is in order.
Investigating the way they manage their IP within the company (is it a Board level consideration or is it managed at a lower level?).
Considering how they plan to work with third parties to develop and market the technology, and the impact this may have on their IP strategy.
How important IP is to the business.
How IP is handled and managed internally.
Identifying any immediately obvious fundamental IP risks (i.e. inadequate protection, poor IP management, ownership issues, known Freedom to Operate FTO issues).
Setting the immediate actions you will need to take to mitigate any future risks.
Ascertaining exactly how best to support future valuation on exit.
At Potter Clarkson, we have developed a structured and straightforward approach to commercial IP due diligence. It’s based on more than a decade of experience working with investors in the UK, the Nordics, and Germany examining investments ranging from £2m - £50m.
Unlike others, our approach doesn’t start with examining paperwork at a distance. Instead, we adopt a genuinely collaborative stance. We work closely with the people in the business in question to gain a good understanding of the company’s commercial products/processes before reviewing the IP position, including attending a technology briefing provided by the company when appropriate.
From there we can determine:
How the IP is managed internally.
How the existing and future IP maps to the commercial products/processes.
Whether there are any collaboration agreements in place and the scope of these.
If there are any ownership issues.
If there are any known FTO issues and if there are any known FTO issues.
If the company has already obtained any formal FTO opinions.
Unless agreed otherwise, provide a formal written IP due diligence.
If there is any pre-investment FTO needed.
If there are any license agreements in place.
We then summarise our findings in an IPDD report solely for the benefit of investors. We do this first in person so you can ask any questions and drill into the details as/if required then in a written report so you can factor our findings and recommendations into your decision-making process.
Better IP DD, better data room!
Better still, if the company has gone through this process with an experienced IP team (including both patent attorneys to examine the technical side and IP solicitors to look at the supporting licensing and other commercial agreements), your life will be easier. You will find yourself in a data room that delivers exactly what you need to make your investment decision without having to root around or, worse, keep asking for additional information:
A summary of current IP strategy.
A list of all patents, registered designs, and registered trademarks with status information (including web links to the published applications on the relevant registers, ownership details, and comments on relevance to the company’s commercial products/processes).
An outline of key trade secrets relied upon by the company.
Copies of assignments.
Copies of license agreements.
Details of any collaboration agreements.
Details of further innovations in the R&D pipeline.
Details of any potential FTO risks (including a summary of any FTO analysis that has already been conducted).
For early-stage companies that don’t have a well-established IP position or related procedures, we usually conduct a preliminary innovation capture session with them to identify IP and determine key IP issues.
Potter Clarkson is Europe’s leader in IP due diligence. If you would like to speak to one of their dedicated investor team to find out more about how IP DD can help you reduce the risk around a potential investment, you can email them direct.