IP strategist: IP due diligence for fundraising

IP strategist: IP due diligence for fundraising

Classic IP due diligence considers the validity, ownership and encumbrances of rights, and sometimes freedom to operate. But venture capitalists are increasingly requesting a deeper dive into patent assets and strategies

Venture capitalists need to know whether the intellectual property owned by a start-up in which they are interested is perfectly aligned with the promise they are investing in. In reality, the quantity and the quality of start-up owned patents rarely meet that promise. However, this fact is not necessarily a deal breaker if there are competencies and opportunities to build an IP portfolio within an IP landscape under control. Taking time to methodically build and reinforce an IP portfolio is never wasted: it minimises the risks of failure and creates new value to monetise at the next exit point.

Once the classic due diligence has been performed, we recommend further in-depth IP due diligence. We start by getting to grips with the start-up’s business plan to understand where the promise and the value creation are situated. To this end, we need a business-focused team with the right technology and market competencies. We then assess the strengths and weaknesses of the intellectual property in relationship to the business plan; this is the internal diagnosis. Once this is complete, we analyse the IP landscape to detect and qualify threats and opportunities, the level of risk to enter such new market and the competition; this is the external diagnosis. Taking into account both the business plan and the analysis of strengths, weaknesses, opportunities and threats, we then define the IP strategy roadmap. Finally, we implement the tools and key performance indicators to follow up this IP roadmap.

The main idea behind this in-depth IP due diligence is to gain a broad overview of the start-up’s IP protection and not to focus only on what the venture capitalists already have. Thus, the first step of the internal diagnosis involves breaking down the start-up’s innovative product or service in successive technological silos.

This part of the methodology is one of the most important. If there are too many technological silos, it is critical to focus on those which bring the most added value and differentiation to the start-up.

Once the technological breakdown is complete, the internal diagnosis can begin. It starts with the patents which we align along the silos. We check that these are granted (extended) in the right territories, and that the claims cover the product or service and match the expected competitive advantage.

A highly sensitive point is to understand whether the patents could be used against competitors to protect market share. Thus, design-around possibilities and infringement detection are two critical criteria to be considered. Indeed, the fact that patents are granted and filed on the right market does not necessarily mean that they are strong enough to provide a monopoly. It must be difficult to design around the patents and easy to demonstrate any infringement.

The true value of this IP protection can be appreciated only in relationship to the external landscape of the start-up, assessing the dynamics and the aggressiveness of the domain. A weak IP position in a slow and peaceful domain can be managed; but in a fast-evolving, complex and litigious domain, it can become extremely dangerous for the survival of the start-up.

A macro analysis is insufficient to assess the opportunities and threats in the environment. These should be assessed through a detailed analysis of the landscape, searching for patents that could be blocking the start-up’s development, as well as those that could be acquired to reinforce its IP position and potential partners for collaboration. These searches must be performed for each technological silo and the results aligned along them.

The final objective is to synthesise the findings to provide an overall view of the strengths, weaknesses, opportunities and threats. Of course, such analyses are rarely entirely positive, so an IP roadmap must be defined and implemented in order to reach a position which matches the promise of the start-up.

The IP roadmap consists of an action plan with milestones which aim to move the start-up from an initial weak IP position to the best placement not only for its own success, but also for the shareholders’ benefit. An example of an IP roadmap is as follows:

  • File for additional patents to reinforce the portfolio, using the IP landscape to identify white spaces;
  • Search for prior art relating to blocking patents in order to be prepared for an invalidation action – design-around efforts can also be performed for more security;
  • Use the patent landscape to identify the best partners and accelerate product development based on existing competencies and technologies; and
  • Abandon patents which are clearly understood to have no value for the company, reducing the associated costs. Additionally, it is sometimes critical for a start-up to license out existing intellectual property for other application areas or territories in order to generate new cash flow.

This in-depth IP roadmap cannot remain static as the start-up’s environment changes; threats evolve and must be monitored. Start-ups’ strategies often change too, so the IP roadmap must be continuously adapted to reflect this.

In-depth IP due diligence is becoming increasingly business oriented and must be performed by, or with the support of, business people. It is no longer merely a legal opinion which is required by venture capitalists, but requires the support of IP strategists. And as was concluded in “Patent positions and start-up success” (IAM issue 70), “you can’t trust the start-up executive team to perform this alone”.

Patrick Pierre is senior vice-president at Questel Consulting, Paris, France

Unlock unlimited access to all IAM content