Why predicting the success of a venture doesn’t need a crystal ball

Failing to conduct Intellectual Property due diligence has led to investors losing millions they didn’t need to.

By Paul Adams, CEO, EverEdge IP

A very experienced (and wealthy) investor once told me “if you want to make a small fortune in technology start with a large one.” Sage advice as every week we see not only part-time but also professional investors that have put millions into 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? Undertake proper intellectual property (IP) due diligence before investing.

Why is IP 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, property portfolio or the corner dairy! Consequently if most of the value is in the intangibles then the IP that underpins those intangibles will be central to the venture’s ultimate success or failure.

  • Here are just 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 IP been strong and clean. In short, if the IP is 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 or acquisitions, development partners, collaborators and further investors.

A few rules of engagement for effective IP due diligence:

  • IP due diligence is not “does it have a patent?” Yes / no, tick… move onto “IT due diligence”. If that’s your idea of IP 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 IP they’ve been paid to protect is flawed.
  • Don’t only look at patents – IP frequently includes trade secrets, copyright, design rights, brands and other assets – focussing solely on patents blinds you to other opportunities and threats.
  • Don’t assume the chain of title is clean – who actually owns this IP? Is it already encumbered, if so how?
  • Do investigate whether the IP is 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.

Like any due diligence exercise using a professional, knowledgeable and most of all, independent, firm is critical. This is particularly important in New Zealand where the IP industry is very small.

The good thing about IP due diligence is that it can be carried out early in the investment process and is relatively inexpensive. And that is a positive bargain compared to losing millions of dollars.

Paul Adams is CEO of EverEdge IP, New Zealand’s largest and most successful intangible asset management and commercialisation firm, winner of the Outstanding IP Leader Award, China 2012 and ranked as one of the world’s Top300 IP Strategists. www.everedgeip.com.