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$2.5B Apple v. Samsung Urges Disruptive Early-Stage Investment Due Diligence

by Andy Gibbs, August 2012

Patent-based, early stage due diligence on start up business plans creates critical investment decision-support intelligence that no amount of traditional due diligence will ever discover.

Early stage patent due diligence on start up business plans creates critical investment decision-support intelligence that no amount of traditional due diligence will ever discover.

Let’s be candid. We all know that as soon as one venture capitalist funds the first company in an emerging market, all the other hens in the coop get their feathers in a tizzy, and rush to keep up with the Joneses – to show their investors they've found the real winner - or so they hope.

That rush to find and fund an “also ran” is competitively driven – find the best looking start up before someone else funds them. In the 2000s, everybody had to have a "peer-to-peer" music play, a social media start up, and an online grocery store. Today the Joneses have a mobile APP in their portfolio, so we need one, too.

Rushing to find and fund an "also-ran" to quickly add to an investment portfolio breeds carelessness – most of those start ups will become money pits. (Can you hear the DOT.COM whisper at VC events?)

Apple v. Samsung has just disrupted the investment due diligence game forever – and the new model won’t be taught at Wharton or Harvard for another five years.

For starters, the record-setting $2.5B damages claim clearly illustrates that intellectual property HAS ARRIVED as a core, revenue-generating business operation – right on schedule with my 2009 prediction.

Obscured is the notion that, if IP is now a core business operation, the strategy to create a dominant position in emerging markets must begin at the business-plan stage – long before a company’s first product hits the market. and most certainly before venture capital investment.

Since tomorrow’s market share dominance will be won in the Circuit Courts (not in the marketplace), old-school review of an early stage company’s IP isn’t good enough.

DISRUPTIVE DUE DILIGENCE

DISRUPTIVE DUE DILIGENCE: An innovative technology and method to improve the venture capital investment due diligence process in ways that the market does not expect.

Investment decisions boil down to a few fundamental metrics: credible revenue forecasts, sustainable competitive advantage, and a clear exit strategy at maximum value.

Patent-based due diligence discovers start ups that are best-positioned to dominate, and staged to identify a credible acquisition exit - years in advance.

You're thinking "oh - the 'patent' word - that’s for our attorneys” and you're patently wrong.

Attorneys perform expensive LEGAL due diligence, and we’re still looking for business support for an investment decision.

ACQUISITION DUE DILIGENCE SHOULD INCLUDE PATENT DUE DILIGENCE

Augmenting traditional due diligence with patent due diligence delivers decision-support intelligence available through no other source - we'll get to the example in a moment.

In contrast to traditional due diligence (running the business plan information through a standardized verification process), IP-focused due diligence requires an interpretation of explicit and implicit information extracted from patent and related data.

In other words, you’ll need to CREATE information from IP data that doesn't exist until a human creates it.

Patent attorneys only do legal work – paying them to learn how to correlate patent data to investment decision support would be cost-prohibitive - assuming patent attorneys even want to do that kind of work.

Here is simple scenario.

Huge markets create fierce competition. Your investment target's business plan may claim huge opportunity, but business plans almost always under estimate (or are oblivious to) future competitors sitting on huge patent portfolios, waiting for nascent start ups to develop the market.

The EXIT is your end game, so start there, and work backwards to the investment.

Researching the patent landscape will identify companies already entrenched in the technology sector. Whether or not the “Biggies” are currently applying that technology to products in the start up’s planned marketplace is irrelevant. When the emerging market starts throwing off enough revenue, those technology owners WILL jump into your company’s sandbox.

With patent-extracted information, investors can:

  1. Project possible competitive responses to the company’s products: A competent technologist can correlate those patent holdings to the start up’s planned products, and opine on whether those patent holdings pose a significant threat. This is not a legal due diligence, but rather a broad view of how “patent-dense” your target market is, and what companies dominate that technology domain.
  2. Strategically establish a future market position within the technology domain. Patent strategists can direct the early stage company (and investors) on where there are “holes” in the patent space available to capture and patent. These holes may NOT be absolutely aligned to support your company’s planned products, but we’re talking about capturing “IP Market Share” – bargaining chips that are so closely aligned with the Biggies’ products that you’ve successfully set up:
    • A defense to infringement challenges when Biggies want more than a simple corner of your sandbox,
    • An Exit Strategy. Patent based due diligence identifies the obscure and non-obvious Biggies that would find your company's patent assets a logical compliment in an acquisition. Further analysis of the patent holdings for each of them individually, such as filing dates and trends, patent volume, paints a picture of their product/market strategy. Patents are a reliable proxy to estimate their internal R&D budget to  address your start up's targeted domain. Creating an IP strategy to saturate the available IP “white space”, and not overlap "Biggie's" technologies sets up a future high value acquisition.

      On the other hand, start ups with no IP, or thin but threatening IP sets the Biggie in motion to sue and destroy. It's cheaper than an acquisition, and insurance that the start up isn't acquired by one of their competitors.

Patent-based due diligence and the resulting information extraction augments traditional early stage due diligence with critical decision support information that really matters.

Typically, a patent due diligence report is the fastest and most inexpensive path to the investor's decision to "double down", or walk away.

Disruptive due diligence can find, and help create, the best disruptive start ups.