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
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
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: 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
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.
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:
- 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
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.