For those who invest in businesses, intellectual property (IP) is often seen as something to be covered off in terms of due diligence at the investment stage, but is not significantly addressed thereafter. Investors tend to devote much more of their energies to scrutinising the business plan and financial projections.
But what is the reason for investing? Obviously, to deliver the maximum return. IP can make a huge impact on that. Taking the IP of the invested business seriously and ensuring there is a strategy to manage it, can multiply value on exit. Smart investors are realising this more and more.
What does an IP strategy for investors look like?
Making the investment
You need to understand what kind of business you are looking at, and what is the most suitable ‘mix’ of IP for that business. Investors often feel most comfortable knowing there is a portfolio of patents, but how much effort is put into checking the actual quality of those patents? And if the business is a software or internet play, patents are unlikely outside the USA. If so, you need to check for strong copyright protection. Does the business actually own its IP? It might all be licensed-in from a third party. Could third parties leap out of the woodwork after you have committed your money and shut the business down because it infringes their IP? A wise investor will do some research on the general IP ‘space’ in which the business operates.
Building the investment
This can make all the difference to valuation on exit. The investor needs to work with the management of the business to ensure that its IP strategy is aligned with the business strategy. The growth of the business should not just be about revenue. To make it scaleable and saleable, it needs good IP. Thus, if the plan is to expand into certain geographical markets or fields of activity, the IP coverage needs to be staked out beforehand. This can make the difference between a business operating in a market where competitors are kept at bay, and one which is crowded with ‘me-too’ businesses. Implement sensible procedures to identify, evaluate and as appropriate protect newly-created IP, so that the pool of valuable IP assets is added to steadily.
Preparing for exit/flotation
Twelve months before planned exit, start making sure that the business’s ‘IP story’ is as good as it can be. Deficiencies in the IP can be an easy reason to discount the price, or even walk away from a purchase altogether. Check in advance that the business has all the IP it should have, in the right names, and covering the right markets. To the extent possible, plug any gaps.
If investors in businesses ensure their companies are driven with a sound IP strategy throughout, they will find their returns are increased many times over.