Improve VC profitability with IP portfolio management
Despite all the glamor and charm that surrounds the Venture Capital industry, one would expect the investment returns of venture capital funds to be significantly higher compared to other investment vehicles that are more widely available. However, industry research indicates that over time, the returns on venture capital have been roughly equal to those on the broader stock market. In fact, more than half of all venture capital-backed companies fail and roughly the same 50% of all money invested in venture capital funds is lost. This article looks at how a comprehensive IP management strategy could help venture capital firms reduce their risk and increase the performance of their respective funds.
Based on some conversations I’ve had with people in the venture capital industry, the statistics above don’t offer a complete picture. In addition to the half of venture capital-funded businesses that fail, there are those that are described as “the walking dead,” that is, businesses that neither close down nor provide the substantial profits needed to satisfy typical venture capital models. A panelist I saw at a venture conference last year suggested that for their financial model to make sense, they needed at least 1 in 10 companies to provide a 20 times return on their investment. This could be of particular concern for the industry, given the emerging trend towards fewer liquidity events and lower value.
But what if a hedge fund could extract incremental investment returns from its portfolio companies, including bankrupt companies and so-called dead companies? I believe that a comprehensive IP management strategy across portfolios could provide higher returns for venture investors.
IP due diligence to reduce business risk
Venture capitalists often invest in companies in the early stages of their respective life cycles. When making the investment decision, the venture capitalist bets on the business idea, the management team; And whether they know it or not, they are also betting on the intellectual property that sustains the business.
It is critical that venture capital firms conduct proper and appropriate due diligence in support of their investment decisions. Sorry, but having a list of patents and applications is not enough. Investors need to understand whether or not patents are strong, with adequate coverage for the business and technology in question. The following quote sums it up better than I can:
“In particular, before investing in a new business idea for a new company, why would you not want to know if you can own the business idea in the long term or if you have a minimal opportunity to innovate freely in relation to that business. ? Or why wouldn’t you want to know if another company has invested $ 100,000 or more in patent rights alone in the new business idea you are researching? “ – from IP Assets Maximizer.
These all-important questions need to be answered during investor due diligence. However, keep in mind that landscape maps from topographic patents or other abstract visualizations do not represent a sufficient level of analysis. They may be an improvement over a simple list (although some might argue that point), but a proper analysis should involve a detailed examination of the patent claims in the context of the business and technology in question.
IP portfolio management to reduce costs and increase margins
Although most portfolio companies funded by a given venture fund will be relatively small and have a relatively small patent portfolio, it may be worthwhile for the venture capital to look at the entire IP portfolio together.
I did a quick scan of a couple of regional venture capital firms: With a relatively small portfolio of companies, these firms had an invested interest in over 300 and 600 patents. By corporate standards, these are sizeable portfolios. I would expect to find even bigger portfolios with bigger venture companies.
In companies with portfolios of this magnitude, it is important to understand the portfolio in multiple dimensions. For example, IP professionals, marketers, and business leaders want to know which IP assets support which products. Knowing these relationships can allow a company to lock in competitors, lower costs, increase margins, and ultimately increase profitability for investors. Additionally, they will want to categorize their patents by the markets and technology areas they serve, as it helps them understand whether their patents align with the business approach.
Bringing this discipline to IP portfolio management has the added benefit of revealing patents that are not critical to the company’s business. With this knowledge in hand, a typical company will seek to reduce costs by letting patents expire, or it may seek to sell or license its sub-patents, thereby creating a new source of income.
Intellectual property licenses to increase profits
Patents that are not critical to the business of the owner company can be valuable to other companies and other industries. There are some well-known examples of companies that have been able to generate significant revenue from their sub-patents through active licensing programs – companies like IBM and Qualcomm come to mind. However, there are other companies that have generated significant profits by monetizing their complementary IP assets.
In the case of a portfolio of venture capital firms, each firm may only have a small number of sub-patents. But across the entire portfolio of companies, the venture company may have rights to a significant number of patents that may be valuable to other companies / industries.
We can extend the concept of secondary asset monetization from the top risk portfolio companies to the “walking dead” and even the defunct portfolio companies (although with the latter two groups, we may be less concerned with the distinction between core and secondary patents). In many cases, the business model and due diligence that supported the original investment in these was likely strong, but the business failed due to execution or market timing issues. In many cases, the underlying IP assets may remain fully valid, valuable, and available for entry into a specific licensing and monetization program.
A multi-million dollar stream of licensing revenue would nicely complement periodic liquidity events in today’s VC market.