Archive for 'Due Diligence and Risk Assessments'
Michael D. Moberly June 21, 2013 ‘A blog where reader attention span matters’.
There are and infinite number of interpretation to what is routinely referred to as what ‘the American dream’ and an equal number of paths how to achieve it. The notion of ‘the American dream’ has certainly embedded in political rhetoric as one need only watch C-SPAN and listen to countless elected politicians consistently apply those three words to produce – elicit a myriad of emotions, imaginations as well as anger and frustration among their so-called target audience at the time. The lingering effects of the 2008 economic recession are still very much evident in most sectors as many Americans and certainly citizens in numerous other countries struggle to find sustainable paths to surface from their own economic breakdowns. Collectively, these persistent downturns has made first, retaining, and second, re-achieving ‘the American dream’, however one wishes to personally characterize it, elusive.
But, this piece is not about painting a new or conventional portrait of ‘the American dream’, rather it’s about the one twentieth of one percent of those individuals engaged in entrepreneurism and R&D who are seeking their version of ‘the American dream’ which often commences with making application for and hopefully having a patent issued for their work and achievement.
Due largely to the nature of my business consultancy, I encounter entrepreneurs of all stripes engaged in some truly remarkable endeavors. These very purposeful encounters over the years have lead me to conclude that while there are numerous rationales for entrepreneurs to seek a patent for their idea – innovation, one rationale seems to repeatedly surface, which is, seldom are they familiar with, nor have they been apprised of options or alternatives to the ‘conventional patent route’. Instead, I often characterize entrepreneurs as being singularly focused on seeking and securing conventional intellectual property, i.e., a patent.
There’s little doubt, being in a position to seek and possible secure a patent is indeed a privilege and achievement which very few others can put on their resume. Further, in many instances, obtaining an issued patent will shine a well deserved light on one’s expertise and assign instantaneous credibility, short-lived as it ultimately may be among colleagues, peers, and even competitors.
Too, once a patent is issued it provides the holder with well deserved grounds for expressing pride in their labors, which in many instances have evolved over many years, depending on the product, testing, re-testing, etc. Of course some do in a singularly boastful manner while others are far more humble and even self-deprecating in their characterizations.
But, I often find it puzzling, particularly with individual entrepreneurs, who, for the most part are very thorough, objective, and ‘driven’ researchers, why and how they readily gravitate to ‘going the patent route’ versus taking time to genuinely explore perhaps just as viable alternatives and/or options.
For the countless entrepreneurs I have had the pleasure of meeting over the past 25+ years, is their seemingly innate penchant for ‘going the patent route’ while conveying little if any awareness or interest in exploring alternatives to safeguard and commercialize their innovation against the realities of the increasingly predatorial global business environment in which any idea, patented or otherwise, is in a constant state of risk of infringement, misappropriation, theft, counterfeiting or a target of economic espionage.
As readers know well, there are numerous variables and influences that come to bear on entrepreneurs with respect to the path they choose for safeguarding and commercializing their original idea. Aside from the demands made by would-be investors, including venture capitalists, angel investors, etc., one influential variable, I’m quite confident, even though I have never heard it specifically expressed in these terms, is that ‘idea holders’ opt for the patent route because they mistakenly assume that if/when a patent is issued, the stewardship, oversight, and management of their intangible asset (idea, innovation) becomes magically guaranteed, thereby relieving them of absolutely essential chores, which of course, is simply not the case!
I respectfully and admirably recognize possessing an issued patent represents for many entrepreneurs the ultimate ‘brass ring’ if you will, that will define, in many instances, one’s professional career. Any assumption though that ‘going the patent route’ is the only option to achieve the necessary protection, and thus serve as the singularly best path to successful commercialization of an idea and possible profitability, is one that numerous professions and institutions wish to preserve and are not so courteous to those who want entrepreneurs to at least be exposed to equally viable alternatives. To be sure, part of the challenge lies in the reality that there is no intangible asset strategist available to objectively articulate viable alternatives and objectively describe, with no malice, the reality that all forms of intellectual property, i.e., patents, trademarks, and copyrights have been the victim of some major hits in the past 20 years.
Let’s be clear, intellectual properties, i.e. patents, trademarks, copyrights, etc., are merely one type or category of intangible asset. The primary difference is that a patent, once issued by the U.S. Patent and Trademark Office (USPTO) or other countries’ counterpart, will assume a tangible/physical property only insofar the issuance letter one receives which can be framed and hung on an office wall as a testament of one’s persistent and challenging work.
Too, I suspect, respectfully so, that deference is often attached to patent (only) strategies by entrepreneurs due to the time honored, but flawed assumption that an issued patent conveys a more personal sense of ownership and certain legally defensible rights of protection, technically speaking, over say, a trade secret.
Too, a constant source of nourishment to ‘patent only’ strategies is the widely held, but mistaken assumption that an issued patent constitutes a standalone deterrent to, or safe harbor from, would be infringers, misappropriators, counterfeiters, and economic espionage in general. To that I say, in today’s increasingly aggressive, globally predatorial, and winner-take-all R&D and business transaction environments, ‘idea holders’ can be assured that depending on the nature and subject matter of their patent, it will likely be in a constant state of risk from a host of legacy free players, independent (information) brokers, and certainly state-sponsored entities engaged in economic (industrial) espionage.
Some years ago, I would characterize/frame the likelihood that an entrepreneurs’ idea, innovation (or patent) would be stolen, infringed, or counterfeited, etc., in the context of probabilities. Since the early 2000’s, I believe I have taken a wiser and more reasoned and realistic approach by framing such likelihoods, not as mere probabilities, rather as inevitabilities if relevant precautions and safeguards are not taken that extend beyond the presumptive deterrents and safeguards in conventional intellectual property.
Comments regarding my blog posts are encouraged and respected. Should any reader elect to utilize all or a portion of my posts, attribution is expected and always appreciated. While visiting my blog readers are encouraged to browse other topics (posts) which may be relevant to their circumstance or business transaction. I always welcome your inquiry at 314-440-3593 or email@example.com
Michael D. Moberly December 21, 2012
As stated here on numerous prior occasions, it’s absolutely essential for business decision makers to recognize that in a vast majority of transactions they either initiate or otherwise become engaged, correctly identifying and assessing intangible assets plays an increasingly significant role in achieving a desired, presumably profitable and sustainable, outcome!
The reason of course, is that steadily rising percentages, at least 65+% of most transactions’ value and potential resides exclusively in the effective stewardship, oversight, and management of the intangible assets in play, and, as noted above, critical to achieving a favorable transaction outcome. So, if a transaction management team overlooks or dismisses the intangible assets, it’s tantamount to excluding how and where deal/transaction value is created, revenue is generated, and further strategic planning will be executed.
This makes it all-the-more-important, and, according to many, rising to a level of fiduciary responsibility insofar as transaction management teams’ incorporating intangible assets in their task of strategic oversight. When executed effectively, a transactions’ intangible assets will be collectively addressed in due diligence, inventory, audit, and valuation contexts. On the otherhand, if transaction management teams are deaf to the intangibles underlying most any deal, i.e. by doing neither, it’s quite fair to say it’s time to either change transaction management teams or engage them in relevant training to elevate their operational familiarity with intangible assets, i.e., their ability to identify, unravel, make quantitative-qualitative judgments regarding their status, stability, fragility, contributory value cycle, and overall sustainability.
As readers know, there is an abundance of research that consistently paints a very convincing picture that if and/or when a merger, acquisition, strategic alliance, or other type of transaction ‘goes south’, evidence of impending problems and challenges will surface quite early and will very likely be determined to be rooted in mishandling or disregard for the relevance or contributory value of one or more intangible assets necessary for achieving sustained transaction success.
One technique to mitigate or even remedy the probability that the latter will occur is for decision makers to require (receive) a ‘heads up’ from their transaction management team in the form of what I broadly describe as a ‘before transaction consumation asset impact analysis’. As the phrase implies, this specialized analysis should bring greater (business) clarity, i.e., a more definitive picture of the stability and strategic contributory value of key assets, particularly should certain risk(s), reputation and others, materialize that carry a high probability for adversely affecting one or more of the intangible assets integral to achieving a favorable transaction outcome. The most usable analysis (report) will address
- the inter-relatedness of intangible assets’ contributory value and associated risks and threats as well as key assets identified as being impaired in some manner, or are found to be already misappropriated, infringed, and/or counterfeited.
- the probability that particular risks/threats will materialize to adversely affect the projected economics, competitive advantages, and/or synergies of a transaction
- strategies for mitigating and containing certain risks/threats relative to the resiliency and sustainability of the transactions’ key intangible assets.
The obvious rationale for incorporating a ‘before transaction consumation asset impact analysis’ is for decision makers to be apprised of circumstances and scenarios that should be revealed which can (may) influence decisions and outcomes.
I am a strong advocate of ‘before transaction consumation asset impact analysis’ because I believe the three, most challenging intangible assets to sustain and preserve their contributory value (pre/post transaction) are, (a.) intellectual, (b.) relationship, and (c.) structural capital because they are individually and collectively highly mobile and attitudinally based.
Too, a ‘before transaction consumation asset impact analysis’ can reveal other cautionary circumstances/scenarios while retaining the option to proceed with a (a.) plan for risk mitigation, or (b.) re-negotiate a deals’ terms in light of the risk(s) and/or asset impairment(s) that have been identified.
But, the objective remains the same, that is to facilitate a more secure and profitable transaction going forward, not impede it!
Comments regarding my blog posts are encouraged and respected. Should any reader elect to utilize all or a portion of this post, attribution is expected and always appreciated. While visiting my blog readers are encouraged to browse other topics (posts) which may be relevant to their circumstance. And, I always welcome your inquiry at 314-440-3593.
Michael D. Moberly June 27, 2012
Context…today, 65+% of most company’s value, sources of revenue, and ‘building blocks’ for growth and sustainability directly evolve from intangible assets usually, intellectual property. One must, and I might add, correctly conclude then, that proportionately, similarly increasing percentages of (global) business transactions will involve either the buying, selling, or trading of intangible assets and IP.
As intangible assets become more recognizable and play more integral roles in business transactions, their value and exposure (vulnerability) elevates. So now, it’s not merely prudent, but rapidly being quite correctly characterized as a fiduciary responsibility for transaction management teams to:
- include intangible asset specialists and strategists skilled in the art and science of conducting due diligence on intangible assets that are increasingl in play and/or part of a deal.
- be alert to an ever increasing and sophisticated array of risks and threats when materialized, can rapidly undermine and/or erode asset value, competitive advantages, and projected synergies and efficiencies, or, worst case, cause certain intangible asset values ‘to go to zero’.
Perhaps it’s worth repeating, it’s no longer merely prudent, rather, it’s essential, if not a fiduciary responsibility for transaction initiators to recognize that in most, if not all deals, intangible assets, e.g., IP, competitive advantages, proprietary information and know how in the form of intellectual, structural, and relationship capital are critical to transaction value and achieving a positive and sustainable outcome. It is in this context then, that I urge transaction management teams to include, at the outset, a high degree of specialization and expertise, particularly with respect to intangible assets, i.e., professionals who…
- are additionally skilled in identifying, unraveling, and safeguarding those intangible assets identified as being integral to transaction success.
- can identify transaction risks, which, if materialized, can stifle a deals’ momentum and/or undermine important assets’ projected value, competitive advantages, and synergies.
- can articulate relevant-favorable (off-setting, mitigating) modifications to the terms of a transaction when risks are revealed that jeopardize asset value projected synergies, expected efficiencies, etc.
- can readily put in place effective, yet unobtrusive measures that compliment re-negotiated transaction-contractual codicils to retain control, use, ownership, and monitor value and materiality of key assets in both pre and post transaction contexts.
One could make an effective argument then that intangible asset specialists and strategists today are comparable to industry sector (Wall Street) analysts who assess and monitor relevant-key variables, e.g., trends, events, cycles, and risks to intellectual and structural capital, innovation pipelines, and the full range of intangibles relative to their near – long term stability, sustainability, fragility, and volatility.
The premise here, of course, is that intangible asset specialists and strategists should be early and consistent invitee’s to the ‘transaction management and decision table’. And, once ‘at the table’, their assessments and recommendations should be given due attention relative their contributions to facilitating more secure, stable, and profitable transactions as they were initially envisioned.
While visiting my blog, you are respectfully encouraged to browse other topics/subjects of interest. Should you find particular topics of interest or relevant to your circumstance, I would welcome your inquiry or comment at 314-440-3593 or firstname.lastname@example.org
Michael D. Moberly June 7, 2012
At the outset, let me say that the intent here is certainly not to cast dispersion on, or otherwise suggest the state of being unemployed or under-employed necessarily renders one more receptive to infringing proprietary knowledge acquired from a previous position, as leverage to secure new employment, market themselves as a specialized sector consultant, or start a new enterprise.
But, as we all have come to know all-to-well, the extended economic recession we’re experiencing and its various and often devastating ‘trickle down after shocks’ has placed growing percentages of workers and families at risk.
One well-understood reality, regardless of whether its influenced by this current recession or not, is that large scale layoffs, terminations, and the sheer unavailability of gainful employment prospects across all sectors, irrespective of whether one received a severance package, advance notice, unemployment benefits, or opportunity for ‘call back’ can, and usually will produce disgruntled and justifiably worried employees coupled with an elevated sense of (company, employer) disloyalty.
Collectively, we know through multiple objective and rigorous research studies, these factors can manifest themselves as a greater propensity (proclivity, receptivity) for a (former) employee to engage in illegal and/or unethical acts, e.g., theft, misappropriation, and/or infringement of proprietary information, intellectual property and other intangible assets.
Such attitudes and the adverse behaviors they can spawn are largely manifested as uncertainty that such dire economic and employment circumstances produce, particularly as one’s financial future and solvency become increasingly and indeterminately at risk.
In these circumstances exit interviews should obviously be ratcheted up to, among other things, emphasize the (legally binding) contractual components of employee non-disclosure confidentiality, and non-compete agreements (the latter in jurisdictions where they’re enforceable). This especially important for employees who have had access to sensitive-proprietary information and other forms of intangible assets.
The recession has also prompted countless companies to ’look to the proverbial low hanging fruit’ as targets for budget reductions which we know has substantially curtailed if not eliminate countless security and risk management programs and initiatives.
Translated this means fewer information (intangible asset) audits and less direct oversight and management of information-based intangible assets which includes intellectual property, proprietary and sensitive information, competitive advantage driving business processes and methods, as well as brand, reputation, and goodwill, etc.
But, collectively, these (intangible) assets conservatively comprise, for most companies, 65+% of their value, sources of revenue, and ‘building blocks’ for growth, expansion, and competitive advantage.
Too, we see many companies reallocating (re-distributing) their security resources or literally dismantling their security departments causing decentralization of security and asset protection responsibilities. Routinely then, these responsibilities are being delegated – entrusted to untrained and inexperienced personnel and/or business units. For the most part, they are unaccustomed to asset protection and security which, practically speaking means inconsistent interpretation, assessment, and treatment of intangible asset risk thresholds.
We can also presume with considerable certainty, that during an economic downturn, there will be an elevated presence and even more aggressive and predatorial tactics emanating from global competitive/business intelligence operations, information brokers, and various state sponsored entities and actors that will specifically target ’disgruntled employees’. In most instances, the objective of course is to elicit proprietary information, knowhow, and other forms of value laden intangible assets that can deliver new/additional sources of revenue and/or competitive advantage to another (end) user.
Similarly, we can presume these circumstances may well prompt a percentage of already disgruntled and disheartened employees to initiate contact with competitors or other adversaries to leverage or otherwise offer any specialized knowledge acquired during a previous employment for (a.) cash payment, or (b.) in exchange for employment with a competitor, or (c.) to start their own company.
A collective bottom line to all of this is that some company’s appear to have positioned themselves, as perhaps an unfortunate choice or reaction to the recession, to accept increasingly higher risk thresholds regarding their primary sources of value, revenue generation, and strategic (intangible asset) capability. The question, or perhaps more appropriately, the challenge for information – intangible asset protection professionals is how much company value, reputation, image, goodwill, and IP, etc., will be eroded, de-valued, undermined, or outright lost in the interim?
To me, this is hardly a sustainable position!
Michael D. Moberly May 31, 2012
A requisite to conducting superior due diligence for today’s intangible asset dominated and driven businesses, is possessing a depth of experience, knowledge, and investigative skill sets. These are unique differentiators and essential requisites which collectively serve as starting points for achieving the necessary and insightful (due diligence) product that allows management teams to make informed decisions, i.e., proceed, don’t proceed, buy, don’t buy, or invest, don’t invest!
Respecting the economic fact that 65+% of most company’s and transaction’s value, sources of revenue, and foundations for growth and sustainability evolve directly from intangible assets, selecting not just the right, but, the absolute best individual or firm to conduct due diligence is critical.
For starters, a well-designed and executed due diligence plan must fully examine each of the target’s intangible assets. That’s because they will inevitably be in play in any transaction. Effective assessment and integration of intangibles serve increasingly significant role to a transaction’s success. On the other hand, with untold frequency, when intangible assets are not addressed or dismissed during due diligence, transaction failure can be imminent and materialize in a long, slow, and costly fashion, i.e., ‘failure by a thousand cuts’.
To increase the probability that certain projected transaction objectives or outcomes be realized, it’s imperative that the individual or firm contracted to conduct the due diligence can articulate the findings in objective business contexts and certainly not through a one-size-fits-all, snap-shot-in-time guesstimate oriented lens.
Key elements to superior due diligence in today’s intangible asset dominated and driven businesses, starts by possessing the experience, knowledge base, and investigative insight to…
- unravel (identify) how, where, and by whom the key (intangible) assets originated.
- determine and assess how or whether control, use, and ownership of the assets is or can be sustained.
- determine the assets’ contributory value and complimentary role(s) relative to current and future projects and initiatives, i.e., as potential sources of revenue and foundations for (future) growth and sustainability.
- recognize and differentiate the origins, motives, and asymmetric nature of global risks and threats to (intangible) assets that have become embedded in all transactions.
- understand how materialized risks can adversely affect asset value, a company’s competitive advantages, reputation, brand, and/or stifle project momentum and best practices to prevent or mitigate those risks.
- ensure asset control, use, ownership, and value are monitored for sustainability, especially in post-business transaction contexts.
- build a risk intelligent culture that renders a company more aware and resilient to significant and catastrophic risks, natural disasters, and/or business interruptions.
Anything less can produce an array of unwelcome challenges or worse, spell almost certain doom to the projected and desired outcomes of a transaction!
Michael D. Moberly May 24, 2012
It’s important for management teams, c-suites, and boards to recognize that merely because a deal or transaction has progressed to the due diligence stage, there is absolutely no guarantee the projected values, synergies, and competitive advantages the targeted assets are projected to bring, an increasing percentage of which will be intangible, will sustain those projections.
In today’s globally competitive, aggressive, and predatorial business transaction environment, it is quite naïve in my view, to assume the full control, use, ownership, value, and materiality, etc., of the targeted assets will remain fixed throughout the transaction period without close monitoring and risk mitigation in both pre and post transaction (due diligence) contexts.
In large part, that’s because a potential, but, I might add, an increasingly routine by-product of business transactions is that they produce uncertainty at all employee levels as well as among stakeholders and investors. Uncertainty, individually or collectively can, influence individuals to assume demeanors, exhibit behaviors, or engage in acts that otherwise are considerably less likely if/when uncertainty is not present.
Put bluntly, uncertainty can manifest itself in many ways, some of which are adverse when change (i.e., a business transaction) is pending or eminent. Too, in business transactions and the uncertainty it frequently sparks, can manifest as asset compromises, misappropriation, and/or undermining of competitive advantages. Perhaps more so when due diligence teams are dismissive, unaware, or conclude the monitoring necessary to prevent or mitigate such circumstances is beyond (beneath) their mandate. That’s irrespective of evidence that suggests asset vulnerability elevates during periods of (company, employee) uncertainty. To be sure, commencement of due diligence is well-recognized as an indicator that change (and uncertainty) within a company and/or business unit are fully under consideration or eminent.
What’s more, uncertainty, and the various ways/contexts it manifests, can occur in rapid-fire order and cascade throughout a company. Due diligence team ‘radar’ should surely recognize any adversity and modify the way due diligence will be structured and executed. This is especially relevant if the transactions’ envisioned (projected – desired) economic and competitive advantage benefits decline.
Admittedly, I am not an advocate of using the uninitiated or inexperienced to conduct due diligence. It is far too important. Neither do I subscribe to the view that there is a one-size-fits-all template (for efficiency sake) to conduct due diligence.
So, for those, and other considerations, some of which are described below, I have identified various issues that should definitely be on the radar of every due diligence team. Any one of the following for example can be a signal that a higher probability exists that a transaction will be successful, i.e., is there evidence of:
1. a broad company culture that genuinely recognizes the value of the core (revenue – value producing) intangible assets?
2. consistent stewardship, oversight, and management of those assets?
3. consistency in the representation of those assets, ala Sarbanes-Oxley, FASB, etc., in which (asset) risk, value, materiality, and financial performance are measured and accounted for?
4. business continuity-contingency (organizational resilience) planning that includes the due diligence targets’ core intangible assets?
5. strategic – internal planning and execution that achieves recognition and utilization of intangible assets as source of value, revenue, and ‘building blocks’ for growth and sustainability?
While visiting my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) . Should you find particular topics of interest or relevant to your circumstance, I would welcome your inquiry or comment at 314-440-3593 or email@example.com
Michael D. Moberly May 23, 2012
With such significant percentages of deal – transaction value now evolving from a targets’ intangible assets, due diligence must be much more than a cursory or confirmatory review of the assets’ presence, absence, or positioning.
Too, a due diligence report must provide decision makers with much more than a subjective, snap-shot-in-time estimate of asset value. Instead, due diligence must provide unequivocal clarity to decision makers. This includes, among other things, an assessment of the assets’ fragility, stability, defensibility, longevity, and perhaps most importantly, its collective contributory value throughout an enterprise. Key, revenue producing (intangible) assets will also be a focal point relative to their ability to be strategically utilized as ‘building blocks’ for future growth and sustainability.
The strategic and contributory value of intangible assets must not be overlooked, but, cannot be accurately demonstrated either solely by calculating asset value in snap-shot-in-time contexts. This of course is why it’s important to factor other asset characteristics such as fragility, stability, defensibility, risk, longevity, and contributory value. Understanding how these characteristics can, and frequently do, adversely impact asset control, use, ownership, and materiality or serve as preludes to legal challenges is certainly information decision makers should have at the ready.
When these characteristics materialize, as they do with increasing frequency in today’s globally competitive and predatorial business transaction environment, asset value and usefulness can erode, be undermined, and become vulnerable to compromise and/or misappropriation very rapidly.
By the same token, it’s important for those structuring business transactions, when intangible assets are in play and/or part of a deal, as they inevitably are, to recognize that conventional forms of intellectual property enforcement (i.e., patents, copyrights, trademarks) are not applicable to safeguarding other forms of intangible assets, i.e., reputation, goodwill, structural, intellectual, and relationship capital, etc. Thus, having due diligence – transaction management teams in place with expertise in intangible assets is a necessity which will produce much needed insights, clarity, and benefits.
Another reason why it’s important to fully factor these and other (intangible) asset characteristics in a due diligence strategy, is that the time frame when holders, buyers, and/or sellers of intangible assets can extract the most value (from them) is being continually compressed. That’s due, in no small part, in my view, to the persistent, increasingly sophisticated, and globally predatorial business/competitor intelligence and data mining operations that can, when successful, ‘get out front’ of a transaction and a company’s competitive advantages to affect a transaction’s outcome, usually adversely, depending of course, whose side one is on.
Below are some additional, but, just as important areas which I encourage due diligence management teams to direct attention, e.g., is there evidence of…
- a company culture that recognizes the value of the core revenue – value producing intangible assets?
- consistent stewardship, oversight, and management of the targets’ intangible assets?
- consistency in the representation of intangibles to reflect Sarbanes-Oxley, FASB, and even ISO mandates, etc., wherein risks, value, materiality, and financial performance are accounted for?
- business continuity-contingency (organizational resilience) plans that ensure that specifically address intangible assets?
- ell executed and monitored strategic planning designed to achieve the fullest utilization of the targets’ intangible assets?
Effectively conducted due diligence that finds affirmative evidence that each (many) of the above are being practiced by a target firm, should be smiling, as they say, all the way to the bank!
While visiting my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) . Should you find particular topics of interest or relevant to your circumstance, I would welcome your inquiry at 314-440-3593 or firstname.lastname@example.org
Michael D. Moberly May 17, 2012
Want to elevate investor confidence? Start by ensuring your intangible (IP) asset house is in order! One consequence of management teams, c-suites, and boards of emerging growth firms not recognizing and exploiting the intangible assets their company produces and possesses is that it will have a bearing, usually adverse, relative to prospective investor’s ‘invest, don’t invest’ decision criteria.
The conventional assumption that investors are, by their nature, more accepting of risk is, in my view, much overplayed. I have yet to meet an investor who does not have a fully developed internal ‘smell test’ to gauge a prospective transaction’s risk and return potential. Too, I see increasing numbers of seasoned investors…
- requiring a target’s intangible asset and IP house be in order as a requisite to investment consideration.
- recognizing intangible assets are crucial contributors to a target’s profit potential, share price, market position, and competitive advantage.
- assigning more weight to differentiating intangible assets from tangible (physical) assets.
- recognizing that transaction due diligence must include pre and post components for monitoring any fluctuations in asset value, control, or ownership.
To emphasize these realities, I refer to a previous ‘Howery Survey of Investor Attitudes on IP Protection’ in which a significant number of respondents reported that companies which lack an effective IP (intangible asset) strategy has a detrimental effect on company performance. In fact, one in four of the Howery Survey respondents reported they had actually turned down investment opportunities due to the target company’s inadequate approach to IP and other intangible assets.
Fully 95% of the Howery survey respondents report that it is no longer sufficient, in the context of their investment decision, for a target company to merely own IP with no (aligned, integrated) protection, managerial, or competitive advantage peripherals.
So, in my view, the proverbial bottom line (in conjunction with the Howery Survey’s findings) is this:
companies that presume conventional IP issuances and enforcement protections are sufficient, standing alone, to attract investors are finding instead that an increasingly important requisite to attracting and satisfying the demands of serious investors relative to their invest – don’t invest decision criteria, is the existence of comprehensive plans, practices, and procedures which…
- demonstrate the about-to-be-purchased/invested assets, have effectively safeguarded from their inception.
- reflect today’s increasingly aggressive, predatorial, and winner-take-all business transaction environment.
- are seamlessly aligned with – integrated into a viable and strategically competitive business strategy that encompasses (intangible) asset development, acquisition and utilization, and exploitation.
(Adapted by Michael D. Moberly from the work of Howery, Simon, Arnold & White’s Survey Of Investor Attitudes on IP Protection)
Michael D. Moberly April 16, 2012
Many, if not most companies want to attract investors. For intangible asset intensive companies there are particular strategies that company management teams should consider to elevate investor curiosity and render them more attractive investments.
I encourage management teams, c-suites, and boards to read intangible asset and IP-related surveys and studies, particularly one’s previously produced by Howery which, among other things, found prospective investors are more likely to have more than a passing interest in companies that have practices in place to identify, assess, monitor, safeguard, and (e.) fully utilize their intangible assets as effectively as possible.
Two key reasons why experienced (prospective) investors are focusing more attention on intangible assets are:
- their correlation to a company’s attitude for recognizing and consistently monitoring the value of intangible assets, IP, competitive advantages, and sustainability.
- they obviously understand that intangible assets comprise 65+% of most investment’s value, projected sources of revenue, and ‘building blocks’ for growth and overall sustainability.
Therefore, investing in companies that have either no, ineffective, or inconsistently applied procedures – practices to identify, assess, and sustain control, use, ownership, and monitor the value and materiality of about-to-be-invested intangible assets presents, at minimum, a cautionary yellow flag insofar as an invest – don’t invest decision is concerned.
Too, when asset management and oversight (of intangibles and IP) are deemed lax, non-existant, or when management teams exhibit indifference or trivialize the prudence, or worse, don’t recognize the necessity to safeguard their (intangible) assets, it would be quite proper to presume risks and vulnerabilities (to those assets) will elevate and probably materialize. When, not necessarily, if those risks materialize, asset contributory value will almost assuredly erode. For prospective investors and stakeholders then, circumstances like this can, quite literally push an investment initiative and/or strategic alliance beyond acceptable (risk) thresholds.
It warrants being said again, that in today’s globally competitive, increasingly predatorial, and ‘legacy free’ business (transaction) environment, the mere fact that a company has been issued a patent, is standing alone, not likely to negate the aforementioned risks or produce much additional investor confidence as it did in previous decades.
Unfortunately however, many management teams, naively in my view, remain inclined to assume conventional IP enforcements, i.e., patents, trademarks, and copyrights are applicable to other forms of intangible assets and therefore suffice as an intangible asset protection strategy.
More aggressive and targeted due diligence can mitigate, if not alleviate, a good portion of risk. Due diligence questions should, among other things, determine whether the IP and the underlying intangible assets been adequately safeguarded:
- from inception, and
- in pre and post transaction-investment contexts?
If so, this generally translates as greater assurance that asset value and utilization remain intact. Its worthy to remember though, in this globally competitive and predatorial business environment, neither can be assured solely because a patent has been issued.
On a positive note, increasing numbers of prospective investors – stakeholders are experienced enough to recognize that conventional IP protections do not supplant a comprehensive set of policies, practices, and procedures to safeguard and monitor valuable (intangible) assets. But, when management teams proceed indifferent to the risks, prospective investors should exercise their options to:
- abandon the investment altogether, or
- ratchet-up the due diligence and asset assessment process to identify and leverage the (pre – post) risks for better terms.
The result often is, in the absence of managerial oversight on these increasingly critical aspects noted above, investments are increasingly likely to manifest themselves as frustrating experiences that fail to meet the projected (desired) outcomes.
Michael D. Moberly April 10, 2012
It’s time prospective investor’s and VC’s get serious! In my judgment, an important, but all too often overlooked aspect to achieving favorable terms and outcomes to venture capital-backed projects, is balancing (a,) the understandable requisite for putting an experienced management team in place, with (b.) ensuring control, use, ownership, value and materiality of the about-to-be invested intangible assets are sustainable.
A starting point for achieving such a balance is conducting a comprehensive due diligence and assessment of the targeted intangible assets designed to provide prospective investors (VC’s) with an objective and over-the-horizon analysis of the assets’ status. A equally worthy product of the due diligence and assessment is that it can serve as the foundation for:
- making the all-important invest – don’t invest decision, or
- consummating a more secure, profitable, and sustainable outcome for investors.
This level of due diligence and asset assessment must extend well beyond the conventional ’snap-shot-in-time’ or amateurish ‘check the box’ approach. It must include…
- unraveling the assets to identify any/all under-the-radar risks and vulnerabilities that could…
- impair and/or entangle particular (intangible) assets and adversely affect investor’s ability to sustain their control, use, ownership, and value
- serve as preludes to costly, time consuming, and investment stifling legal disputes and challenges.
- identifying all centers of internal and/or stakeholder intangible asset generation, value, and revenue production beyond what is already publicly available.
- identifying – assessing existing (intangible) asset production, protection, and value preservation measures and determine if they are effectively aligned with the:
a. investors’ objectives
b. company’s strategic business plan, and
c. functional (life, value) cycle of the about-to-be invested assets.
Preferably, depending on the due diligence – asset assessment team’s operational familiarity with intangibles, they would determine if the identified risks can be prevented or mitigated to a (risk) tolerance level acceptable to the investing party so the transaction can proceed.
For start-ups and early stage firms, it is not uncommon for 75% to 90+% of their value, sustainability, projected sources of revenue, and building blocks for growth to directly evolve from intangible (IP-based) assets. This makes intangible asset due diligence and assessments all-the-more essential and potentially revelatory insofar as serving as a foundation, again for invest – don’t invest decisions, relative to distinguishing assets that are suspect, impaired, or have already been compromised.
In these circumstances, while it may not be necessary to wholly abandon a particular investment opportunity, it can prompt prospective investors to include specific (risk mitigation – transfer) covenants that are applicable on both the pre and post transaction side.
It’s unlikely, in my judgment, when an intangible asset due diligence – assessment revels significant risks, merely putting an experienced management team in place would, standing alone, be able to overcome or reverse such transgressions absent costly, time consuming, and momentum stifling legal challenges! Therefore, having experienced and sophisticated intangible asset specialists conduct the due diligence will reap strategic returns for prospective investors.