Intangible Asset Due Diligence For VC’s

Michael D. Moberly   

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…

  1. serve as preludes to costly, time consuming, and investment stifling legal disputes and challenges.
  2. identifying all centers of internal and/or stakeholder intangible asset generation, value, and revenue production beyond what is already publicly available.
  3. 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 reveals 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.

Michael D. Moberly  April 10. 2014  St. Louis  [email protected]  ‘A business intangible asset blog where attention span really matters’!

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