Risk Assessment and Due Diligence For Venture Capital Investments

 Michael D. Moberly    December 22, 2011

It is not uncommon for 75% to 90+% of start-up – early stage firms’ value, projected sources of revenue, and ‘building blocks’ for growth lie in – are directly linked to the invention’s IP and intangible assets. 

We’ve come to know that investments in early stage companies and/or university spin-off’s, VC’s will require, quite correctly, putting in place management teams with experienced and strong (intangible asset and intellectual property) oversight, stewardship, and licensing credentials.    

Among other essential responsibilities, the management team and the inventor absolutely must ensure that control, use, ownership and value and materiality of the invested IP and intangible assets is being monitored.  Unfortunately, many merely rely on  patent issuances as being a sufficient stand alone deterrent to infringement.

The path to achieving that essential objective commences with the genuine recognition that a well-designed and thorough (IP, intangible asset) assessment and due diligence process must be conducted to provide investors (VC’s) with current and objective pre/post transaction insights and perspectives about the fragility, stability, defensibility, and marketability of the invested assets.  The assessment – due diligence findings will serve as a foundation for facilitating (consummating) a more secure, profitable, and sustainable transaction.

Investors need and want relevant, insightful, objective, and forward looking (over-the-horizon) perspectives that extend well beyond the conventional ’snap-shot-in-time’ assessment – due diligence that does not take into account – address asset volatility or the ever growing possibility that the invested assets have already been compromised in some manner.

 Thus, the intangible asset – IP assessment and due diligence must, among other things…

  • identify any embedded, under-the-radar risks, vulnerabilities, and operational – usage complexities that can impair and/or entangle the assets and become preludes to costly and time consuming legal disputes or challenges.
  • unravel the invention’s development and identify any additional clusters of value and potentially revenue producing (intangible) assets and competitive advantages, aside from the registered IP and beyond what was espoused in the inventor’s initial pitch.
  • determine if asset safeguards and (asset) value preservation and monitoring measures were in place and aligned with (a.) the investors’ objective, (b.) the company’s strategic business plan, and (c.) the functional (life, value) cycle of the invested assets, and of course  (d.) the all important exit strategy.

If an assessment-due diligence reveals that any of the key assets are suspect, impaired, or may have already been compromised, the investment transaction may warrant reconsideration or inclusion of specific (risk mitigation – transfer) covenants before going forward.  Under such circumstances, it’s unlikely that a management team alone, regardless of their experience and skill, can effectively manipulate the assets to overcome or reverse such transgressions without requiring costly, time consuming, and possibly momentum stifling legal action.

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 [email protected]

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