The Question VC’s Should Stop Asking, Why, and What Questions Should Be Asked!

Michael D. Moberly   December 12, 2014   ‘A blog where attention span really matters’!

Venture forums…

Venture forums are typically fast paced and highly charged events where management teams of intangible asset intensive startups, university-based spinoffs, and early stage companies give impassioned ‘elevator pitches’ to prospective investors.

Most pitches are purposefully limited to 3-5 minutes wherein the spokesperson explains their companies’ mission, the innovation, further research that’s necessary, fiscal projections, business model, why investment is warranted, and how the investment will be used should an investor deem it a worthy risk. Following the ‘pitch’, prospective investors may ask the company questions, one invariably is, ‘what’s your IP position’?

What’s your IP position…

Of the numerous venture forums I have attended the most consistent answer to this albeit over-rated, misunderstood, yet seemingly obligatory question is, a patent…

  • application has been filed (provisional),
  • is pending, or
  • has been issued.

The attention startup company’s attach to achieving IP status for their innovation, coupled with the consistency which prospective investors ask the IP position question, suggest each party believes that conventional IP, patents particularly are influential requisites to securing investment capital. Of course there are other factors considered in ‘invest – don’t invest’ decisions.

Legal symbolism…

True, IP status does provide investors with the necessary legal standing and recourse options should the invested enterprise fail, not meet its projections, or its IP is infringed or challenged within the 3 – 5 year exit strategy plan investors typically demand. And, yes, patents and other forms of intellectual property are obligatory for WTO and TRIPS signatories.

But, the global business transaction environment is becoming increasingly aggressive, predatorial, competitive, and legacy free. That coupled with the persistent challenges and vulnerability to intangible asset (IP) infringement, theft, and/or counterfeiting make a startups’ IP position little more than legal symbolism. Should companies elect to pursue other strategies to safeguard their proprietary – competitive advantage intangible assets, i.e., trade secrecy for example, those legal portals for bringing action against the inevitable infringers, thieves, and counterfeiters in locales where a company’s most valuable assets are in play also carries some ambiguity.

Legal – economic safety nets…

Through my lens, conventional IP has less relevance as a legal – economic safety net than startup management teams should be assume.  Too, the costs associated with mounting an IP infringement – misappropriation suit are significant, if not cost and time prohibitive for resource conscious startups to pursue regardless of case credibility.

It’s prudent for investors and IP holders alike to acknowledge patents and most other forms of IP, no longer serve as…

  • stand alone deterrents, or
  • reliable prognostications of innovation value.

More relevant venture forum questions…

I urge prospective investors – venture capitalists to re-phrase their venture forum questions. For example, rather than merely asking ‘what’s your IP position’ assuming that is an important criterion to ‘invest-don’t invest’ decisions, perhaps a more relevant and telling question would be…has the proprietary know how, i.e., intellectual, structural, and relationship capital that underlie the startups’ innovation and serve as the cornerstone to the IP on which an investment would be premised, been adequately safeguarded from its inception?

Patents start life as trade secrets…

It’s a well acknowledged adage in the information asset protection arena that patents typically start life as trade secrets and proprietary know how.  Therefore, if the know how underlying a prospective investment has been treated in a cavalier manner absent the

  • requisite minimums of trade secrecy or other best information asset protection practices
  • prior to filing a patent application,
  • it’s only prudent for prospective investors to ascertain
  • the status, i.e., fragility, stability, and sustainability of the assets being considered for investment.

Asset vulnerability, probability, criticality, and speed…

Today, the vulnerability, probability, criticality, and speed which know how, i.e., intellectual and structural capital assets particularly, can be compromised, infringed, misappropriated, or stolen are issues that should be fully explored as being integral to any ‘invest – don’t invest’ decision.

Follow-up questions…

Before making an investment in intangible asset rich and dependant startup companies, it’s important to direct probing follow-up questions to company management teams. Doing so will allow prospective investors to more objectively assess whether control, use, ownership, and value of the underlying intangible assets are…

  • sustainable relative to an intended exit strategy, and
  • reflective of the assets’ functionality and value cycle.

Today, with increasing certainty, ineffectively safeguarded intangible assets (IP) will quickly hemorrhage in value, competitive advantage, and elevate investor’s vulnerability to costly, time consuming, and momentum stifling challenges and exit strategy headaches!

As always, reader comments are respected and welcome.

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