For all the glamor and attract surrounding the Enterprise Capital business, one would count on the funding returns from VC funds to be considerably larger relative to different funding automobiles which might be extra broadly obtainable. Nevertheless, business analysis signifies that over time, enterprise capital returns have been roughly equal to the inventory market basically. Certainly, over half of all enterprise capital-backed firms fail and roughly the identical 50% of all cash invested in enterprise capital funds is misplaced. This text discusses how a complete IP administration technique may assist VC companies decrease their danger and improve the return of their respective funds.
In response to some conversations I’ve had with folks within the VC business, the statistics above do not inform the complete image. Along with half of the enterprise funded firms that fail, there are these which might be described because the “strolling lifeless” – firms that neither exit of enterprise, nor ever present the substantial returns wanted to fulfill typical VC fashions. One panelist I noticed at a enterprise convention final yr prompt that for his or her monetary mannequin to make sense, they wanted at the least 1 out of 10 firms to offer a 20x return on their funding. This might be particularly troubling for the business, given the rising development in direction of fewer and decrease valued liquidity occasions.
However what if a enterprise fund may extract incremental funding returns from their portfolio firms, together with the failed firms and from the so-called walking-dead firms? I imagine a complete cross-portfolio IP administration technique may present elevated returns to enterprise traders.
IP Due Diligence to Decrease Enterprise Danger
VC’s usually put money into firms on the earliest phases of their respective life cycles. On the level of creating the funding determination, the enterprise capitalist is inserting his or her wager on the enterprise concept, the administration crew; and whether or not they understand it or not, they’re additionally inserting a wager on the IP which underpins the enterprise.
It’s crucial that VC companies carry out correct and sufficient due diligence in help of their funding choices. Sorry, however merely having an inventory of patents and functions will not be sufficient. Traders want to grasp whether or not or not the patents are sturdy patents, with sufficient protection for the enterprise and the know-how in query. The next quote sums it up higher than I can:
“Particularly, earlier than you put money into a brand new enterprise concept for a brand new enterprise, why would not you need to know whether or not you possibly can personal the enterprise concept in the long run or whether or not you’ve got minimal alternative to innovate freely in relation to that enterprise concept? Or, why would not you need to know whether or not one other agency has invested $100K or extra in patent rights alone within the new enterprise concept that you’re investigating?” – from IP Property Maximizer.
These all-important questions must be answered through the investor’s due diligence. Be warned nonetheless, that topographical patent panorama maps or different summary visualizations don’t characterize a enough stage of study. They could be an enchancment over a easy checklist (though some may argue that time), however a correct evaluation should contain an in depth examination of patent claims within the context of the enterprise and of the know-how in query.
IP Portfolio Administration to Decrease Prices & Improve Margins
Though many of the portfolio firms financed by a given enterprise fund will likely be comparatively small, and have a comparatively small portfolio of patents, it could be price it for the VC to look throughout all the IP portfolio in mixture.
I did a fast evaluation of a pair regional VC companies – with comparatively small portfolio’s of firms, these companies had an invested curiosity in over 300 and 600 patents. By company requirements, these are sizeable portfolios. I’d look forward to finding even bigger portfolios with bigger enterprise companies.
In companies with portfolios of this magnitude, you will need to perceive the portfolio in a number of dimensions. For instance, IP professionals, entrepreneurs and enterprise leaders need to know what IP belongings help which merchandise. Information of those relationships can permit an organization to dam opponents, decrease prices, increase margins and in the end improve returns to traders. As well as, they are going to need to categorize their patents by the markets and know-how areas they serve, because it helps them perceive if their patents align with the enterprise focus.
Bringing this self-discipline to IP Portfolio administration has the additional benefit of unveiling patents that aren’t core to the enterprise of the corporate. With this data in hand, a typical firm will search to decrease prices by letting patents expire, or they might search to promote or out-license their non-core patents, thus creating a brand new income.
IP Licensing to Improve Returns
Patents that aren’t core to the enterprise of the proudly owning firm should still be beneficial to different firms and different industries. There are some well-known examples of firms who’ve been in a position to generate important revenues from their non-core patents by way of energetic licensing applications — Firms like IBM and Qualcomm come to thoughts. Nevertheless there are a selection of different firms which have generated important returns by monetizing their non-core IP belongings.
Within the case of a VC portfolio of firms, every firm could solely have a small variety of non-core patents. However throughout the portfolio of firms, the enterprise agency could have rights to a major variety of patents that could be beneficial to different firms/industries.
We are able to lengthen the idea of monetizing non-core belongings of the highest firms within the enterprise portfolio to the “walking-dead” and even the defunct portfolio firms (though with these latter two teams, we could fear much less in regards to the distinction between core and non-core patents). In lots of instances, the enterprise mannequin and the due diligence supporting the unique funding in these have been most likely sound, however the enterprise failed on account of execution or market timing points. In lots of instances the underlying IP belongings should still be absolutely legitimate, beneficial and obtainable for entry right into a targeted licensing and monetization program.
A multi-million greenback licensing income stream would properly praise the periodic liquidity occasions in at present’s VC market.