Improve venture capital returns with IP portfolio management

With all the glitz and glamor that surrounds the venture capital industry, one would expect investment returns from VC funds to be significantly higher compared to other investment vehicles that are more widely available. However, industry studies show that venture capital returns have roughly paralleled those of stock markets generally over time. In fact, over half of all venture capitalized companies fail, and roughly the same 50% of all money invested in venture capital funds is lost. This article discusses how a comprehensive IP management strategy could help VC firms reduce their risk and increase returns on their respective funds.

After some conversations I’ve had with people in the VC industry, the stats above don’t paint the whole picture. In addition to half of the venture capital backed companies that fail, there are those known as the “walking dead” – companies that neither go out of business nor ever achieve the sizeable returns required to become typical VC models fulfill. A panelist I saw at a venture conference last year suggested that at least 1 in 10 companies would need to generate a 20x return on their investment for their financial model to make sense. This could be of particular concern to the industry given the emerging trend towards fewer and lower rated liquidity events.

But what if a venture fund could get additional investment returns from its portfolio companies, including failed companies and the so-called walking dead companies? I believe that a comprehensive cross-portfolio IP management strategy could offer higher returns for venture investors.

IP due diligence to reduce business risk

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VCs typically invest in companies in the earliest stages of their lifecycle. When making an investment decision, the venture capitalist relies on the business idea, the management team; and whether they know it or not, they also bank on the intellectual property that underpins the business.

It is crucial that VC firms conduct proper and appropriate due diligence to support their investment decisions. We’re sorry, but just having a list of patents and applications is not enough. Investors need to understand whether the patents are strong patents that adequately cover the business and the technology in question. The following quote sums it up better than I can:

“Specifically, before investing in a new business idea for a new venture, why wouldn’t you want to know if you can own the business idea for the long term, or if you have minimal ability to freely innovate in relation to that business, or why would you want to.” Don’t know if another company has invested $100,000 or more in the new business idea you’re investigating in patent rights alone?” – by IP Assets Maximizer.

These all-important questions should be answered as part of the investor’s due diligence. Be warned, however, that topographic maps of patent landscapes or other abstract visualizations do not provide a sufficient level of analysis. They may represent an improvement over a simple list (although some might argue that point), but proper analysis must involve detailed examination of the patent claims in the context of the business and technology in question.

IP portfolio management to reduce costs and increase margins

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Although most portfolio companies funded by a given venture fund are relatively small and have a relatively small patent portfolio, it may be worthwhile for the VC to look at the entire IP portfolio as a whole.

I did a brief analysis of some regional VC firms – with a relatively small portfolio of companies, these firms had interests in 300+ and 600+ patents. By corporate standards, these are sizeable portfolios. I would expect to find even larger portfolios at larger venture firms.

In companies with portfolios of this size, it is important to understand the portfolio in multiple dimensions. For example, IP professionals, marketers, and executives want to know which IP assets support which products. Knowing these connections can enable a company to block competitors, cut costs, increase margins, and ultimately increase returns for investors. Additionally, they should categorize their patents by the markets and technology areas they serve, as this will help them understand if their patents align with the business focus.

Incorporating this discipline into IP portfolio management has the added benefit of disclosing patents that are not part of the company’s core business. With this knowledge in hand, a typical company will attempt to reduce costs by phasing out patents, or attempt to sell or out-license its non-core patents to create a new revenue stream.

IP licensing to increase ROI

Patents that are not part of the core business of the owner company can still be valuable to other companies and other industries. There are some well-known examples of companies that have been able to generate significant revenue from their non-core patents through active licensing programs – companies like IBM and Qualcomm spring to mind. However, there are a number of other companies that have achieved significant returns by monetizing their non-core IP assets.

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In the case of a VC portfolio of companies, each company may only have a small number of non-core patents. But across the company’s portfolio, the venture company may have rights to a significant number of patents that may be valuable to other companies/industries.

We can extend the concept of monetizing non-core assets of the top companies in the venture portfolio to include the “living dead” and even the defunct portfolio companies (although for these latter two groups we care less about the distinction between core – and core companies must make non-core patents). In many cases, the business model and due diligence that supported the initial investment in these companies was likely sound, but the deal failed due to execution or market timing issues. In many cases, the underlying IP assets may still be fully valid, valuable, and available for entry into a targeted licensing and monetization program.

A multi-million dollar royalty revenue stream would complement the periodic liquidity events in today’s VC market well.