For all the charm and appeal of the venture capital industry, it can be expected that the return on investment of venture capital funds will be much higher than other investment tools that are more readily available. However, industry research shows that over time, the return on venture capital is generally roughly equal to the stock market. In fact, more than half of the venture capital support companies have failed, and 50% of all funds invested in venture capital funds are roughly the same. This article discusses how a comprehensive IP management strategy can help venture capital firms reduce risk and increase the returns of their respective funds.
According to some conversations with people in the venture capital industry, the above statistics do not explain the overall situation. In addition to half of the failed venture capital firms, there are also companies that have been described as "walking dead" – these companies have either closed down or provided the substantial returns needed to meet the typical VC model. A panel member I saw at a risk meeting last year said that in order for their financial model to be meaningful, they needed at least one-tenth of the company to provide a 20-fold return on investment. This is especially disturbing for the industry, given the decreasing number of liquidity events and the trend of lower and lower values.
But what if venture capital funds can get incremental return on investment from their portfolio companies, including failed companies and so-called walking dead companies? I believe that a comprehensive cross-combined IP management strategy can bring higher returns to venture capitalists.
Intellectual property due diligence to reduce business risk
VCs typically invest in companies in the early stages of their respective lifecycles. When making an investment decision, the venture capitalist is placing his or her bet on the business idea, the management team; whether they know it or not, they are betting on the intellectual property that supports the business.
Venture capital firms must conduct appropriate and adequate due diligence to support their investment decisions. Sorry, just having a patent and a list of applications is not enough. Investors need to understand whether a patent is a strong patent and has sufficient coverage for the business and related technologies. The following quotes are better than I can summarize:
"In particular, before investing in new business ideas for new businesses, why not want to know if you have a long-term business idea, or do you have the least chance to innovate with that business idea? Or why you don't want to know if another company is only Investing $100,000 or more in patents for the new business idea you are investigating?" - From IP Assets Maximizer.
These very important questions should be answered during the investor's due diligence. However, please note that terrain patent situation maps or other abstract visualizations do not represent sufficient levels of analysis. They may be improvements to simple lists [although some may think of this], but the right analysis must involve a detailed review of patent claims in the context of business and related technologies.
IP portfolio management reduces costs and increases profitability
While most portfolio companies that advance through specific risk funds are reliable and have a small portfolio of reliable patents, VC may be worth considering the entire IP portfolio as a whole.
I did a quick analysis of some regional venture capital firms - these companies have relatively few portfolios, and these companies are interested in investing in more than 300 and 600 patents. These are fairly large ports according to corporate standards. I look forward to finding a bigger port for a larger venture capital firm.
In companies with ports of this size, it is important to understand portfolios across multiple dimensions. For example, intellectual property professionals, marketers, and business leaders want to know which IP assets support which products. Understanding these relationships can enable companies to stop competitors, reduce costs, increase profits, and ultimately increase investor returns. In addition, they want to categorize their patents according to the market and technology they serve, as this helps them understand whether their patents are in line with their business priorities.
The introduction of this principle into the management of intellectual property portfolio has the added benefit of revealing patents that are not at the heart of the company's business. With this knowledge, a typical company will seek to reduce costs by expiring patents, or they may seek to sell or sell their non-core patents to create new sources of revenue.
Intellectual property license increases revenue
A patent that is not core to a company's business may still be of value to other companies and other industries. There are some well-known company examples that can generate significant revenue from non-core patents through a proactive licensing program - think of companies like IBM and Qualcomm. However, there are other companies that have generated significant returns by monetizing their non-core intellectual property assets.
For VC companies, each company may only have a small number of non-core patents. But across the company portfolio, venture capital firms may have a large number of patents that may be of value to other companies/industries.
We can extend the concept of monetization of non-core assets of top companies in the venture portfolio to "walking dead" or even portfolio companies that have closed down [although the latter two groups, we may not care much about core and non-core patents]. In many cases, business models and due diligence that support the original investment may be justified, but business failures due to execution or market timing issues. In many cases, basic intellectual property assets may still be fully effective, valuable, and available for entry into key licensing and monetization programs.
The multi-million dollar license revenue stream will complement the cyclical liquidity events in today's VC market.
Orignal From: Improve the return on risk investment by using IP portfolio management
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