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The venture capitalist perspective regarding intellectual property is easily understandable. Succinctly put, intellectual property is an integral part of value creation in a technology-based enterprise.
Patents, trade secrets, copyrights, etc., afford the protection and the opportunity to create unfair advantage in a market. Unfair market advantage should lead to dominant market position and above-average profits.
Strong profits most often mean higher capital stock values for the enterprise and a greater reward for the venture capitalist or technology investor. Consequently, the venture capital investor generally will not invest unless adequate action has been taken to protect technology and, accordingly, market position.
For the scientific and technology community the venture capitalists' view should be no surprise. Many have encountered circumstances where venture capital investment hinged entirely on the rigid assessment of a perceived value of underlying intellectual property.
Important role
There are obvious reasons why venture capitalists weigh the quality of proprietary position heavily in their investment evaluations. To better understand this perspective, it helps to understand certain elements of the venture investor's thought process.
Although venture capitalists play an important role in technology commercialization, they should not be confused with those who could control the mission to provide funding for basic research.
The focus of venture capitalism is commercial. Consequently, venture capitalists want to know where an invention fits in the marketplace, whether the invention offers a dramatic and sustained advantage, and whether there is compelling evidence to warrant building a business based on the invention.
These judgments are made on the basis of a risk profile of the project. Generally, venture capitalists use the following risk-related criteria to evaluate both the strength of an innovation and the ability of the entrepreneur to motivate commercialization:
- Market risk: Does the technology address a significant problem in the market position? What are the competitive alternatives and is the market large enough to yield a significant return on the investment?
- Financial risk: How much capital is needed to achieve a sustainable market position? What are the potential sources of capital required by the project in addition to initial venture capital investments?
- Management risk: What are the strengths and weaknesses of the scientific entrepreneur of the team? Is additional management needed and do the commercial objectives and expectations of the entrepreneur and the venture capitalist match?
- Technology risk: How strong are the proprietary aspects of the technology, including patent position and ownership; what further development is needed to get to the first product; manufacturability; and the potential breadth of the technology's application?
Although one of four key risks, technology risk assessment occupies a dominant space in the collective investment analyses of the venture capitalist.
Protecting core technology
In technology assessment, venture capitalists and their experts typically review all the entrepreneur's patents and published and unpublished patent applications. Key issues in strategy for protecting core technology are also reviewed.
Questions posed by venture capitalists often surround whether the patent strategy relies on the method, composition or other types of claims, where the entrepreneur's patent counsel expects difficult theoretical questions, whether the product strategy relies on broad or narrow claims, and what types of claims the patent counsel expects to be awarded.
Additionally, the degree to which anticipated patents will block potential competitors and whether title to the intellectual property is unencumbered are significant elements of review.
The question of title ownership of intellectual property is now receiving greater attention.
Ownership is often self-evident -- for example, when a project has been funded by the inventor. The classic example is that of an inventor working in a garage, developing an idea that has no prior art or similar contept. More common, however, is the situation in which someone who in the course of employment has an idea that may have been stimulated objectively by work in progress for an employer.
To defend against future challenges, the entrepreneur must establish a distinction between work that was truly part of employment and work that was independently created.
Establishing a proprietary position early in a technology's history is important because proprietary technology is the entrepreneur's top priority in selling a business proposal.
Too often the venture capital community is faced with exciting investment opportunities, only to find that the proprietary position has been weakened by inadequate patent coverage or late filings.
Good business practice will improve and protect the intellectual property asset. High among these practices, the scientific and technology community should integrate patent protection actions as a regular course of research documentation early in the discovery process. Patent counsel should be a regular contact for the scientific entrepreneur. If the entrepreneur wants to protect future commercial options, a constant dialogue during extended periods of new discovery is paramount.
More than just processing patent applications, patent counsel should be viewed as a key ally of scientific entrepreneurs for developing patent strategies focused on competitive markets. |
