Businesses that continuously innovate and demonstrate effective management of their IP will be more likely to succeed commercially and attract financing from VCs and investors. So what does a small technology company seeking financing need to know before beginning discussions with or investigations by VCs relating to IP?
VCs invest at various stages of a company’s life (pre-seed, seed, early stage, first round, second round, etc.). The size of the investment also varies, depending on the nature of the technology (for example, biotech companies usually receive greater amounts of funding than IT or industrial technology companies because of their lengthy and complex R&D phases) or the involvement of foreign VCs (such as those from the U.S.) in an investment round. Regardless of the stage or size of the investment, more sophisticated VCs usually focus on the manner in which the technology company is managing its IP assets and related risks.
The following are five key areas of interest for VCs who conduct some level of IP investigation or assessment before they invest:
- the IP assets or rights (such as license rights) owned or held by the technology company;
- the quality and scope of those assets or rights;
- the presence of any third party patents or rights that may potentially pose risks for the company, especially in the U.S.;
- the commercial relevance of the portfolio to the company’s business objectives; and
- any unprotected or pipeline technology that can still be protected.
Unfortunately, small technology companies often do not manage their IP assets or risks effectively. For example, if the company decided at the outset to forego patent protection, it may be too late to obtain such protection if the product or service has been offered for sale in North America for more than a year. This can be damaging if found during a VC’s pre-investment investigation.
Most Canadian technology companies focus on the U.S. as a key marketplace for their products or services. Since the U.S. is arguably the most complex IP jurisdiction worldwide, even a small technology company operating on a limited budget should have a clear and sensible position on each of the above five items.
Budgetary constraints are not usually a satisfactory reason for taking very little or no action on IP matters. In most cases, the technology and related IP are a small technology company's most important assets, and it should therefore act responsibly to show that sensible steps have been taken to protect these key assets. In addition, even a small company on a limited budget can use its own resources to conduct a cursory assessment of potential risks from third party patents in the U.S. An external IP firm is not required for this purpose until after the company has received financing (after which such services are recommended).
A technology company seeking financing should address the five items above in order to be viewed favorably by a VC during its pre-financing investigation. This process will effectively prepare the company for the next stage in the VC's investigation.