HomeKnow-HowAre you ready for investors to scratch deeper than ever?

Are you ready for investors to scratch deeper than ever?

Editor’s Note: This article has been contributed by Guest Writer, Peter Finnie.

Venture capitalists’ relationship with risk has certainly become a little more distant. 2022 showed a community spooked, with VC funding across Europe falling short of the €100 billion total investment mark set in 2021. A total of €91.6 billion was invested last year. What’s a few billion between friends, right?

Unfortunately, with Limited Partners holding back and other more recent scares such as Silicon Valley Bank’s collapse, VCs are exercising greater caution – while doubling down on their ‘winners’. And that means more rigorous due diligence.

This doesn’t mean the rise of scaleups and their impact on national economies is over, however. In the UK alone, there has been a 13% increase in ‘visible scaleups’ – those breaking through the £10 million turnover level or with assets of more than £5.1 million. In France, the investment in Station F’s startup campus has been influential in busting through President Macron’s self-imposed target of 25 Unicorns by 2025 3 years early. And the German government’s ‘Zukunftsfonds’ has mobilised tens of billions of Euros to fund technologies of the future.

Every leading European nation is pinning its economic recovery on the value of its scaleup community. Nevertheless, 5 in 10 scaleups believe they lack sufficient capital to meet their current growth trajectory and the ‘Valley of Death’ for follow-on funding is becoming deeper and wider. This begs the question of what scaleups can do to ensure they have the best chance of securing funding from VC and angel investors.

Uncertain macroeconomic trends have led to uncertain investors

In 2023, we’re facing an almost unheard of ‘scaleup cemetery’, with figures showing a global VC funding drop of 33% between Q2 and Q3 – this is 53% lower compared to the same time last year. It’s clear that the days of multi-million initial funding rounds are over, at least for now, as macroeconomic trends such as increasing costs, a global energy crisis, and geopolitical instability create cause wider concern.

For scaleups that have relied heavily on a period of cocooned R&D with investors showing trust and belief in the potential, cases such as Theranos have left investors angry and fearful of being taken for a ride. This perfect storm of events has directed greater focus on the inner workings of businesses they are looking to back, with more thorough due diligence than in the past.

Founders often dread due diligence, but this was ok when it was a seller’s market, with investors jostling to issue term sheets and the inherent costs and delays required by professional due diligence regarded as an expensive distraction. But if founders are to successfully bridge the funding gap and bypass the ‘Valley of Death’, it’s vital to flip the thinking. Rather than viewing it as a daunting obstacle, it is a mutually beneficial exercise for founders and investors to identify issues that may later arise.

A good IP due diligence strategy starts with patent protection

Intellectual property (IP) strategies are often left to the wayside by founders, as they view them as consuming unnecessary time and money. However, particularly in the context of the current climate, scaleups must be equipped with the answers that investors want to hear during the due diligence process – this starts with IP.

In high-growth, often high-risk sectors such as life sciences, AI and digital health, investors will want to see that a robust IP strategy is already in place in order to protect intangible assets. For the investment-savvy scaleup, this is one of the first processes to take into consideration for your business. Not only this but patent protection and any trade secrets policy must be consistently revisited.

Between 80 and 90% of a company’s value lies in its IP and intangible assets. When one considers that investors will be looking to invest millions into the business and idea, it comes as less of a surprise that investors expect at least some level of market ‘ownership’ that a consistent patent protection strategy brings.

Active patent protection to prepare for investors to scratch deeper

Often, founders fall into the trap of filing multiple patents at the startup stage of their business but neglect to ensure it aligns with the company’s growth strategy as it reaches the critical stage of scaling up. These IP gaps – much like a CV – lead to challenging questions. Ultimately, companies that fail a due diligence health check will fail to secure the next round of investment or achieve the valuation they deserve. IP protection has to follow the technology roadmap.

To avoid these pitfalls, consistent internal IP due diligence for investment readiness must be part and parcel of your business strategy. This includes continually reviewing the relevance of your patent portfolio and identifying any gaps, as well as reviewing IP agreements and other commercial contracts to ensure correct legal ownership of IP pertaining to future revenue drivers. The IP data room must be ready to go at all times.

Just as founders strive for follow-on investment, so they must seek follow-on patent applications for new innovations. An explicit IP strategy implemented well can help bolster intrinsic value and ward off competitor ‘trespassing’ by creating a deeper protective moat, instilling investor confidence in your scaleup.

In a buyers’ market, founders must be prepared for investors to scratch deeper into the due diligence process, and work collaboratively with them – or else risk slipping into the gaping recesses of the valley.

Peter Finnie
Peter Finnie
Peter Finnie is a Partner and Patent Attorney at Potter Clarkson, an IP law firm. Peter’s focus is to help businesses maximise the commercial return they realise from their innovation and intellectual property. He works with different startups to help them develop their IP strategies in a way that will build their corporate value.

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