IP due diligence on start-ups

By Anton Blijlevens, AJ Park

The three most critical IP due diligence questions I ask before investing in a start-up are:

1. what IP have they already protected or can they still protect?
2. do they have freedom to operate?
3. do they own the IP they purport to have?

Even if the start-up is unable to answer these questions with certainty, it’s still worth asking some high level questions. Here are nine quick areas to explore:

1. Are the core value drivers in the technology protected by patents or by trade secrets?  You will want to know if their business model is going to rely on the trade secret route or the patent route. The trade secret route is potholed with risks that others may steal the secrets or independently derive them. The patent route is expensive. Perhaps they are a ‘me-too’ model company, in which case the only form of IP that may be applicable is brand protection and copyright.

2. Have they had positive results from patentability searching? How much have they spent on this?  A cheap, low cost, but not very conclusive patentability search done by an IP firm may cost around NZ$1,500-$3,000. Depending on the technology, a thorough patentability search may cost NZ$4,000+.

3. Have they done any FTO searching for IP rights of others in countries where the product or service will be used or sold?  An FTO search and opinion on infringement risks in the USA will cost no less than NZ$7,000 depending on the technology.

4. Who has done the IP work? For technology-based IP, it is important to ensure that the IP advisor is qualified in the same technical field as the technology in question. They know the technology, know what it takes to design around IP protection, don’t need to spend hours being brought up to speed, know where to conduct prior art and FTO searching and may sometimes make valuable suggestions to improve the technology even further.

5. If the patent route is to be followed, find out what stage they are at and see if the spend per invention is at least the amount shown it the timeline below, at the appropriate phase of their protection process.

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6. If they are pre-provisional then a very important question to immediately ask is, ‘have you kept your IP confidential?’  All ideas start off as a trade secret and this status must be maintained until the provisional application is filed if the patent protection route is going to be pursued.

7. Some patents are filed as window dressing. Ask about earlier technology and if any searching for such has been done. Seeing the current state of the art will help you understand what their patent will never cover. A patent cannot protect what is already in use or published. For early stage due diligence and when the investment is low, you can take a low cost approach to figuring out the usefulness of a start-up’s patent application.

8. Be very wary of trade secret protection for technology. Trade secrets are vulnerable to theft, reverse engineering and independent design.  Know about the industry and any obligations for information to be revealed for public safety reasons. For example, food labeling requirements often result in the secret sauce being revealed.

9.At a recent investment evening, I heard about a clever smartphone app. A quick search on the app store showed that the market was pretty crowded already. I was also able to find that the brand they had selected was going to run into trouble with an existing trade mark registration showing on www.iponz.govt.nz. You can also get onto Google patents and do free patent searching.

The key message is that there are a number of pragmatic tools and high levels questions that can be used to assess the IP position of a start-up, not all of which involve high costs. Whatever you do, don’t skip this step – it can yield useful and valuable information for investors and founders alike.

The Resources Guys, in collaboration with AJ Park offer an excellent “Getting Started” workshop that is eligible for NZTE voucher funding assistance to work through many of these issues in a very cost effective way.