Eagle Private Equity’s Pre-IPO Fund seeks investments in companies with unique Intellectual Property, in large markets where the impact can be maximized.
Investing in intellectual property can be a lucrative investment opportunity if you do it right. However, there are some important concepts you should understand before pursuing such an undertaking.
Early Stage Companies with Intellectual Property
A big problem many new technology companies and startups face is obtaining their first round of funding. In most cases, a new company has limited options for gaining initial funding:
- Going into debt
- Obtaining friends and family investments.
- Seeking individual Angel investors in their community.
- Going on Kickstarter or another crowd funding platform.
Understanding the Opportunity Size
Key to choosing which opportunities to invest in requires the assessment of the importance and the market size of the technology. As Warren Buffet has said a great improvement in trombone lubricating oil, one that led to owning the whole market, still would only be worth $100,000 in revenues per year.
To properly assess the potential, you have to uncover the following:
- Know how an innovation or invention is going to fit into the current market, specifically relating to potential competing products or services that may already exist or could possibly exist in the future.
- Know if you are investing in has a large, sustainable advantage over the competition.
- Know the evidence that suggests building a business around the proposed innovation or invention is warranted.
Evaluating Strengths and Weaknesses
Investors want to evaluate the strengths and weaknesses of an invention thoroughly, as well as the entrepreneur’s ability to motivate sales. Venture capitalists do what they do because they want to get the maximum possible return on their investments with a minimal risk. Potential risks an investor will need to consider include things such as:
- The current market
- Financial considerations
- Managerial considerations
- Technological requirements.
New technology companies typically cannot afford things such as litigation. This is because they need to apply most of their time and their resources in developing their product or service. Then, they must attempt to commercialize it. For this reason, if there is a potential legal concern that may come into play, the possibility of obtaining fruther investment is greatly reduced. For example:
- Patent lawsuits can cost around $500,000 for a single claim if they are brought to trial.
- Trade secret lawsuits can cost anywhere from $300,000 to $500,000.
As a result, intellectual properties that come in the form of something like a trade secret will usually be more attractive to a potential venture capital investor than a theoretically “weak” patent, which could potentially be open to facing legal action. One good example of the impact intellectual property can have on the potential success of a company is the fact that venture capitalists tend to favor investing in them.
The Importance of Intellectual Property Assets
Technology-based companies can primarily benefit from the exclusive rights the intellectual property system offers. When the intellectual property system is properly utilized, it can contribute in a number of beneficial ways, such as higher capital return rates. This is important when companies are attempting to attract follow on investors.
It is important to evaluate the economic value of things carefully, such as:
- Computer software
- Internet domain names
- Intellectual properties.
Potential investors should carefully consider these things when analyzing whether a company should receive an investment. Investors should use established and consistent methods to evaluate a company’s intangible assets, so as to make an informed decision about whether a company should receive an investment. The potential security of specific intellectual property is one of the most important things that a investor should evaluate.
Under normal circumstances, a strong patent is highly desirable. The ownership of the intellectual property should also not be able to be called into question. The investor should also take the potential financial burdens associated with patents into consideration.
There are a number of market-specific mechanisms that can play a critical role in the diffusion of technology. This can cause the process of innovation to become:
- Highly competitive
This can also help to create new technology-based companies.