Downturn in VC investment means investors must be smarter about their chosen targets

I was interested to read about a downturn in venture capital investment over the last year as a result of rapid unchecked inflation and interest rate rises. The Economist believes this will lead to three key changes in investment strategy:

• A switch from firms which are not profitable now but promise huge returns in the future to a focus on small firms which are profitable now;
• Preference for firms that are aligned with government objectives and stand to benefit from government support; and
• Insistence on a seat on the board for better oversight of investment.

Regardless of the criteria on which VCs decide to invest going forwards, it is clear that in all circumstances they will be looking ever closer at the prospective value of the target business.

A proper assessment of a business’ intellectual property assets not only assists investors in establishing the current value of the business but also enables them to consider how robust the target is likely to be to competition, and thereby value suppression, in the future. An intelligent analysis of IP issues is about so much more than simply looking at what rights the target has on the register. Questions regarding the validity of those rights, the existence and strength of unregistered rights to plug gaps, the direction of travel of the courts in respect of things like non-traditional IPRs or divergence from existing EU-derived case-law following Brexit can all have a material impact on the overall valuation of a business and yet are often overlooked in a cursory IP due diligence exercise.

Given the squeeze on available investment funds going forwards, and the resulting pressure to make  the “right” investment decisions, I would hope to see greater recognition of the value of instructing a true IP specialist to take a more thorough approach at an early stage of the investment process.

Until last year, venture capital (vc) had been riding high. With interest rates close to zero and little yield to be found elsewhere, large companies, hedge funds and sovereign-wealth investors began ploughing cash into startups, sending valuations upwards. In 2021 alone the amount of money flowing to startups doubled to nearly $640bn. Then soaring inflation and surging interest rates brought the market crashing down. Last year the investments made in startups worldwide sank by a third. Between the final quarter of 2021 and the same period in 2022, the valuations of private startups tumbled by 56%.

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