01/12/2011

By Modwenna Rees-Mogg, AngelNews

Investors - I wonder which of your investments have the potential to be worth more than your home? More about this a bit later. Did you know it’s your most exciting investments that are now facing the biggest risks, not the ones on your sick list?

Next time you cast an eye over your portfolio, I wonder what risks you will be looking to mitigate?

The news in recent days has been all about the fact that large companies - to you, the ones whose business models your investee company is looking to disrupt or destroy — have cash war chests. And, no question, they are going use this cash to protect and exploit their market positions wherever, and in whatever way, they can.

One of the ways the will do this, I promise you, will be by attacking other businesses whose IP threatens their products and services. If you don’t believe me, just look that the massive IP row in the smartphone world between Apple, Samsung and the rest. I wonder how much that is costing each side in legal fees alone - £100,000s, £1,000,000s, £10,000,000s?

Companies attack competitors’ IP because it is probably the single most effective way of stopping them in their tracks commercially, disrupting management time. The bonus of getting a big financial award in the end is the cherry on the cake.

After all, you can start an attack for almost nothing. You just post off a letter to arrive amidst the flurry of Christmas cards which are about to start dropping through the letterbox of the company you are targeting.

When times are tough, as we know they are going to be for the foreseeable future, even known and dismissed IP litigation risks suddenly rear their ugly heads; particularly if the target has or looks like it will have cash in the bank, making it worth attacking.

The best kept secret in the early stage tech investment world is that IP litigation between bigco and littleco is much more prevalent that you think. It’s a secret because most settlements are reached under the shroud of confidentiality agreements. That’s why you may not be fully aware of the issue.

But our research earlier this year showed that large numbers of tech investments do face at least one IP attack in its early years.

Even a relatively minor spat over IP will run into £10,000s if not £100,000s for a SME, and that is just the legal fees, but what if an injunction is issued that order you to cease trading whilst the dispute is resolved and all the costs that entails? And if you lose there will be a large compensation payout to be met.

Even if you don’t lose and end up paying a royalty to the litigant, imagine the knock on profitability it will cause.
Whichever way you look at it the soft costs are huge too. Our research showed it will probably take around 6-9 months of the CEO’s time — full time — to deal with just one IP dispute.

As attacks come when the business starts taking off and the litigant can see a big financial win for themselves, by slowing down or stopping them. So it is the highest potential IP rich companies, especially those you have funded well “to take advantage of the potential!” which are, in fact, at most risk.

So what are you going to do about it?

Back to that issue about the relative value of your home vs your investments.

I’m going to take a guess that your home is worth at least £1,000,000. I am willing to bet that you would not mind receiving a cheque for at least the same amount from your most exciting investment.

I guess too, that you insure your home. After all, if a fire broke out and destroyed it you would want get enough money to rebuild it or to buy another one wouldn’t you? And if your contents were stolen, you would want to make a claim to replace them.

So why aren’t you making sure that your favourite investment is insured against an IP attack? Based on current prices, it would take 50 years to make the costs of insurance more expensive than the typical payout you have to make you to finance the full costs of defending and settling an IP attack. To me it’s a no brainer. After all, once you have invested, it’s not the cost of your investment that matters. (Sensible investors mentally write that sum off on day one). It’s the opportunity cost of not getting the £1,000,000 cheque on exit.


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