- Nine out of ten tech startups fail, which makes the due diligence process especially important for both investors and the companies seeking their capital.
- Investors typically evaluate a startup’s protection of its intellectual property, gaps in that coverage, and whether commercial activities align with its IP goals.
- Due diligence also covers updated business plans, contracts, corporate governance documents, and legal/litigation risk across areas like tax, employment, accounting, and foreign law.
- Companies that proactively address these legal and IP risks ahead of time put themselves in a stronger position both to attract investment and to defend their market share later.
The Lure Of “Disruptive” Companies
By: Rajkumar (“Kumar”) Vinnakota
Chances are, most young technology companies would describe themselves as “disruptive.” Yet the sobering statistic is that nine out of ten tech startups will fail.
For investors, such an uncertain landscape presents a significant challenge to find a successful technology investment. This is why it’s imperative technology companies be aware of “what investors want to see.”
Whether you are courting a single investor or a private equity fund, tech companies must understand and be prepared for the investment due diligence that is critical to grow their companies and protect their futures.
Mitigate Investment And Litigation Risk
Understanding the role that initial investment due diligence plays is not only important for infusion of early to late-stage capital, but also for successful protection in defending an innovative startup’s market share (e.g., future licensing and/or enforcement actions in court). Investors review company performance to ensure that certain steps are taken to shore up any identified legal risks/weaknesses.
These metrics range from:
- Protecting intellectual property,
- Identifying any gaps in coverage,
- Reviewing updated business plans,
- Commercial activities for congruity with intellectual property goals,
- Updating company policies,
- Contracts and other legal documents to reduce investment,
- Litigation-related risks,
- Updating corporate formation and any related foundational documents governing the company for ongoing compliance with best practices,
- Updating corporate governance documents as the company grows,
- Mitigating legal and litigation risks in tax,
- Employment,
- Accounting,
- Foreign law, and
- Other specialized regulatory areas.
Being Proactive Matters
Startup and technology companies that think ahead and lay the foundation for limiting risk better aid themselves and their investors decisions. The coveted 10% success stories are those technology companies that are proactive and ahead of the game – indeed what true disruption is.
For more information visit www.jvllp.com.
