IP Due Diligence Reduces Risk of Investments in Startups

Because new technologies such as artificial intelligence, Big Data, the Internet of Things and blockchain are developing rapidly in China, Chinese high-tech startups have become the most popular investment targets for multinational companies. While intellectual property is the greatest asset of these startups, it also poses a high risk to investors. Is its IP protected or at least protectable? Are the rights sustainable? And does the young company have freedom to operate, or does it infringe on others’ IP rights? 

To reduce the risk and losses of a bad investment, we recommend that investors conduct an IP due diligence of the target company before deciding to invest. This focuses on the ownership of the core technology from which the start-up’s competitiveness is derived. If this core technology is licensed by third parties or even used without authorization, there are major risks for investors. The Startup could be thwarted in its further business development and even sued by the rightful IP owner.

The quality of the IP and its importance for the core business also influence the future profitability of a start-up. IP due diligence can analyze the stability of core patents, as well as the status of litigation and possible invalidation notices against the target company. This is particularly important in China because Chinese companies file patents en masse, especially in the aforementioned high-tech areas. This huge reservoir dramatically increases the amount of prior art that must be considered when examining a start-up’s IP. Our experience in projects shows that there are often big surprises here with Western companies.

Picture: Unsplash

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