Lessons on IP and Investment from TIN’s Investor Guide Launch

Last month TIN launched the Investor’s Guide to the New Zealand Technology Sector, a comprehensive guide to investment in New Zealand technology companies. This was marked by the event "Series A Success – Making the Leap from Angel to VC" in which a panel of experienced investors and leaders of NZ technology companies offered insights into technology investment.

The discussion covered a range of aspects of the investor / investee relationship and there were valuable learnings when it comes to intellectual property (IP) in the investment process.

Clearly, investment in the NZ technology industry is growing. Venture capital investment in New Zealand has grown from $60m to $270m in the last four years*  and angel investment in early stage technology companies increased 31% in the last year to reach $99m.** This shows the NZ technology sector is increasingly being considered a place where successful technology companies start and expand successfully.

The panel at the event was made up of an impressive mix of investors (John Henderson of AirTree Ventures, Jason Graham of Movac, and Chintaka Ranatunga of Global From Day One Fund II) and successful NZ technology companies having received significant capital investment (Jo Mills of Fuel 50, Alex Fala of Vend, Mike Carden of Joyous and Grant Straker of Straker Translations). Rebecca Smith of Nasdaq South East Asia also participated in the discussion.

Some common themes arose. For example, everyone emphasised that a relationship between the investment-seeking company and potential investors should be established early in the process, well ahead of the time the capital is required. This gives time for the parties to get to know and appraise each other before a decision on whether to offer or accept investment capital is due.

IP forms a huge part of the value of any technology company, particularly early stage companies and start-ups. Some estimates put the value of non-tangible assets at over 80% of an average business’ value, and this value is possibly as high as 90% for start-ups. A company’s IP, then, is of significant interest to an investor.

The panel highlighted that, for a NZ technology company seeking investment, it is crucial to get an understanding of IP from as early a stage as possible so that the IP position can be communicated to potential investors well ahead of when investment is required. This means a company identifying, documenting and, if appropriate, protecting its IP, and formulating and being able to articulate an IP strategy.

Investors conduct due diligence on a company when deciding whether or not to invest. The due diligence process varies in its extent, but IP is always an important factor given its potential value. Sometimes IP considerations in due diligence can be left until near the end of the process, by which time it is usually too late to remedy whatever issues are identified.

Panellists at the TIN event suggested a company that is, or soon will be, seeking investment should have the information investors seek during the due diligence process already prepared and ready to go. This provides two benefits. Firstly, issues that are likely to cause an investor real concerns can be identified early and remedies put in place. A common example of an issue in the due diligence process we come across is the IP not being owned by the entity seeking investment. For example, a subsidiary, sister company or founder might own the IP. Where there is significant value in the IP this is a real problem for an investor as they may not end up with a share in the company owning this value. Usually this can be readily fixed, but sometimes there are difficulties or delays in doing so.

The second benefit of having due diligence prepared is that, when the parties are ready to proceed with the investment, there is no delay from conducting due diligence on issues that can be assessed earlier, when time is less critical.

The TIN event offered a huge amount of optimism and excitement in the opportunities available to NZ technology companies seeking to grow. It also provided some valuable lessons for managing IP in the lead up to an investment round considering the amount of a company’s value captured in IP.

*EY/NZVCZ New Zealand Private Equity and Venture Capital Monitor 2019.

**PWC/Angel Association NZ (2019).