Venture Capital

Venture Capital

I, one of your editors, often invest my time and work with small ventures.  Start up companies with no revenue or just starting to make revenue in exchange for some deeply discounted stock or stock options.

It was during my work with one of these small companies that I saw the classic conflict of “need to disclosure”, “engineers who are too trusting” and “competitive intelligence’’.

The company possesses a fair bit of Intellectual Property and Critical Information and had filed 12 patents.  A lawyer told the company executives that they had to file the patents to protect their intellectual property and they should disclose these files to potential investors, as the investors needed to make fully informed choices.  The principles of the company did as they were instructed by the attorneys.

Management filed patents on every thing they could, even some matters that fell more into tradecraft as opposed to a patentable idea.  All of the filings were included as an appendix to the offering memorandum.  The lawyers also advised that they file an S-1 offering as well as merge the company into a shell so the investment shares would be tradable immediately.

There is an entire industry built around mining the miners. There is also an entire industry built around mining the entrepreneurs.  Advice peddlers who honestly think they are doing their best to help the entrepreneur both succeed and remain complaint. I also find that these so called “experts” ( mostly lawyers on the lower tier of competence ) honestly believe in what they are doing.  This is all the more dangerous.  A patent only gives you a right to make a legal claim to stop others from using the idea covered by the patents.  It is much like a driver’s license in that while you have the sheet of paper – actually owning, maintaining, and defending patents, like owning, fueling and insuring a car is more expense than the fee of the license.  Furthermore, the expense of crafting, submitting and making a offering of shares in a public market will often eat up 25% of the funds raised from commissions, filings fees, legal fees, audit fees, etc. Furthermore, like a driver license – going public is a lot easier than running a public company and often cheaper.

In the end I walked away from this company as the principle would not listen to very sound and hard won advice that all of the disclosure of the patents filed, not yet issued, and the cost of going public before they had any revenue – let alone profits, was a very bad idea.  How bad, looking at the list of people they met for money, 4 of the potential investors were all employees of likely competitors to the product from Fortune 500 companies.

The “if chain” became too high for me.  If they get funding for the 2 million they want net to begin production, they will need to raise 3 million and if they raise the 3 million they will need 200K per year to be a public company and if no one infringes on their patents,  they have to or might diver money from production to patent defense as this was not part of their budget, and if no one beats them to the market…etc. etc. etc.…

The proper method would have been to keep the technology private, seek private funding, and implement an aggressive OPSEC program and CI – for monitoring competitor’s developments.  The idea is to keep private what you have as long as you can and only file patents when a competitor looks like they are coming close to your space.  Use the private funding to get you into production and flood the market place and brand the technology space as yours and everyone else as a pretender.

Once you have his  sweet spot you are more likely to be bought out by a competitor as opposed to wasting time and energy and substantial sums of money by going public at a time of weakness.  If, however, you wish to go public – you can do so later from a position of strength.

But it was not my company, not my idea and not my money. Thus, the 25 plus years of my assisting companies was ignored and attorneys and accountants with less than 5 years  experience began to run the strategy of the company.  They make their fee and move on, yet it is unlikely that by acting on their advice the owner will ever see a dime of investment or the fruits of their labor. A patent is only as good as the litigating funding you have to back up the claim.  And a public company is not complete at this stage – especially not merging with a shell.

Development stage companies need advice that is appropriate to their space, place and timing of their technology.  There is no one model that fits all.  It is also most certainly not passing out keys to Bentleys and Ferraris to brand new drivers.

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