For early-stage drug discovery companies, intellectual property (IP) is often the cornerstone of value creation. Patents not only protect innovation but also serve as a key signal of credibility and commercial potential. As such, they are a central focus during investor due diligence. However, many startups underestimate the depth and complexity of IP scrutiny during fundraising. Without careful preparation, even promising ventures face delays, reduced valuations, or failed deals.
Why is IP due diligence so critical for startups seeking investment?
Investors typically engage legal and technical experts to assess the strength, scope and ownership of a startup’s IP portfolio. This process goes beyond simply counting patents. It involves evaluating whether the company truly owns its IP, whether the patents are enforceable and commercially relevant, and whether there are any legal risks (such as freedom-to-operate (FTO) issues or disputes over ownership).
Startups that have emerged from academic settings or collaborative environments may face particular challenges in establishing clear ownership. Incomplete assignment records, joint ownership arrangements, or lingering rights held by universities or former collaborators can all raise red flags. Similarly, if the IP strategy appears disconnected from the company’s business model, investors may question the team’s strategic vision.
What are 5 strategic ways to prepare for IP due diligence?
There are practical steps that startups can take to prepare for investor due diligence and present a strong, credible IP position:
1) Establish clear IP ownership. One of the most important steps is to ensure that the company has a clean and complete record of IP ownership. This means confirming that all inventors have signed assignment agreements transferring their rights to the company, and that any contributions from academic institutions or collaborators are clearly documented. Where joint ownership exists, it should be justified and carefully managed, as it can complicate enforcement and licensing.
2) Audit your IP before investors do. An internal IP audit is another essential tool. By reviewing all patent filings, assignments, and related agreements in advance, startups can identify and address any inconsistencies before investors do. This includes checking that filings are up to date, that maintenance fees have been paid, and that there are no conflicting obligations (such as prior employment agreements that might affect ownership). In the UK, funding support is available for professional IP audits via the UK Intellectual Property Office’s (UKIPO’s) IP Audit Scheme (subject to meeting the relevant eligibility criteria).
3) Craft a coherent IP narrative. Equally important is the ability to articulate a clear and coherent IP narrative. Investors want to understand how the company’s patents support its commercial goals. A concise summary of the IP strategy (such as highlighting what is protected, in which jurisdictions, and why) can help demonstrate strategic alignment. Startups should also be prepared to explain how their patents create barriers to entry, support licensing opportunities, or underpin future product development.
4) Address legal risks with FTO analysis. Including a FTO analysis in your data room can further strengthen investor confidence. Even a high-level FTO review shows that the company is aware of potential risks and has a plan to address them. If any third-party patents pose a concern, startups should be ready to discuss mitigation strategies, such as design-arounds or licensing opportunities.
5) Emphasize patent strength over volume. Startups should focus on demonstrating the quality (not just the quantity) of their patents. Investors are more interested in enforceable, commercially relevant patents than in a long list of filings. Highlighting granted patents with broad claims, international coverage, or successful enforcement history can help convey the strength of a portfolio. If the company has secured licensing deals or defended its IP, these achievements should be clearly communicated.
How can startups turn IP due diligence into a strategic advantage?
Investor due diligence on IP is a critical juncture for drug discovery startups. It is an opportunity to showcase not only the strength of the company’s innovations but also the professionalism and foresight of its leadership. By preparing early, maintaining clean records, and aligning IP strategy with business goals, startups can turn due diligence into a strategic advantage and lay a solid foundation for future growth.
