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How Investors Can Improve ROI
AltAssets January 2010

What factors do venture capitalists consider when deciding to invest in a company? This is the topic of a new report entitled Management, Management, Management - or what?. In the report, intellectual property specialist Coller IP Management suggests that a re-examination of due diligence processes by investors is needed in order to improve the returns on investments, writes Coller CEO Jackie Maguire.

The report, which details the due diligence processes of early stage technology investors, found that variable returns from venture capital and angel investments may be explained by inconsistencies in due diligence processes. The research identifies that some investors do not consistently follow a reliable and best practice due diligence process, and that the weighting investors give to assessing the different risks may be out of balance.

The survey aimed to further understanding of the issues faced by investors: in both assessing the differing risks associated with making a technology investment and in the relative importance they placed on the key aspects of the underlying asset portfolio. Most venture capitalists would say that they deploy a combination of research, analysis and gut instinct when deciding whether and how much to invest in a company.

 The survey, however, shows the “hunch” factor as being very heavily relied upon when committing often substantial funds to the success of a company. A further finding was that some venture capital firms, when undertaking due diligence, pursue a highly structured and formulaic process designed to optimise the efficiency of the exercise, with regular check points along the way to assess for deal breakers. Others, however, are much more laissez faire, which is surprising considering the sums of money often at stake.

A key finding of the report is there is an over-reliance on the assumed ability of the management team to make the investment a success. When survey respondents were asked which statements they most agreed with on a variety of issues relating to due diligence it was clear that most viewed the management and related issues as very important - but a significant proportion (10-20 per cent) did not see underlying IP or commercial issues as nearly so vital. The results of the research would seem to indicate that variance in angel and venture capital performance may in fact be due to too much emphasis being placed on management strength instead of looking at the wider intellectual capital of a business. This is not just the IP behind a technology, but also areas such as market positioning, customer demand, supply chain processes, know how and branding. more >