New Report from Coller IP Management and Angel News Calls for Major Rethink on Due Diligence by Venture Capitalists and Business Angels

Investing is not just about backing the right team

A new report by Coller IP Management into the due diligence processes of early stage technology investors has found that variable returns from venture capital and angel investments may be explained by inconsistencies in due diligence processes. The research behind the report was undertaken by Angel News on behalf of Coller IP Management - specialists in helping organisations define, protect and develop the commercial value of their intellectual property.

In the report, Coller IP Management and AngelNews invite a re-examination of due diligence processes by investors in order to improve the returns on investments. The results of the research, undertaken in autumn 2009, identifies that 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.

In particular, claims the report, there is an over-reliance on the ability of the management team to make the investment a success, at the expense of undertaking due diligence of the quality of the management team, commercial issues and intellectual property. This is leading to unpredictability in assessing returns on investment.

According to Jackie Maguire, CEO, Coller IP Management,

“Some venture capital firms, when undertaking due diligence, pursue a highly structured and formulaic process designed to optimize the efficiency of the exercise, with regular check points along the way to assess for deal breakers. Others are much more laissez faire. She continued: “Looking at the results, it can be argued that most spending on external advice is not being spent in a way that can impact on returns.”

Maguire adds,

“Whilst conventional wisdom in the venture capital community suggests that management is the most important issue, the report shows that variance in angel and VC 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 customer demand, supply chain processes, know how and branding.

“In practice we know that the management team rarely stays in place throughout the life of the investment, so why are investors not placing more reliance on assessing the IP and commercial potential of the business prior to investing, so that they know what they have invested in will have a great chance of succeeding even if the team is not perfect or will have to change?”

Modwenna Rees-Mogg, CEO of AngelNews said,

“It is already known that there are issues over how much due diligence early stage investors conduct, but the surprising findings are that Angels and VCs are more similar than different in their approach to due diligence, albeit the former tend to have tighter monetary budgets for their research and spend less time on it.

In addition, the lack of correlation in returns, when mapped against time and money spent on due diligence, surely suggests that the emphasis these investors place on the different aspects of due diligence must be challenged, and fast, so that the decisions made behind the 2010 vintage of investments are fundamentally better.”

A pdf of the report is available from the Coller IP Management website here

or on e-zine here