Five Questions VCs Should Ask About IP Before They Invest

Intellectual property diligence too often starts with the wrong question: how many patents does the company have? For venture investors, that is rarely the most revealing answer. The real issue is whether the founders understand IP as a strategic asset — something that protects ownership, supports freedom to operate, strengthens the commercial moat and increases the company’s value before the next funding round. A patent schedule may show what has been filed, but it will not tell you whether the business is defensible.

These five questions have been developed in real funding discussions, and are designed to help VCs move beyond box-ticking diligence and really test whether a startup’s IP position is genuinely investable.

1. “Tell me about your IP”

A deceptively simple question, but letting founders lead the conversation can be surprisingly effective for cutting to the key issues.

On the surface it sounds broad and unscripted. In practice, it is extraordinarily revealing because it tests not only the company’s IP position, but also management’s understanding of why IP exists in the first place. Most founders will be prepared to be asked about the number and scope of their patent filings, but opening discussion with a judgement question forces them to decide what actually matters. The key insight is that the answer reveals their strategic thinking, and tells you far more than a patent schedule ever will.

Perhaps most importantly, it lets them reveal themselves before you start asking the harder questions. A founder’s first five minutes answering this question will often tell you whether you’re speaking to someone who has an ad-hoc portfolio, or someone who actually has an IP strategy which views IP as a business asset.

2. “Who actually owns the IP, and where can that ownership be attacked?”

This sounds mundane, but for venture-backed startups, chain-of-title risk is often a larger threat than validity risk.

We have seen more value destroyed by ownership defects than by infringement disputes. Despite this, the concerning reality is that many investors spend more time reviewing patent claims than reviewing assignment chains.

Failure to identify all owners, secure proper assignments, and clear any open-source contamination compounds with time. Inventors move and become hard to contact, only to come crawling out of the woodwork once you are successful for a slice of your exit. Once a technology stack is built on top of disputed IP, it becomes increasingly expensive to substitute, with worse outcomes for negotiations. Tying up these issues early is essential, but all to easily overlooked. For investors, this is an important gauge of the sophistication of the company, and a useful lever during term-sheet negotiations.

3. “What is your moat when you outgrow your current patents?”

What would happen to a company if every patent application they own disappeared today? Given the risk of opposition or revocation, this is far from an academic question.

Many startups believe patents create exclusivity yet, in reality, they are only one factor in building a moat. Customer adoption, data, know-how and execution are all key aspects, and sophisticated teams will have identified these as assets and ensured they are adequately protected.

Moreover, a sophisticated team will have a clear pipeline of developing IP around their developmental lead, including formulations, processes, and dosage regimens. In time, these will progress into new patent filings, providing overlapping layers of defensibility around the technology.

Asking this question allows VCs to probe how the company values their IP, and whether they agree with this valuation. Companies who fail to realise that their current filings are their core proposition, or who inadequately build fallback positions into their portfolio may lack credibility when compared to their peers.

4. “What is your freedom-to-operate strategy… if you succeed?”

Many startups assume IP is about protecting themselves from copying. In reality, once revenue grows, IP often becomes about protecting themselves from being blocked. Unfortunately, establishing Freedom-to-operate (“FTO”) is challenging for founders and investors alike. Proving that there are no infringement risks is obviously appealing, but attempting to prove this negative could easily incur costs far beyond what is justified by the size of investment. As a result, for early-stage companies who think they are “too small to be sued”, FTO analysis usually focusses on identifying and clear and credible risks to current activities. This, however, misses the point.

Success attracts litigation. As such, the question is what happens once a company becomes important. Consider the risk-appetites of dominant players in the field, the need for (cross-)licences, and the viability of mitigation and defence strategies in the event an infringement suit is brought. These are important, but frequently overlooked, steps in FTO analysis.

Focussing on FTO after a company is successful helps hone the discussion, and separates founders who haven’t thought about their strategic roadmap from those who can see the bigger picture.

5. “At your next funding round, if a new lead investor commissioned an independent review of your IP, what would you expect them to find that is stronger than it is today?”

This question shifts the discussion away from today’s patent count and towards something far more revealing: whether the company has a credible plan to strengthen its competitive position over time. As a VC, you are not investing in an IP portfolio as it exists today, but in management’s ability to build a more valuable, defensible and investable business before the next round.

The strongest answers are rarely about filing more patents. Instead, founders should be able to explain how their IP position will mature as the business grows: stronger ownership and assignment records, greater freedom to operate, better protection of trade secrets, granted rights replacing pending applications, and clearer alignment between IP strategy and commercial objectives. In other words, what will make a future investor more confident than you are today?

The question is particularly powerful because it tests whether management understands that scrutiny increases with every funding round. What satisfies a seed investor may not satisfy a Series A or Series B lead. Founders who can articulate how their IP position will evolve tend to have a clear IP roadmap. Those who cannot may simply be accumulating filings and hoping for the best.

For VCs, the real value lies in understanding that roadmap before the next investor does. An independent assessment can often reveal whether the business is genuinely strengthening its competitive position or merely increasing its patent count. The most attractive companies are not those with the largest portfolios, but those whose IP strategy is demonstrably becoming more robust, more defensible and more aligned with future value creation.

If you are assessing an investment and want to know whether the IP position is creating value or storing up risk, HGF can help you ask the right questions before the next funding round does.

This article was prepared by HGF Patent Director Andrew Tindall