Guide on Intellectual Property

Evaluation and Support
for Venture Capitalists
Common IP Pitfalls and Countermeasures

Japan Patent Office
Ministry of Economy, Trade andIndustry
Fiscal Year 2018

INTRODUCTION
In order to accelerate the growth of startups, it is essential to coordinate initiatives in intellectual
property (IP) with the business environment and strategy. Especially for deep tech startups which
commercialize innovative technologies, the IP strategy will greatly affect the success or failure ofbusiness growth.
However, since startups have limited funds and human resources on their own, their efforts may
be limited, or they may not be aware of the importance of IP in the first place. Although IP specialists
including patent attorneys and lawyers can support the startup’s IP strategy, it is often too late whena startup consults these specialists.
Investors, on the other hand, often have a deep connection with startups from their beginning andthus, are most likely the key players that can give the appropriate advice to strengthen a startup’s IP
strategy. In addition to providing advice, investors are also in a good position to financially support
the cost of implementing such IP strategies. This guide was made to “enable stronger support frominvestors for the IP strategies of startups”.
This guide for investors gives a comprehensive summary of the pitfalls startups may encounter in
relation to IP evaluation and support, and possible countermeasures to these pitfalls. We believethat it would especially benefit investors considering IP evaluation and support.
Three main features of this guide are as follows:
1. It is the first IP guide written for investors;
2. It collates real-life cases of pitfalls encountered during investments;
3. Case studies include both domestic and foreign cases.
We sincerely hope that this guide will enhance your appreciation of evaluation and support ofintellectual property.

March 2019Japan Patent OfficeCONTENT
Introduction
Executive Summary ··············································································· 1
Chapter 1
Chapter 2

Significance of IP support by investors······························ 2
IP strategy support by investors ········································ 4

Chapter 3

IP milestones and pitfalls at each funding stage ··············· 8Angel Round ··················································································································· 12
Pitfall 1
Pitfall 2
Pitfall 3

Lack of IP strategy in business plan ·························································· 12
Pre-filing disclosures of core technology ··················································· 14
Limitations on IP licensing in a joint research contract·································· 16

Seed Round ···················································································································· 18
Pitfall 4
Pitfall 5

Lack of business perspective in setting the scope of a basic patent ··············· 18
Issues in the license agreemen t which hamper startup growth and exit ········· 20

Series A Round ······················································································· 22
Pitfall 6
Pitfall 7

Mismatch between scope of IP and business model···································· 22
Low incentive of CTO·············································································· 24

Series B Round ······················································································· 26
Pitfall 8Competito r’s patents blocking the use of company’s basic patent················ 26

Series C Round ······················································································· 28
Pitfall 9
Pitfall 10

Infringement warnings and lawsuits from competitors just before IPO···· 28
Lack of global IP and standardization strategy································ 30

CVC ····································································································· 32
Pitfall 11
Pitfall 12
Pitfall 13

Chapter 4
Conclusion

CVC limiting collaboration between startup and potential competitors ··· 32
Lack of objectiveness in evaluating investments in existing fields········· 34
Lack of evaluation and “hands-on” support capabilities in new fields ····· 36

Framework for IP evaluation and support ················ 38········································································ 40

EXECUTIVE SUMMARY■ Chapter 1
Significance ofintellectual
property support
by investors■ Chapter 2
IP strategy
support byinvestors■ Chapter 3
IP milestones andpitfalls at eachfunding stage

With increased investments in deep tech startups and broader efforts foropen innovation by operating companies, evaluation and support for IP arebecoming crucial for venture capitalists in order to improve the startup’s
corporate value and to proceed toward exit. As a result of investors’
support, we are seeing successful cases.
A major consideration for IP strategy is not only to broaden the scope ofprotection, but also to constantly consider the elements of IP at various
points in the overall management strategy. Investors have overarchingviews of management strategies and can therefore play an important rolein developing IP strategies. The proper incorporation of IP elements informulating business plans is crucial in order to avoid IP pitfalls.
The important points in a startup’s IP strategy change depending on thefunding stage. Thus, it is advisable to set milestones for intellectual
property according to each funding stage.

There are pitfalls just before and after the establishment of a university
spinout that could have major impacts on its future growth. Such pitfalls● Pitfalls during
include pre-filing disclosures of core technology at academic meetings
Angel Funding ~ which makes the invention unpatentable, and problems in the licensing
Seed Funding
agreement with universities. Therefore, it is important to incorporate an IP
strategy into the business plan to avoid such pitfalls during these funding
stages.
● Pitfalls during
Series A ~Series C
Funding● Pitfalls of CVCs

■ Chapter 4
Framework for IP
evaluation andsupportAfter series A funding, there can be more pitfalls such as mismatches
between the business model and scope of IP, and the IP strategies ofpartner companies or competitors which may block the scaling-up ofbusiness and exit. We therefore need to ensure effective IP governance.
Evaluation of IP by CVC becomes distorted in existing fields due to closed
innovation, while in new fields the evaluation can become difficult. Care isalso needed not to focus too much on exiting collaboration businessincluding the CVC’s company.
It is important to structure in-house IP evaluation processes and to build
a framework that can provide support after investments have been made.
It is also useful to share know-how within the company instead of leaving
it to a specific IP person. Building networks and collaborating with IP
specialists such as lawyers and patent attorneys is also important.

- 1 -Chapter 1 Significance of IP support by investors
The increasing need for IP support from investors
Venture capitalists (hereinafter “investors”) support the growth of deep tech startups
possessing innovative technologies, and their importance is increasing year b y year. The
competitive advantage of these startups is their technology and new business models built uponthem. In order to ensure the rapid expansion and continuity of these businesses, it is necessary
to protect “intellectual property (IP)” as a whole. This not only includes IP rights such as patents,
but also know-how and IP protected through contracts. We also need to positively utilize such
IP as a means to strengthen our business.
The increasing complexity of industrial structures and technologies in recent years has
encouraged broader open innovation efforts by operating companies. For startups, thisincreases chances for tie-ups and M&A exit strategies with operating companies, which is
becoming more important as a way to quickly apply technology to society. From thisperspective, flaws in the IP strategy of the startup may affect the success or failure of thealliance / acquisition or may be the reason for discounts in M&A transactions.
On the other hand, the proper evaluation and active support by investors in IP will not only
protect the competitive advantage of these startups, but also increase business growth andexit options, and increase corporate values. For investors, this will lead to further investment
and various exit options which will ultimately maximize returns.

- 2 -Case study of IP evaluation and support by venture capitalists

Case Study

Gap fund provided IP support and gained huge
returns

Natural Motion is a Deep tech startup spun out in 2001 by Torsten Real, a student who wasresearching neuroscience at Oxford University. The company developed a technology in which 3D
people and animals in a game interact with each other and move naturally. Initially, Oxford
University’s gap fund made a seed investment of £25,000 (approx. 4.3 million yen) and supported
the formulation of business plans and establishment of the company.
Patents were important because the company adopted a business model that utilized theirpatents through licensing to game production companies. Oxford University therefore advised
Torsten to obtain patents which would cover his core technology. The core patent was
subsequently granted, and the technology was adopted by a major game company.

In 2014, Natural Motion was acquired by Zynga (a US social gaming company) , a major gamecompany, for $527 million (approx. 55 billion yen). As a result of this acquisition, Oxford University
gained £33.6 million (approx. 5.8 billion yen) in proceeds from the sale of its shares.
(Source) Oxford University “Oxford digital spinout completes $500m sale””(12 th Feb, 2014)
Oxford University “Financial Statements 2014/15”
Financial Times “Gaming group Natural Motion began in Oxford’s zoology department”(31 st Jan, 2014)

Case Study

IP lawyer within VC supported IP strategy leading to M&A

A US VC employs an IP lawyer as a managing director. One deal involved the VC investing $40
million (approx. 4.5 billion yen) in a startup. Af ter the investment, the in-house IP lawyer advised thestartup to promptly apply f or an international patent and the startup was able to secure patent rights in
the US and Europe within two years of f iling the PCT application. Furthermore, af ter being explainedthat the startup’s products were protected by patents, an operating company acquired the startup f or
$200 million (approx. 22.5 billion yen). As a result, the VC gained a huge prof it from the acquisition.
(US Venture Capital)- 3 -Chapter 1
Significance of IP

We are starting to see cases where investors focusing on the startup’s IP and offering handson support for IP strategies earn huge profits both in Japan and in foreign countries.

Chapter 2 IP strategy support by investors
Patent rights are not the only "intellectual property" that investors
evaluate and support
First of all, patent rights are not the only "intellectual property" to be considered. Names ofcompanies and products are protected by trademarks and designs are protected by design rights.
Furthermore, know-how, data, trade secrets such as customer information, and copyrights are also
important intellectual property.
It is important to determine the intellectual property that a startup should protect, and how toprotect and use it, depending on the type of competitive advantages that supports the business ofthe startup.

Basic considerations of IP strategy
The major points in considering an IP strategy are described below. It should be noted that theexamples given here are merely examples of IP strategies and these may change depending on
the business field and the f unding stag of the startup, as well as the economic conditions at thatpoint in time.
IP strategy is not just about “how to secure a broad patent right” when a new invention is born.
The main consideration of IP strategy is to always consider the elements of IP in various
aspects of the overall management strategy.
In deep tech startups, new inventions are often the starting point for business ideas. In order tostart a business based on a new invention, you need to first consider business strategies. In theprocess, you create a business model for the company to follow. At the same time, the core valuesof the company are clarified, and you consider strategies such as the so-called “open and close
strategy” in order to maintain your competitive advantage while developing your market.
Furthermore, once the target market is determined in your market strategy, your competitors
become clear. Then, we can start considering which country to secure the IP rights . Next, in orderto prevent the entry of competitors while expanding our markets, you begin to build an IP portfolio
including a combination of patent technology and technology that is protected as know -how, andfurther putting some technology in the public domain or standards. If you use patent information to
conduct a technology trend survey, you can understand market trends, the situation of competitors,
and the position of the company in the market. At the same time, based on your branding strategy,
it is important to establish the brand of your company by acquiring trademarks while considering
the target business, marketplace, usage situation, etc.
In addition, your research strategy will be determined according to your marketing strategy.
Depending on the relationship with competitors, your company may have to change the directionof its research to avoid conflict with technology competitors possess. It is also necessary to develop
technology to strengthen entry barriers. Furthermore, when conducting joint research anddevelopment with operating companies, etc., it is necessary to consider how to best handle IP in- 4 -contracts and other legal frameworks.
Lastly, it is important to strengthen IP governance in terms of human resource strategy for driving
the business. While enhancing R&D, startups need to strengthen IP governance. Initiatives include
building an in-house IP management framework, setting up a Chief IP Officer (CIPO) position inorder to identify issues related to IP as management issues, and creating incentives and employee
invention regulations to deal with human resource mobility.
If new technologies and inventions are created as a result of research and development, IP
protection should be sought where necessary. All the elements included in the string of processes
constitute the “IP strategy”.
Chapter 2
Investor Support

Considering the elements of IP in each aspect of the overall management strategy- 5 -Investors develop perspectives on IP strategy
What does it mean for an investor to evaluate and support the IP of a startup? You may think,"Isn’t it OK to just leave IP matters to the CEO or CTO or an external IP expert?"
However, as mentioned above, the “IP strategy” is an integral part of the “management strategy”.
Thus, it is necessary to consider the target for the management strategy and in turn consider thetype of IP strategy that is necessary to support it. Without this linkage, protecting a startup’s businesswould be difficult, even if you obtained the necessary rights.
When startups consider IP strategies by themselves, they tend to consider only the IP rights andcontracts from the belief that their “technology” is superior. Deep tech startups in particular often dohave superior technologies, and therefore, there is a tendency to think that protecting thesetechnologies is the only thing that needs to be done. Furthermore, an IP expert good at obtaining
patents for an invention may not necessarily see things from the perspective of “management
strategy”.
On the other hand, investors can consider the overall management strategy from the perspectiveof current and future “markets” and “alliance partners” in order to maximize the corporate value ofthe startup. Thus, investors can play an important role in developing and balancing IP strategies.
In particular, similar to capital policy, it is often difficult to recover from an IP pitfall once you fall
into one, and in this regard, the key to success is the investor who can support a startup from its
early stages. In addition, investors can provide financial support for the IP expenses relating to thestartup's IP research, patent applications, contracts, etc. The role played by investors inunderstanding the significance of IP and providing the necessary evaluation and support are
therefore very important.

Incorporate IP strategy into business plans
If the IP strategy is not properly considered, there are chances you will encounter various IP
pitfalls. These pitfalls may include issues like “disclosing important research results before patentfiling”, “signing an IP-unfavorable contract with a partner”, “being sued for infringing the IP rights
of another company”, “being forced to change the name of a service after much PR effort had
been made”, etc.
Therefore, it is important to incorporate the various IP elements discussed above as appropriate
when drafting a “business plan”. It is also important to estimate the necessary IP-related budget thatcan be used for concrete actions.

- 6 -Chapter 2
Investor Support

Chapter 3

IP milestones and pitfalls at eachfunding stage

IP milestones vary by funding stage
Considerations of IP strategy of startups change depending on the funding stage.
Investors should set milestones for intellectual property along with other milestones forinvestment.
Let us first take a look at the diagram below which depicts the various funding stages stated inthis guide.

- 8 -For example, milestones can be considered as follows:Stage

Milestone

IP milestoneAngel Prepare strategies to creating
underlying and core technologies andbuild a system for their development.

 Clarify the direction of R&D and intellectual
property
utilization
in
order
to
commercialize research achievements.

stage

 Secure freedom of usage of results in joint
research contracts negotiations with
universities and companies.
Seed
stage

 Complete PoC (Proof of Concept).
Narrow down possible markets andproducts to which the underlying andcore technologies can be applied /transferred.

 Increase commercial potential for research
results through development.
 Acquire rights
or conceal basic
technology of research results from theviewpoint of commercialization.
 Secure freedom of usage of research
results in licensing contracts negotiations
with universities.

SeriesA

B

 Align the business model with the scope of
IP rights and know-how.

 Stably implement growth strategies
towards commercialization and mass
production. Develop exit strategies
such as alliances with operatingcompanies or towards IPO.

 Secure technology and IP (manufacturing
technology, UX, design, etc.) necessary forcommercialization as a portfolio.

 Acquire additional technology and IP
quickly in response to the pivot analysis.
 Build a management system that
continuously induces ideas and inventions
from the CTO and employees.

 Secure freedom of usage of results inpartnership contract negotiations with
operating companies.
 Leverage IP to deal with competition.

SeriesC Further strengthen business structure
in preparation for exit (strengthening
management functions, streamlining
operations, etc.). Formulate further
growth strategies after exit.

 Reduce the risk of infringement of othercompany's rights in preparation for exit.
 Explain technology and IP to stakeholders
in an easy-to-understand manner in
preparation for exit.
 Rebuild global IP and standardization
strategies for overseas expansion.

- 9 -Chapter 3
Pitfalls

Series Carry out pivot analysis of underlying
and core technologies that havepassed PoC (Proof of Concept). Buildand enhance business models forcommercialization
andmass
production.

CONTENTS OF PITFALL EXAMPLESBusiness / IP Correspondence

1

Lack of IP strategy in business plan······························································· 12
University

2

Business / IP Correspondence

Pre-filing disclosures of core technology ·························································· 14
University

3

Contract

OpCo

Limitations on IP licensing in a joint research contract………………………………………16

University

Business / IP Correspondence

Lack of business perspective in setting the scope of a basic patent …………………………18

4

University

Contract

Exit

Issues in the license agreement which hamper startup growth and exit …………………….... ..20

5

University

6

Business / IP Correspondence

Exit

Mismatch between scope of IP and business model ············································ 22

Governance7

Low incentive of CTO············································································· 24
Business / IP Correspondence

OpCo

Competitor’s patents blocking the use of company’s basic patent ························· 26

8

Exit

9

Infringement warnings and lawsuits from competitors just before IPO···················· 28
ForeignBusiness / IP Correspondence

10 Lack of global IP and standardization strategy················································································· 30
CVC

11

Exit

CVC limiting collaboration between startup and potential competitors···················· 32

CVC

12

Lack of objectiveness in evaluating investments in existing fields························· 34

CVC

13 Evaluation and hands-on capabilities of the business and IP departments lacking wheninvesting in new areas ································································································································ 36- 10 -

How to read through the pitfall examples
Left page ~ Pitfalls ~Indication of the f unding stage where thepitf all

is

prone

to occur.

CVC

issummarized at the end.

Descriptions of actual pitf alls. Illustrated indiagram f or easy understanding.
Chapter 3
Pitfalls

Many similar types of pitf alls do exist. Anytype that looks f amiliar?

Chapter 3
Pitfalls

Right page ~ Countermeasures ~Summaryof the preventive measures

before andrecovery measuresafter

encountering pitfalls.

Case

studies

relatedtothediscussed, including foreign cases.

- 11 -

pointsFunding stage
Angel

Seed

Series A

Series B

Series C

CVC

Business / IP Correspondence

Pitfall 1

Lack of IP strategy in business plan

Common Cases
A Venture Capital (“VC”) was considering an investment in a startup that a researcher wasplanning to set up, and formulated business plans together with the researcher while preparing tostart the business.
The researcher claimed that he had “applied for a lot of great core patents”, andenthusiastically told the VC how excellent his research results were. The VC felt relieved, thinking
that “It’s safe if that’s the case”.
However, after the establishment of the startup, other startups with similar technologies
bypassed the core patents and entered the market one after another. It was found that thecompany had infringed patents filed by competitors. At the same time, it was also found thatmany patents had high maintenance costs resulting in deteriorating cash flow.

Pitfalls with similar patterns• At the stage of investment, the investor was informed that there are no related patents in ofcompetitors, but after the investment, the investor was told that the startup had actually identified
patents from other companies.
• Due to technological advancements, new technologies were discovered or invented that could
bypass the core patent technology.
• The startup excessively applied for patents unrelated to the business plan and spent most of
the funds raised to maintain patents unrelated to its business.

額な 特許維持 費用- 12 -

Funding stage
Angel

Seed

Measures
Point 1

Series A

Series B

Series C

CVC

Be sure to discuss IP strategies when
formulating business plans

Incorporate IP strategy in business plans

IP strategies should be included when developing business plans. There is no point in simply
checking whether patents exist or not. After drafting the business model and exit options, identify
the core values that support them, and consider the various methods of utilizing IP. These
include issues relating to the ability to secure the right to prevent entry of competitors, the ability
to conceal know-how that need concealing, whether the company should execute the businessexclusively, and the party to license to.

Point 2

Examine the IP information of competitors

Researchers often do not look into the IP rights of competitors. Checking whether there arecompeting IP rights during the business plan drafting process will enable you to take advance
precautions such as developing technologies to bypass a competing IP right if it does indeed exist,
or to create IP rights to counter any allegations of infringement.

Point 3

Appoint a person responsible for IP strategy

Case Study

Investors should evaluate the IP strategies both before
and after funding, and also fully support IP negotiations

When providing grants, this university gap fund uses external bodies to examine not only thecommercialization strategies, but also the existence of IP strategies, the persons owning IP and
the types of IP owned, as well as FTO (Freedom to Operate) issues.
While the university bears the cost of researching IP information even after the grant has been
provided, meetings will be held among the gap fund manager, IP experts and researchers to
examine and discuss long-term IP strategies based on the state of the art.
When establishing a startup, the investors involved in next stage funding, the CEO, university
gap fund manager and technology transfer department personnel will act as a team to negotiate
licensing issues. Where the CEO lacks sufficient IP knowledge, it is not uncommon for the investors
involved in next stage funding and the university to conduct negotiations directly.
(Gap fund of overseas university)- 13 -

Chapter 3
Pitfalls

One of the reasons for failing to create IP strategies is the absence of a person responsible.
During the process of team building, startups should appoint a Chief Intellectual Property Officer(CIPO) to handle IP strategy. The CIPO may be a concurrent appointment, or the job title may bein another form, but it is important for management to clarify the responsibility.

Funding stage
Angel

University

Seed

Series A

Series B

Series C

CVC

Business / IP Correspondence

Pitfall 2

Pre-filing disclosures of core technology

Common Cases
Focusing on a university researcher’s patent for a research achievement, a VC went to meet withthe researcher along with a CEO candidate. They decided to work together with the researcher toestablish a company and agreed to appoint the researcher as a technical advisor when the company
was established, and also consulted with the university about the patent license.
After the company was established, a patent license was granted from the university, but it was
found that some important research results were not patented. The researcher said, "the research
results have already been announced at academic conferences" . The investor and CEO were
bewildered when the researcher added that “research results regarding to further applications
will be announced at the academic conference next week”.

Pitfalls with similar patterns• VC sets up a company with CEO candidate thinking "this university’s technology seems to beinteresting", but the researcher is not interested in startups and continues to publish research
papers one after another.
• Researcher applied to the university IP Department before an academic conference, saying “Iwould like to apply for a patent”, but the patent application was turned down because he wastold that the value of the invention was low. Only one week was left before the academic
conference.
• There was an alliance offer from a large corporation after the company was established. The
engineer gladly gave product demonstrations and samples of innovative materials even before
filing for patents.

- 14 -

Funding stage
Angel

Seed

Series A

Series B

Series C

CVC

Consider the timing of patent application
Measures and thesis presentation regarding the
research results used for venture startup
Point 1

Be careful of publicizing through conferences / thesis presentation ,demonstration, sample provision and pitch presentation

If research achievements are made public through academic conferences, thesis presentations,demonstrations, sample provision, pitch presentations, etc., then the invention or design will lose
novelty, which is a requirement for patent and design protection. In particular, where the CEO andthe researcher are not the same person, the CEO may not know the researcher's academic
conference / thesis presentation schedule. The research may therefore be publicized through these
events. It is therefore important to clarify which part of the research results is to be used in thebusiness, and to carefully consider the timings of IP rights filing and academic conferences / thesispresentations. At the same time, attention is to be paid to prevent trade secret leakage whenproviding samples to third parties (refer to Point 3 in Pitfall 8).

Point 2

Generalize your presentation when you must make a presentation at an
academic conference so that you can apply for a patent later

Point 3Think of alternative filing methods if research is already made public

If the invention has been already made public by the applicant before patent filing, the research
can still be patented if the filing is done within one year of the publication by applying for an
exception of novelty loss (Article 30 of the Patent Act). Alternatively, consider whether you can still
start a business using another research result, or whether you can file a patent for that.

Case Study

Agree with researcher on timing of patent applicationand thesis submission when investing

A researcher decided to start a business based on technology derived at the university, and ourfund decided to invest. At that juncture, an agreement was reached between the fund and theresearcher, stating that “the researcher will never write a thesis until having filed for a basic patent".
In addition, the researcher was asked to submit papers only to top international academic journals
only after applying for a basic patent. The researcher was flooded with inquiries from overseas
investors after publishing in the most prestigious journal in the field. Subsequently, we were able
to raise a total of several hundred million yen from US VCs.
(Domestic university gap fund)- 15 -

Chapter 3
Pitfalls

If a decision is made for you to make a presentation at an academic conference even before filingfor a patent, it is necessary to pay close attention to the content of the presentation. For example,
avoid disclosing the specific elemental requirements of the invention as much as possible, and use
a general description. It is also useful to ask an IP expert to review the presentation script.

Funding stage
Angel

University

Contract

Pitfall 3

Seed

Series A

Series B

Series C

CVC

OpCo

Limitations on IP licensing in a joint
research contract

Common Cases
A VC was interested in the research results of a university and together with the researcher, began
preparing for the establishment of a startup.
While trying to obtain an intellectual property license from the university, it was found that thepatent in mind was jointly held with a partner company in the joint research and did not belong
exclusively to the university. In other words, it was necessary to obtain the consent of the otherjoint proprietor for the license.
Together with the university, the researcher and the VC negotiated with the other proprietor.
However, there was no incentive for the other company to agree to the license. The company was
thinking that “even though we will not be commercializing the results of the research, we wish to becareful to avoid unlikely competition”. For that reason, the researcher and the VC could not obtainthe license, and as a result, the startup establishment failed.

Pitfalls with similar patterns• A post-doctorate degree holder of a laboratory was thinking of starting a business, but the
professor of that laboratory has no interest in establishing a startup. However, the professor
was interested in acquiring joint research funding, and concludes a joint research contract thatis advantageous to the partner company.

- 16 -

Funding stage
Angel

Seed

Series A

Series B

Series C

CVC

Consider the possibility of a spinout
before deciding on joint research, andMeasuresreflect it in the IP clause of the joint
research contract
Point 1

Consider the possibility of a spinout through joint research

It is commonly seen that the terms of the joint research contract with an existing company
becomes a bottleneck when establishing a startup based on its results. Special care should betaken regarding the handling of rights to research achievements when conducting joint researchwith multiple companies. Rather than to conduct the joint research in a casual manner, it isimportant to determine whether a startup is expected to be established before negotiating thecontract with the company.

Point 2

Pay attention to the licensing terms in the university joint research
agreement format

A university may use its standard joint research contract format when carrying out joint
research with a company. If there is a possibility for a startup to be established, the university
should re-check the clauses within the format to see if there are any restrictions on the licensing ofresearch results to the startup.

License the intellectual property necessary for establishing a startup
independently from the joint research

If you are already conducting joint research with the objective of establishing a startup, and if
there are restrictions on the licensing of shared patents, the company and the university should
negotiate in a win-win manner, and it may be effective for the university to apply for the required
patent independently (separately from the joint research).

Case Study

Apply independently for technology that is separately
derived other than from joint research

A VC was interested in the research conducted by a university researcher. The research was
conducted jointly with a company. The joint research contract used the standard contract formatof the university, and if the patents are jointly filed, there was a possibility that consent cannot be
obtained from the sharing party.
Therefore, the VC discussed with the researcher and told him that when establishing a startup,
he was to develop a new technology that would be separately derived other than from joint
research and for the university to independently file an application that would not restrict thelicense.
(Domestic venture capital)- 17 -

Chapter 3
Pitfalls

Point 3

Funding stage
Angel

University

Seed

Series A

Series B

Series C

CVC

Business / IP Correspondence

Pitfall 4

Lack of business perspective in setting thescope of a basic patent

Common Cases
A VC was thinking of investing in a university spinout. According to the CEO, “It's okay because
I have obtained a basic patent for research results at the university”. Based on that claim,
the VC made a seed investment without scrutinizing the contents of the basic patent.
However, at a later date, an expert looked at the contents of the rights of the basic patent, andit was found that the scope of the rights was so narrow that only the certain embodiment actually
implemented by the startup could be protected.
In such a circumstance, other parties can use other alternatives to enter the market, thereby
making the patent useless…

Pitfalls with similar patterns• A university spinout explained that "there is a basic patent for the university", but actually, it did
not cover the target market countries, and only had domestic IP rights.

- 18 -

Funding stage
Angel

Seed

Series A

Series B

Series C

CVC

Secure IP rights covering the businessMeasures scope, usage and target market countriesof the university spinout
Point 1

University "basic patents" are not equivalent to basic patents that
venture businesses use to conduct business

Patent applications by universities are not necessarily aimed at commercialization by university
spinouts. Even if a university says that “it has a basic patent”, it may still not be adequate for astartup to conduct business based on that.

Point 2

Does the “basic patent” cover the scope of business / application oftechnology, target market country, and duration of the patent?

It is important to verify the following issues when checking a patent applied by a university,that is, whether it anticipates the future business scope of a possible spinout or that ofcompetitors, whether it is patented in the country where the spinout might be established, andwhether the patent has sufficient duration till expiry, etc. In the case of a technology that canhave various applications such as raw materials and AI, it is also good to confirm whether the scopeof rights includes such major applications.

Set additional acquisition of IP as a milestone from the viewpoint ofcommercialization

Set the additional filing of patents after investment as a milestone if the existing IP right has
no competitive advantage, for example the IP is unable to prevent the entry of competitors.

Case Study

Chapter 3
Pitfalls

Point 3

VC supporting IP applications even before theestablishment of a university-initiated venture

A VC supports the researchers from the research project stage, even before theestablishment of a university spinout. If there is a university researcher who has the technology,
the VC considers how to apply for a patent from the commercial viewpoint and asks theresearcher to collect data necessary for the filing. Subsequently, the VC supports filing for thepatent, formulates the business plan and starts recruitment of staff.
(Domestic venture capital)

Case Study

Make additional patent application a milestone foruniversity-initiated ventures

While investing in university spinouts, patent rights filed by the university may not have sufficientcompetitive advantage for business use. Therefore, if the VC checks the patents and a deficiency
is found, the VC sets up post-investment milestones to obtain additional patent and trademark
rights and ensures strict compliance by the startups. Such requirements have been observed tolead to next-stage investments.
(Domestic venture capital)
ChaptePitfalls- 19 -

Funding stage
Angel

University

Contract

Pitfall 5

Seed

Series A

Series B

Series C

CVC

Exit

Issues in the license agreement whichhamper startup growth and exit

Common Cases
A VC was considering investing in a startup that utilizes patents held by the university. During the
IP negotiations with the technology transfer department of the university, the university informed
the startup that “contract clause will follow the standard format of the university”. The startup
received a non-exclusive license and though anxious, the VC proceeded with the investment.
Business proceeded smoothly after that and the company began considering M&A with anoperating company as an exit strategy. During the IP due diligence conducted by the operatingcompany, the company notified the startup that “transfer of IP from the university is essential for
M&A”. However, the university refused to respond to the negotiations, and finally, the VC had torethink the exit strategy.

Pitfalls with similar patterns• License fees (initial payments, running royalties) were concluded at high rates, resulting inlower cash flow after business inception and subsequent growth being suppressed.
• Multiples IP licenses from the university were required, resulting in a pool of royalties which
impeded business inception.
• Contract terms (fees, period, etc.) of the license agreement were “discussed separately”,
leaving ambiguity, thereby hindering subsequent financing.
• While in the negotiations of a merger with an operating company, the operating company
skipped the startup to directly purchase only the IP from the university, as the IP was nottransferred from the university to the startup. The M&A failed as a result.
• IP created using public research grants was not sellable to overseas companies due togrant rules.

- 20 -

Funding stage
Seed

Angel

Series A

Series B

Series C

CVC

Provide support for negotiations, funding
Measures and capital policy for license agreementswith universities
Point 1

University contracts have a big impact on subsequent valuations andexit

The terms of the contract with the university may have a detrimental effect on valuations and exit
options in subsequent rounds of investment. In particular, M&A may not proceed if the patent rights
cannot be transferred or the license fees are too high. It is therefore important to take preemptive
measures early so that there is no constraint on mid- to long-term growth.

Point 2Agree on the concept of negotiated items of the IP contract

There are occasions where it is difficult to determine all the details of an IP contract with auniversity when starting a business. In such cases, it may be possible to facilitate negotiations after
business startup by agreeing on the methods for deciding the fees and rationale for the formula for
calculations.

Point 3

Include the cost required for the IP contract with the university in theinvestment amount

Point 4Use stock options for payments to the universities

In Japan, it is also possible to offer stock options to universities as consideration for licenses. It
is a good idea to negotiate with stock options instead if the license fees demanded by theuniversities are too high. In addition, the issuance of stock options should be considered from theperspective of overall capital policy, taking into account future funding requirements.

Case Study

Incorporate the costs of IP license agreements with
universities into the investment amount

A Japanese university VC launched a startup in the field of synthetic biology with a capital ofseveral million yen together with biotech researchers. The VC worked with the startup to
formulate a detailed business model and IP strategy for each field, and these factors helped thestartup to succeed in receiving a huge investment of hundreds of millions of yen from a US VC.
The investment amount included in advance the costs of acquisition of IP with top US lawyers
and the cost of IP license agreements from US universities.
（Domestic university venture capital）- 21 -

Chapter 3
Pitfalls

Universities expect a high compensation in order to secure returns from IP such as licenses.
Investors therefore need to estimate the costs to pay to the university and reflect these in theirinvestment amount and valuation.

Funding stage
Angel

University

Seed

Business / IP Correspondence

Pitfall 6

Series A

Series B

Series C

CVC

Exit

Mismatch between scope of IP andbusiness model

Common Cases
A university spinout with core technology implemented a PoC (Proof of Concept) study with anoperating company introduced by an investor. While conducting the PoC study, the spinout
discovered new market needs and found them to be the most likely markets. As a result, they shifted
their targets to different markets.
Since these markets were not originally envisioned, the spinout had to carry out additional
development, but forgot to secure the relevant IP rights. Subsequently, it became clear that
another operating company had applied for a patent for those markets, and the spinout wasforced to revise its business strategy.

Pitfalls with similar patterns• The final scope of rights may not be suitable for the business if we leave all post -application
procedures to the IP experts.

- 22 -

Funding stage
Seed

Angel

Measures
Point 1

Series A

Series B

Series C

CVC

Draft and implement IP strategies thatcover the business scopeFirstly, align the IP to the business model and exit strategy

IP strategies required (such as patenting, concealment, making public, etc., and in obtaining
patent rights, the scope, etc.) differ depending on the business model, market, and exit strategies.
It is therefore very important to consider IP strategies from the early stages, bearing these points
in mind.

Point 2Check if there is still alignment with the IP if pivot events occur

At the early seed stage, technology and market pivots occur. It is necessary to check the IP rights
whenever a pivot occurs, and to reconcile them if the scope of the rights is out of alignment.
Furthermore, if possible, consider the possibility of pivots and reserve the widest possible scope
for the patent right from the beginning, or use priority rights or divisional applications to keep thepatent application pending so that you can respond to pivots.

Point 3Set IP acquisition as a milestone

Case Study

Examine and review IP strategies at regular meetings ofmanagement, investors, and patent attorneys

At Mobile Internet Capital, the following three parties; startup management, patent attorneys, andinvestors examine and review IP strategies every three months.
Instead of leaving IP strategies to the management and patent attorneys only, investors canprovide advice and broaden the perspectives of IP strategies through inputs from an investor
perspective, such as those relating to “future technology”, “future business”, or “future alliancepartner / competitor”.
In addition, in parallel with rapid changes in technology and business in recent years, we areseeing many cases of pivot events happening. In such cases, there is a risk that the IPs could beleft the same as before the pivot. Periodic reviews of IP strategies enable timely and speedy
responses to be made, such as amending pending patent applications, considering addi tional
applications and applying for peripheral patents in response to pivots.
(Mobile Internet Capital)- 23 -

Chapter 3
Pitfalls

Investors can also consider IP protection including responses to pivot events as investment
milestones. It is important to review whether the rights to be procured are in accordance with thestage of startup growth.

Funding stage
Angel

Seed

Series A

Series B

Series C

CVC

GovernancePitfall 7

Low incentive of CTO

Common Cases
With a focus on a university technology, a VC proceeded to hire a CEO from its own network, andthen established a startup and invested in it. The researcher who developed the original technology
was still with the university but joined the management team concurrently as the CTO.
Initially, the CTO made many inventions as he was interested in development work. However,along the way, he began to concentrate on research for thesis publication, and as a result,no further development work was carried out. He also stated that "I am applying for additional
basic patents with the university, but I will not license these to the company" .
Eventually, the CTO left the company, and development work within the startup came to a
standstill. A rumor was going around that one reason for his retirement was “his dissatisfaction withthe stock options allocated”.

Pitfalls with similar patterns• Researcher with core technology retires from the startup and starts a competing company.
Subsequently, the startup receives a warning of intellectual property infringement from thatcompetitor.
• A startup conducted joint research with a researcher at a university in the US and awarded him
stock options. But he was dissatisfied, complaining that "the stock options allocated are lower
than the standard in the United States", and refused further cooperation.

Cases- 24 -

Funding stage
Seed

Angel

Measures
Point 1

Series A

Series B

Series C

CVC

Design incentives to stimulate continuous
intellectual property creation

Maintain an environment that allows the CTO to continuously create IP

For deep tech startups, it is essential to create an environment in which IP can be continuously
created, including additional development. It is necessary to design incentives including the
preparation of employee invention regulations and allocation of stock options.

Point 2Prevent conflicts by clarifying the attribution of IPs in the employee
invention regulations

Since the inflow and outflow of members in the management team are frequent during the startup period, problems may occur if employee invention regulations and information management
regulations are not established. If it is not made clear that employee inventions belong to the startup
and not the inventor, nothing will remain with the company when the technical staff leaves thecompany with the invention.

Point 3

Assign stock options according to the capital policy

Case Study

Carefully consider CTO stock options for Deep techstartups

Stock option design should not be a simple equal division of shares by the number of founders,
but allocation should consider the relative contribution of each founder. Technology plays a largerole in the competitive advantage of Deep tech startups in particular. The value of the CTO
responsible for its creation to be in the startup is therefore relatively high. Shares should beallocated such that the CTO can be motivated to firmly allocate resources to create IP. Therefore,
estimate the additional IPs needed towards eventual exit of the startup and design the stock option
allocation carefully such that the CTO can be stimulated to continuously create the required IPs.
(Domestic venture capital)- 25 -

Chapter 3
Pitfalls

Issuing stock options as an incentive for the CTO and technical staff is also useful. It is importantto carefully evaluate the level of each staff’s contribution when allocating stock options, and do not
over-issue to the extent that future financing is affected. In this context, you need to consider longterm capital policies.

Funding stage
Angel

Seed

Business / IP Correspondence

Pitfall 8

Series A

Series B

Series C

CVC

OpCo

Competitor’s patents blocking the use ofcompany’s basic patent

Common Cases
A VC was thinking of investing in a university spinout established by a researcher who had
developed an innovative material.
According to the researcher, "Things are all right as we have registered basic patents forresearch results at the university. Joint research with the company is progressing
smoothly". The VC believed these words and proceeded with seed investment.
However, later, the researcher contacted the VC, saying that “it seems that the joint researchcompany had independently filed patents regarding the application of the material”. The patents
covered potentially large markets, and the startup fears it will be locked in by this company.

Pitfalls with similar patterns• A startup had an alliance with an operating company which obtained peripheral patents.
However, the relationship with the operating company deteriorated subsequent ly, and as aresult, business expansion could not proceed.
• Information was leaked by a technical staff seconded from another company. The other company
proceeded to file for peripheral patents.
• An idea disclosed to an operating company was subsequently filed for a patent by that company.

- 26 -

Funding stage
Angel

Seed

Measures
Point 1

Series A

Series B

Series C

CVC

Build an IP portfolio necessary forbusiness growth

Understand the need for a portfolio

In most cases, one IP (patent right or black box technology) is not enough to expand the business.
Peripheral IP for materials may include, for example, manufacturing methods, applicat ions, mass
production technologies, etc. In addition, if it is an IT-based technology, it is possible to prevent theentry of other parties by identifying alternative means that can achieve the same effect and filingrelated patents even if these are not adopted by the company. It is important to consider a portfolio
from the viewpoint of a latecomer to make sure IP sufficiently blocks market entry.

Point 2

Evaluate not only basic IP but also peripheral IP, and support
recruitment of inventors where necessary

Peripheral IP may require technology that is different from the core technology. At such times, it
may be useful not only to recruit inventors in the field of core technology, but also technical staff
with the skills to develop the necessary peripheral technology. A typical example is when a startup
needs to develop mass production technology in the fields of manufacturing and biotechnology.

Point 3

Pay attention to information management and joint application when
conducting business alliance<Reference> Four points of corporate collaboration using IP:
https://ip-knowledgebases.go.jp/public/

Case Study

VC supports hands-on procurement of peripheral IP
from an external company

A US VC invested in a startup that had spun out from a research institute. Although IP relating tocore technology has been transferred from the original research institute, it has become clear thatit does not have the peripheral IP needed when a business-use case was considered. Throughinvestigation, it was found that a foreign company possesses the peripheral IP. The VC and thestartup jointly negotiated with the foreign company, and they were able to obtain a license for thatIP.
(US venture capital)- 27 -

Chapter 3
Pitfalls

It is necessary to pay attention to the control of information when partnering with operatingcompanies. In order to prevent situations where information disclosed at a presentation, etc. ispatented by the other party, or a joint research partner willfully files for peripheral IP, startups need
to be careful to avoid speaking about confidential information and to apply for the patent first. It isalso important to scrutinize contract contents such as NDAs and joint research agreements, etc. It
is desirable to have a lawyer or other expert confirm the contents of contracts.

Funding stage
Angel

Seed

Series A

Series B

Series C

CVC

Exit

Pitfall 9

Infringement warnings and lawsuits fromcompetitors just before IPO

Common Cases
A startup was preparing for IPO with a securities firm. This was also reported in the newspapers
and became a hot topic.
However, shortly before the IPO, a privately-owned company warned of patent infringement. Upon
negotiation with the company, they were required to pay huge compensations and futureroyalties higher than expected. The dispute might affect listing examinations, but the IPO
schedule could not be revised. Both the startup and the securities firm were at a loss as to whether“they should accede to the demands”.

Pitfalls with similar patterns• With increased media exposure, a startup received warnings that the company name or product/ service name infringed the trademark rights of other companies.
• The search formula for the freedom to operate (FTO) survey in an IP database conducted by thestartup was inadequate, overlooking the patent rights of a foreign competitor who accused thecompany of infrignement of patent rights. In addition, the suit was carried out in the plantiff’s
country, and the company lost the suit due to geographical disadvantage.

- 28 -

Funding stage
Angel

Seed

Series A

Series B

Series C

CVC

Regularly conduct intellectual property
Measures investigations to reduce the risk of
infringement if there is a possibility of IPO
Point 1

Risk of intellectual property infringement increases with startup growth

Sales escalating in the order of billions of yen pose a threat to competitors, thereby increasing
the risk of becoming a target in IP litigation. The presence of disputes before IPO will affect thelisting examination, listing timing, stock prices, etc., and these will weaken the position of startups.

Point 2

Conduct regular surveys after product sales has begun. Estimate andadd the survey cost to the investment amountStartups should regularly check for patent applications from competitors even after the productsales has begun. It is necessary to conduct a proper search for patents of other companies
especially before an IPO. It is useful to include such intellectual property search costs in theinvestment amounts for Series B and C funding.

Point 3

There are many options to defend against patent infringement
accusations

Point 4Be sure to check trademarks right from the early stages

It is important to check the registered trademarks of other parties when deciding on a company
name or product / service name. If you later discover that you are infringing on another party’s
trademark, you will have to change the name, despite its having a good reputation, and even if you
have a deep affection for it. Alternatively, it costs a lot to buy a trademark from another party.
Trademark checks can be done relatively easily with the Japan Patent Office's free database. It istherefore best to check it yourself first.
J-PlatPat https://www.j-platpat.inpit.go.jp/web/all/top/BTmTopPage

Case Study

Organize licenses for the technology you are currently
using

From its early stages, a startup requested an IP lawyer to investigate the rights of othercompanies while sorting out present technology licenses from other companies. Sorting out
licenses involve taking an inventory of the source of the technology and source code that iscurrently being used. If negotiations for the necessary technology identified by the sorting appear
to be difficult, the startup can consider workarounds, i.e., devise measures such as changes todesigns or program development environments.
(Domestic law firm)- 29 -

Chapter 3
Pitfalls

Paying the license fee is not the only option even if you get an infr ingement warning or
infringement lawsuit from another company. You can also request a cross license if you have strong
rights in-house. Buying a patent from the company lodging the claim is also an option if you do nothave enough counter patents.

Funding stageAngel

Foreign

Seed

Series A

Series B

Series C

CVC

Business / IP Correspondence

Pitfall 10

Lack of global IP and standardization
strategy

Common Cases
A university-initiated startup into which a VC had made an investment was trying to expand its
business into the US and Europe, as it had produced some results in the domestic market. All teammembers were confident, thinking that "this business will definitely work in the US as it was alreadysuccessful in Japan". In addition, they had also applied for basic patents overseas in preparationfor overseas business expansion.
They proceeded to set up an office in the country they wished to operate in, dispatched a manager
and a researcher from the head office in Japan, and proceeded with the development of products
for the local market. The product was released one year later, but the customer base did notincrease at all. On the contrary, a foreign company issued warnings about their infringementof intellectual property.

Pitfalls with similar patterns• The VC helped hire local management and technical staff . However, some switched jobs to acompetitor soon after recruitment and leaked trade secrets including confidential data.
• A startup had applied for a basic patent only in Japan, and as a result, had to give up overseas
expansion.

- 30 -

Funding stage
Angel

Seed

Measures
Point 1

Series A

Series B

Series C

CVC

Formulate IP and recruitment strategies
tailored to the destination country

Assist in planning IP strategies for destination countries

An IP strategy different from that in Japan is required for foreign operations. It is important toinvestigate foreign IP, discuss about creating an IP portfolio by filing for additional basic patents
and trademarks associated with product development for the destination country and also about
preventing trade secret leakage. It is also important to consult with experts familiar with foreign
circumstances. It should be noted that different countries have different laws and standards, andyou may not be able to procure scope of rights similar to those in Japan.

Point 2

Support recruitment of local managers and technical staff

In deep tech startups, technical staff may consist of only Japanese people such as researchersin university laboratories. When considering foreign expansion, VCs should support the hiring of
foreign managers and technical staff in the destination countries and support intellectual propertyrelated practices such as local product development and the accompanying patent application andresearch.

VC supporting IP localization for foreign expansion

A VC invested in a startup that is developing B-to-B software that handles big data. As coretechnology is in the form of an algorithm, it can be hidden as know-how rather than through patents.
The startup decided to expand into the US after receiving investments. Unlike Japan, as US users
prefer a simple user interface (UI), they thoroughly redesigned the UI with an American design
company. This difference in user values between countries is important.
Furthermore, there was concern that the company name of the startup would be difficult topronounce using US pronunciation. They therefore scrutinized for a company name that can beused across the languages of multiple countries, and also investigated the existence of priortrademarks. With the US being a major market, they were able to rebrand the company name sothat it would give a good image in English.
(Domestic venture capital)- 31 -

Chapter 3
Pitfalls

Case StudyFunding stage
Angel

CVC

Seed

Series A

Series B

Series C

CVC

Exit

Pitfall 11

CVC limiting collaboration between
startup and potential competitors

Common Cases
A corporate venture capitalist (hereinafter “CVC”) invested in a startup that is deemed to havesynergies with the company, and at the same time signed a joint research agreement and right-offirst-negotiation regarding the outcome via a side letter.
Although having merit in terms of synergies, the agreement had excessively limited collaboration
between the startup and potential competitors, resulting in the company having a poor reputationin the venture community.

Pitfalls with similar patterns• A CVC used its veto right to hinder a startup’s exit (M&A) to a competitor, and in the process

damaged its reputation in the startup community.

- 32 -

Funding stage
Angel

Seed

Measures
Point 1

Series A

Series B

Series C

CVC

Support growth and exit with a “Startup
First” mindset

Give priority to the growth of startups when investing

The first priority should be the growth of the startup invested in when investing. As shareholders,
contracts that hinder the growth of startups are not appropriate.

Point 2

Both the startup and CVC to consider various exit scenarios together

Startup exit options may include not only IPO and M&A by the CVC company, but also a sale toother companies. It is important to consider various exit scenarios and deliberate the most suitableoptions for both the startup and the CVC.

Point 3

A downfall in reputation is fatal in the venture ecosystem

It is necessary to enhance the reputation of the CVC in order to continuously collaborate withstartups. If you take actions that are considered to be harmful for the growth of the startups you
invest in, you will get a bad reputation, and this will hinder future open innovation activities.

Case Study

CVC open to startup’s collaboration with othercompanies•

Regarding the handling of intellectual property as an operating company in open innovation, refer
to “IP Open Innovation”, a collection of IP best practices f or open innovation (April 2018, Japan
Patent Of f ice).
URL：https://www.jpo.go.jp/support/startup/document/index/2017_09_jirei.pdf- 33 -

Chapter 3
Pitfalls

A CVC based in the US consider synergies with the CVC company as an investment criterion but
has never considered it to be absolute. It does not conclude side letters related to cooperation or
IP agreements, but rather treat them as pure investments. Hands-on support may be provided by
the head office if necessary, but the CVC company is just simply one of the candidates for potential
collaboration. It strongly recognizes that "CVCs that do not grow startups and that hinder exit willbe alienated from the US venture community".
(A Japanese CVC with a presence in the US)

Funding stage
Angel

Seed

Series A

Series B

Series C

CVC

CVC

Pitfall 12

Lack of objectiveness in evaluating
investments in existing fields

Common Cases
The CVC manager at an operating company considered investing in a startup that was introduced
by a venture capital. The CVC manager began to make a full-scale investment study on the startup
he deemed to have synergy with the company's domain and have a technological advantage.
During the technical due diligence, he asked an in-house research laboratory engineer for areference, but the engineer severely criticized the startup that “the technical content is notparticularly superior”. Furthermore, when the CVC manager asked the in-house IP department
for intellectual property due diligence, he was told that "there are few patent rights and there is apossibility that the business may infringe the patents of other companies", resulting in thedeferment of the investment.
A competitor subsequently made an investment and the CVC manager was asked bymanagement to explain the reason for not making the investment.

Pitfalls with similar patterns•••

Cases where a CVC misses an opportunity owing to too much time taken for due diligence by
the business division.
Cases where a CVC judges the startup as having little technical advantage and cannot fully
evaluate the novelty of the business model.
Cases where investments are made but the startup is unable to get hands-on cooperation fromthe relevant department within the CVC company.

- 34 -

Funding stage
Angel

Seed

Series A

Series B

Series C

CVC

Use internal resources while keeping in
Measures mind that valuing investments close toexisting businesses can be biased
Point 1

Agree beforehand with the relevant departments on evaluation, handson support, and integration

It is desirable to agree in advance on support with the department involved within the company
when investing on the premise of synergies. Startups have limited resources and many steps are
required for commercialization. It is a good idea to provide necessary in-house resources anddiscuss in advance with hands-on departments such as the IP department how to establish
relationships with startups.

Point 2Involve the IP department from the initial stage and deliberate based on
objective IP information

In particular, the in-house IP department can evaluate objectively based on the available IP
information. It is important to involve the IP department from the initial stage of investment
consideration to consider issues relating to competition and alternative technologies based on
available IP information, and link to hands-on involvement after the investment has been made.

Point 3Collaborate with external investors and experts to objectively evaluate
technology and IP

Case Study

Proactive support from HQ legal and IP departments interms of evaluation and hands-on involvement

At one CVC, the legal department not only checks patents and papers during the due diligencestage of investment, but also considers unpatented assets to be as equally valuable as patents.
They join with partner VC experts to conduct detailed hearings on what the basic technology is andhow value chains will be created.
Furthermore, in terms of post-investment support, the IP department at the head office provides
free support for IP strategy formulation and patent application at the request of the startup. The IP
department actively supports venture businesses in response to the management’s emphasis on
open innovation efforts.
(Domestic corporate venture capital)•

For an overview of intellectual property due diligence, ref er to ““SKIPDD”, the Standard Procedure
Manual f or Intellectual Property Due Diligence” (March 2018, Japan Patent Of f ice).
URL：https://www.jpo.go.jp/support/startup/document/index/2017_06_kaisetsu.pdf- 35 -

Chapter 3
Pitfalls

Business unit due diligence in existing fields may result in unreasonable undervaluation or bebiased. The evaluation may be also limited only to technology aspects. It is therefore desirable tobuild a system that can access the opinions of external investors for evaluation from the market
perspective as well as technology and IP.

Funding stage
Angel

Seed

Series A

Series B

Series C

CVC

CVC

Pitfall 13

Lack of evaluation and “hands-on”
support capabilities in new fields

Common Cases
The operating company running a CVC was considering investing in a deep tech startup. Aiming
to invest in companies that are likely to have synergies several years ahead, and in areas that arefar from existing businesses, the investment manager was interested in the technology of the startup
that targeted potential growth markets, although there was a high chance of not getting thosemarkets.
However, due diligence of the business and IP departments concluded that it was not possible toevaluate due to lack of familiarity with the technology. They therefore decided to forgo investment.
A competing operating company subsequently invested in the startup.

- 36 -

Funding stage
Angel

Seed

Series A

Series B

Series C

CVC

Keep in mind that in-house evaluation andMeasures hands-on ability may not be sufficientwhen investing in unfamiliar fields
Point 1

Provide evaluation and hands-on support in collaboration with external
investors and mentors

In-house business and IP departments may not be able to properly evaluate startups in fields
completely different from existing businesses. The IP department tends to be cautious during
evaluation from a risk perspective. Furthermore, the evaluation of technology of startups that maycompete with existing businesses in the future tends to be negatively biased. It is therefore worth
considering building a network of external investors, mentors and experts etc., to evaluate startups
from an outside perspective, while internal resources such as the IP department concentrate on
hands-on involvement.

Point 2

In some cases, it may not be possible to invest in projects with highnovelty based purely on synergy criteria

In the short term, it may be difficult to discern logic for synergies and recovery of investment fundswith highly-novel technologies and services. There are numerous cases in which markets andtechnologies have fused in the future to create new markets. It is therefore necessary to keep inmind that it may not be possible to invest in projects with high-novelty based purely on synergy
criteria.

Hire venture capitalists specializing in new fields as GP

In order to invest in an area totally different from its core business, a CVC of a Japanese company
based in the US hired a top local venture capitalist specializing in said new area with experience
working in a top VC in the US as a general partner (GP).
Having a technical background in the said sector, the GP was able to smoothly evaluate thestartups’ technology and IP and provide hands-on support. In the evaluation of IP, he employed an
IP lawyer to investigate the kind of players in the industry and the types of IPs they possess.
Although investments may be made without the startup having IP, advice will be given in order tocreate an IP portfolio as part of hands-on support. Licensing from other companies was also
provided as needed.
(CVC of Japanese company based in the US)- 37 -

Chapter 3
Pitfalls

Case StudyChapter 4

Framework for IP evaluation andsupportCreate a framework to evaluate and support technology and IP both
inside and outside the company
It is important to create a framework that allows evaluation and support both inside and outside
the company in order to evaluate and support the technology and IP of startups.

Structure in-house evaluation processes and share know-how
It is important to set up processes for technology and IP evaluation. Technology and market pivot
events occur especially in the seed and early funding stages, and the requir es the adaptation of IP
accordingly. In addition, even after the middle stage funding, additional IP is frequently required
due to additional technological development.
It is therefore important to build a framework that can provide IP evaluation and support on aregular basis in order to respond to changes in the business environment. IP should be evaluated
not only at the time of investment but also continuously. In addition, it is useful to share know-how
within the organization rather than leaving it to one in-house IP manager so that the organization
can respond to new IP strategies as a whole.

Case Study

Be sure to include IP evaluation by an external advisor
during the investment process

A venture capital in the US decides to conduct due diligence on IP at the beginning of theinvestment process. In the process, they obtain references on technology, IP and the market fromexternal expert advisors and not just from in-house resources. They ask the advisor to evaluate IPfrom a market perspective, and thereafter evaluate whether the IP should be used for protection or
for licensing purposes.

(Foreign venture capital)- 38 -Collaborate with IP experts
It is important to collaborate with experts such as lawyers and patent attorneys for IP support. Bybuilding networks with the appropriate IP experts, investors can seek collaboration when needed.
In addition, because investors and IP specialists have different perspectives, we can achieve
better IP utilization through discussion among investors, entrepreneurs, and IP experts, rather than
entrusting everything to the IP experts.

Case Study

IP lawyer within VC supports IP strategy, eventuallyleading to exit

A venture capital firm in the US employs a lawyer specializing in IP as a managing director. The
aim is to efficiently support the IP strategy of the startup. The support provided by the IP lawyer
covers a wide range, including the evaluation of startup’s IP and the formulation and execution of
IP strategies. In particular, since the patent right has a limited protection period, latecomers canenter if additional rights are not taken. The IP lawyer therefore also provides advice not only forbasic patents but also for building an IP portfolio.
As an example of support, the IP lawyer advised the startup to acquire an international patent as
early as possible. The rights were subsequently obtained within two years from the PCT application.
A major company was impressed that they could protect their IP even in a foreign territory, andthey subsequently acquired the startup for 200 million dollars.
(Foreign venture capital)
Case Study

VC cooperates with law firm to provide hands-on support
for IPThe Real Tech Fund provides various support necessary for social implementation of technology.
As part of this, they decided to promote “Patent Booster”, an IP hands-on support that is
indispensable in the real tech field. This has enabled early planning and execution of IP strategies
that are integrated with business strategies.
Specifically, in cooperation with a law firm, an attorney supporting IP strategies for startups
provides the startup with support such as formulating IP strategies, confirming IP superiority, andpatenting important assets at every stage including the investment committee, hands-on support
stage, invention creation stage and entry into new business stage.
Since it would be too late to provide IP support for a startup when it starts to think of it, you needto stay close to the startup and maintain access to expert knowledge.
Chapter 4
Framework(Real Tech Fund)- 39 -

Case Study

CONCLUSIONKey Messages
Key messages are as follows:

1. It has become increasingly important for investors to support startups to formulate their
IP strategies.
2. An IP strategy is not only about “how to secure a broad patent right”, but also aboutincorporation of IP elements into various parts of the overall management strategy.
3. The role of investors is to develop the perspectives of IP strategy.
4. In order to prevent IP pitfalls, IP strategies need to be incorporated into business plans.
5. IP pitfalls await investors and startups at each stage of investment.
6. Pitfalls can be avoided if investors can provide support from a strategic angle, and fromthe early stages of a startup.
7. It is important to create a framework / mechanism to evaluate and support IP both insideand outside the company, including help from IP experts.
In the process of creating this guide, we collected and summarized the pitfalls of startups and their
responses from many investors and IP experts. We hope that using this guide investors and IP
experts will be able to work more closely with each other to deepen discussions and work towards
new initiatives. Furthermore, the Japan Patent Office welcomes further information on “new pitfalls
discovered in venture investments”.
Finally, we hope that this guide will contribute to the enhancement of evaluation and support ofyour intellectual property and help contribute to the business expansion of startups and theenhancement of the startup ecosystem.

- 40 -

Members of the Research and Study Committee on
IP Support for the Proper Evaluation of Startups〈Chairman〉
HASEGAWA Hirokazu

Professor, Waseda University Business School
Managing Partner, Global Venture Capital Inc.

〈Vice-Chairman〉
SAMEJIMA Masahiro

Representative Partner, Lawyer / Patent Attorney
Uchida & Samejima Law Firm

〈Members (In the order of the Japanese syllabary)〉
IDE Keisuke

Partner
The University of Tokyo Edge Capital Partners Co., Ltd.

INOUE Tomoko

CEO, Omron Ventures Co., Ltd.

EDOGAWA Taiji

Partner, Corporate Growth Support Center
EY Shin Nihon L.L.C.

OTANI Kan

Representative Patent Attorney
Roppongidori Patent Attorney’s Office

SAKAMOTO Yoshihiko

Investment Manager
Osaka University Venture Capital Co., Ltd.

SHIMIZU Kazuhito

ManagerBusiness Incubation Promotion Dept, KDDI Corp.

NAGATA Akihiko

Representative, Real Tech Fund

NAKAHATA Minoru

Representative Partner, Patent Attorney
Patent Business Corp iPLAB Startups

NOMURA Hironoshin

Senior Analyst
Equity Research Dept, Mizuho Securities Co., Ltd.

YAMANAKA Takashi

Director, Japan Venture Capital Association
Managing Director, Mobile Internet Capital, Inc.

〈Guidebook Production Assistance〉
MOTOKI Arata

Managing Director, Mobile Internet Capital, Inc.

WADA Yuzo

Partner, Lawyer / Patent Attorney
Uchida & Samejima Law Firm

TAKAHASHI Masanori

Lawyer / Patent Attorney
Uchida & Samejima Law Firm

- 41 -

Guide on Intellectual Property Evaluation and Support for Venture Capitalists:
Common IP Pitfalls and Countermeasures
2018 Research on system issues relating to industrial property rights“Research and Study on IP Support for the Proper Evaluation of Startups”

Contracted Party: Mizuho Information & Research Institute, Inc.

- 43 -

Guide on Intellectual Property

Evaluation and Support
For Venture Capitalists
Common IP Pitfalls
And Countermeasures