Intellectual Property (IP) poses a financing conundrum. It is amongst the most mobile and marketable of all the ‘intangibles’ that constitute the vast majority of company value and investment (as Nesta’s research has conclusively shown). Whilst equity investors will often ask questions about IP, lenders (on whom most businesses rely) have historically paid scant attention to it. Why is this?
First, it is important to recognise that banks and other lenders are not blind to IP’s importance. From relationship managers to credit teams, those who deal with innovative businesses are aware that patents, brands, designs and copyright (as well as trade secrets) can deliver vital competitive advantages and make them defensible.
The issue they face that it is hard to predict what the realisable value of a given IP ‘bundle’ will be if a lender ever has to rely on it – particularly if the business that created it is no longer solvent. This is in marked contrast to other kinds of tangible collateral, where there are transparent markets and a wealth of transactions to support assessment and prediction.
Of course, it is possible to lend without taking security (at least, not over business assets: personal guarantees remain popular as a means to ensure there is ‘skin in the game’). But the difficulty is that unsecured money is more expensive for all participants and does nothing to support bank capital adequacy, something recognised as an absolute priority for safe lending.
However, a change in attitude has become imperative, for a number of reasons. In a UK economy where the World Bank estimates that 79% of output is attributable to service industries, most companies simply do not need to own or use the sort of tangible assets banks prefer. Secondly, banks need opportunities to lend to growth companies in order to grow themselves; these desirable customers are often innovative, IP-heavy and tangible asset-light.
As a result, there are welcome signs of movement on the high street – movement that provides important opportunities for growth finance for SMEs that lack large amounts of tangible capital. RBS-owned Lombard, for example, has a Technology Services team that is applying asset finance techniques to lend against business-critical software. Two other high street names have initiated funds based on venture debt principles as a means to lend to ambitious younger businesses. Also, away from the ‘white heat’ of technology, many banks (such as Coutts, Santander and others) have devised ways of lending against the income streams generated by copyright assets in film, TV, music and publishing.
There are interesting developments elsewhere too. Within the ‘alternative finance’ space there are a number of specialists, like pension-led funders Clifton Asset Management, who are able to take security over IP. The Big Innovation Centre, the ‘think-and-do tank’ whose steering group is chaired by economist Will Hutton, has launched its Entrepreneurial Finance Hub and is actively seeking to interest investors and lenders in intangibles. On the wider policy front, the Intellectual Property Office continues to follow up its IP finance agenda with work on toolkits and IP marketplaces, and closely watches the government-backed IP financing schemes that have emerged in places like China and Singapore.
There is no doubt that change is coming. And with this in mind, it becomes clear that the biggest obstacle to using IP financing is arguably not lenders at all. As identified in my joint report to the government on the potential for banks’ lending against SME IP, Banking on IP, companies themselves need a much better understanding of the assets they own and how these deliver value to their businesses. For if they don’t, it’s not reasonable to expect a banker to know. Accordingly, SMEs who believe they are innovative and may have valuable intangible assets should consider getting ahead of the financing game by deploying tools to better measure their innovation and the contribution made to it by their intangible assets.
Inngot is working with Nesta and international accounting body the ACCA to run a UK pilot of an Innovation Accounting Tool, which looks at the value created by intangible asset investment across a range of categories for SMEs. Full participants in the pilot receive a tailored feedback report on their company’s intangible asset profile. We are looking for UK-based SMEs who are not sole traders to take part in the pilot in September / Early October this year. If you are interested in your firm taking part, do get in touch with Ben at Nesta: [email protected].