Attracting investors and financiers is relatively easier for ventures with tangible assets like plant, machinery, equipment, and land. The tangible assets can be valued at market rates and are capable of being traded in the event a business venture fails. This provides a sense of security to investors and lenders, albeit subjective. In contrast it is hard to secure financing for ventures for exploiting Intellectual Property (IP) for commercial gains, in need of several other resources and cashflow. The underlying reason is lack of reliable information about market value of the intangible IP assets and risk of the unknowns is objectively presumed to be too high. Not every innovation becomes a unicorn business model, and no user acceptability data is available to support future cash flow generation potential.
Challenges Faced by SMEs and First-Time Inventors
- Lenders and financiers need security or collateral in the form of some tangible assets, but the worth of an invention and IP Assets lies in the IP Rights as the core value of an entity. The value which cannot be measured is deemed as cannot be harnessed. This leads to the equation of chicken and egg which comes first.
- Invention is encouraged to boost productivity, competitiveness, market share, and sustainability. Ironically, invention on its own is underappreciated or not valued. This is not due to any lack of knowledge or understanding by the investors, but the traditional wisdom causes a roadblock for financing unknowns.
- There is a negative correlation between IP Asset financing and role of IP in boosting innovation and economies of the world.
- IP Assets do not appear in majority of the Annual Financial Reports of Entities in the world today, though this trend is changing. Several multi-national corporations (MNCs) and technology firms have started reporting growth trends of IP Assets as one of the main highlights in their Annual Reports. SMEs do not have history but only future projections.
- Not all IP Assets in the beginning can show scale-up type of businesses which has growth potential but does not have the resources to get traction. The businesses which can show convincing potential, can get lenders interested.
How to evaluate whether an IP Asset is an aspiration or a realty?
This is the first and foremost barrier to overcome before seeking IP finance. The inventor should be able to demonstrate the value of an invention for commercial benefits, which may be done in number of ways, for instance:
- Commercialization methodology
- Market need fulfilment as a Unique Strategic Potential (USP)
- Opportunities and Risks have been well identified and independently reviewed
- Portfolio of IP Assets and related IP Rights
- Securing of IP Rights by legal protection as registered Patents, Trademarks, Copyrights, Industrial Designs, Integrated Circuits, Marks etcetera.
Challenges and Prejudices in IP Valuation
- Valuation of a Single Use Patent versus IP assets with multiple types of IP Rights e.g., Movies and Episodes Based Dramas. Thus, depending on type of IP – Patent, SEP, Copyrights etcetera the valuation approaches will vary.
- Traditionally there is no ready market for IP Assets so Market Value Approach would be inappropriate. Cost based Valuation Approach is historical cost and does not reflect the potential. Therefore, Income Based approach is commonly adopted for IP Valuation but this also has embedded downside of too many assumptions and fails to pass though screening processes of many financial institutions.
- Separability of IP Assets is a test of identification of an IP Asset, but valuation is based on combination of complimentary resources and essential infrastructure for commercialization of an IP asset.
- Any would be buyers if separable, reflect valuation for a business entity but not for an IP Asset, except for limited IP Rights
- Serviceability of collateral – IP Asset can be taken over by lenders in event of default of debt payments.
- Despite above challenges Valuation Report has to overcome the lack of lender confidence that IP is valuable.
- Start-ups and SMEs cannot afford high transaction costs and valuation reports.
- Each IP asset is unique – gives better margin, better access to market in good times. In bad times it is difficult to separate it out of business as business will fail
- There is uncertainty of IP Asset as collateral in case of negative results and less than projected performance.
- Valuation takes into consideration safety nets by governments and supporting institutions in terms of grants, tax concessions, subsidies, and access to markets.
- The subjective treatment from Policy viewpoint is that Institutions and States need to see whom they want to finance and what they are financing.
Solution for Securing IP Finance – Take the First Step of IP Valuation Carefully
According to WIPO Publication on Intangible Asset Finance (2022), “Businesses need practical tools to improve their chances when using intangible assets to secure debt and equity financing. Financiers who are less familiar with IP need a better understanding of the potential value of these assets, their chain of title and how they can be liquidated in the case of default.”
Recommendations for an IP Asset Valuation
- Appoint a Valuer with sound knowledge of IP Laws, Domain Expertise, and valuation accredited qualifications from institutions like IVSC, IVAS and similar international organizations.
- IP Asset has no barriers. Valuation should take into consideration the opportunities of borderless expansion and risks of infringements.
- Valuation costs and Transaction costs should be optimized to avoid high cost of borrowing.
- Identify all IP Rights which can be secured by an IP Asset being valued.
- Explore the possibility of creating an IP portfolio. A Portfolio of IP assets may create higher value than an individual IP Asset.
In short, there is no shortage of valuers and appraisers for tangible assets, but it is prudent to exercise due diligence when selecting IP valuation professionals. Banks and government regulators often recommend using professionals who will be adopting quality, consistency, and international standards in their IP Valuation assignments.
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