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November 13, 2003 1
WIPO-MOST Intermediate Training Course
Geneva, November 10 to 14, 2003
Role of IP in Raising Finance
Christopher Kalanje, Consultant, World Intellectual Property Organization
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Overview The Value of IP
Assets
Toward the use of IP for Financing
IP Assets as Source of Finance Challenges
Conclusions
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The Value of IP Assets • IP has value e.g
– Qingdao Double Star Group brand value estimated at five billion yuan (US$ 600 million) the footwear producers started as a small company about 19 yrs ago
– In 2003, Coca-cola and Johnnie Walker brands are valued at US $ 70.45 billion and US $ 1.72 billion respectively
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The Value of IP Assets – The extension of Zantac (the anti-ulcer
drug) patent life from December 1995 to July 1997 resulted in Glaxo shares jumping 23p to 663p on the UK stock market
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The Value of IP Assets • Why,
– Can be separately identified from other intangible assets
– Can be legally protected – Potential future earnings – Can be valued
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Toward the use of IP for Financing Protection of IPR
Awareness and Respect of IPR
Enforcement
IP Valuation IP for Finance
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Toward the use of IP for Financing • Protection of IPR
– IP Audit • Important to identify existing IP • Decide on the best form of protection • Clarify on status of ownership
• Awareness and Respect of IPR – Ensure there exist internal IP awareness – Measure community/market IP awareness
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Toward the use of IP for Financing Contd. • Enforcement
– Check on the existence of IP enforcement mechanism • Institutions • Regulations
• Undertake IP asset valuation – Decide on methodology
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Toward the use of IP for Financing Contd.
• Financing – Check existing laws – Identify IP assets would provide sufficient
coverage – Identify the best source of finance
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Toward the use of IP for Financing Contd. • Financing
– Identify institutions which could accept the use of IP assets
– Present your business plan to potential investors/sources of finance
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IP Assets as Source of Finance • IP assets as source of finance is
attracting a lot of interest • innovative IP valuation methods
facilitate the use of IP assets
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IP Assets as Source of Finance Contd.
• Have clear understanding on, – Identity of IP assets involved – Whether the assets are legally protected – Ownership status (e.g. absence of
litigation proceedings)
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IP Assets as Source of Finance Contd.
– Potential of the underlying IP asset to maintain its value e.g. absence of clear challenge to its competitive edge
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IP Assets as Source of Finance Contd.
• Conventional forms – Assigning
• The price may be affected by availability of potential buyers and in a case of a patent whether it is a primer technology
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IP Assets as Source of Finance Contd.
• November 2000, Eastman Chemical Company (NYSE: EMN) assigned its IP rights for a polymer pellet-conversion technology to German-based Bruckmann & Kreyenborg Granuliertechnik ("BKG")
• November 2001, Be Incorporated the creator of the BeIA and BeOS operating systems, sold its IP and technology assets to Palm, Inc. the purchase price was US $11 million
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IP Assets as Source of Finance Contd.
– Licensing • Licensing can be a useful revenue
generating activity. Licensing may include a combination of upfront license fees, royalty payments based on future sales by the licensee and guaranteed royalty payments
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IP Assets as Source of Finance Contd.
• New forms, • Donation
• Where relevant, patent donation can lead to tax rebate
• Collateral • ability of the borrower to use the underlying
IP asset as security i.e not tied-up in other commitments like licensing, joint venture, merger and acquisition negotiations e.t.c.
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IP Assets as Source of Finance Contd.
• Example of use of IP assets as collateral – GIK Worldwide a San Francisco based
company used its patents as collateral thus raising US $ 17m
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IP Assets as Source of Finance Contd.
• IP asset-backed security
– Asset-backed securities are marketable debt securities collateralized by financial assets like mortgages, leases, account receivables and installment loan contracts
– Asset-backed securities are created by a process called securitization
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IP Assets as Source of Finance Contd. – From 1970s there has been an increase
in the type of asset-backed securities – Major “breakthrough” was made in the
mid 1990 when for the first time IP asset was used as a form of asset-backed security
• IP backed transaction is a form of future cash flow transaction
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IP Assets as Source of Finance Contd. – IP securitization has taken a variety of
forms which include, • music royalties • future films • trademark licensing receivables transaction
(royalties)
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IP Assets as Source of Finance Contd.
• IP securitization is a growing financial area
• Estimated that so far the value of business done is around US $ 6 billion
• Analysts say this is just a fraction of the potential of IP securitization market
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IP Assets as Source of Finance Contd. • Examples of IP-backed securities,
– 1997 David Bowie raised US $ 55 million. – Ashford & Simpson (songwriters and
performers) raised US $ 25 million. – James Brown raised US $ 30 million
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IP Assets as Source of Finance Contd.
• Benefits of securitization of IP assets – It provides immediate liquidity in the
form of tax-free cash infusion – The IP holder diversify his/her assets – The IP holder maintains total control
over his/her IP i.e. when the bonds are paid (mature) the underlying IP rights revert to the holder
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IP Assets as Source of Finance Contd.
• Challenges facing potential user of “Bowie Bond” securitization, especially SMEs – Importance of having a good documented
track record – Necessity of having existing catalogue of
work – Importance of ownership of underlying IP
assets (copyright)
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IP Assets as Source of Finance Contd.
• Other forms of IP assets have also been used as security – Trademark: In 1999 the Bill Blass
trademark was used to issue investment grade bonds (fashion industry)
– Patent: Yale University was able to raise US $ 115 million. The university used its patent on d4T.
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IP Assets as Source of Finance Contd.
• Venture capital (VC) – Most SMEs have difficulties in accessing
finance from conventional sources • lack of reputation (track record), • low collateral, • high risk, • asymmetric information (i.e entrepreneurs
have superior knowledge on the future prospects of the project than investors)
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IP Assets as Source of Finance Contd. • SMEs deciding to use VC must ensure that
their IP assets are well protected in the event that VC move to replace the original entrepreneur
• VC in China started in mid 1980s • A boom of SMEs activities and an increase
of high-tech industries,contributed to the increase in the number of VC
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IP Assets as Source of Finance Contd.
• Basically lending decisions of venture capital are influence by several factors e.g. – learning (prospect of the project ) – asymmetric information (on exact use of funds.
This would lead to different posterior probability over the likelihood of success)
– moral hazard (the possibility of the entrepreneur not using the funds efficiently due to costs associated needed efforts to attain efficiency)
– private benefits of entrepreneur
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IP Assets as Source of Finance Contd. • Well protected and commercially
viable IP assets have positive impact on VC lending decisions
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IP Assets as Source of Finance Contd.
• VC are also attracted by new business with IP assets which promises high – potential of future income – market control or strong market position,
or competitive advantage stands a greater chance, other things being equal, of attracting venture capital fund.
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IP Assets as Source of Finance Contd.
– Venture Xchange Network Ontario based company with a network of over 350 active venture capital
– Upon request Venture Xchange provide quantitative assessment report on how a company ranks against other venture capital seeking companies in specific business sector
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IP Assets as Source of Finance Contd.
• Assessment is based on –Management structure –Competitive technology –Market growth –Potential alliances –Financial requirements –Forecast on the number of investors
interested in the company
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IP Assets as Source of Finance Contd. • Business Angels
– Family, friends or close associates with money and in most cases have business background
– Expects returns on their investment – IP knowledgeable business angles
would favorably consider investing in enterprises with IP assets
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Challenges • Challenges in the use of IP assets for
financing include, – Inadequate IP awareness (SMEs do not
seek to extend the boundaries of IP potentials)
– Difficulty in assessing potentials of IP assets as a source of future cash flow
– Conventional source of finance are ill equipped to make the assessment
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Challenges – Possibility of surrendering
ownership/equity to VC – SMEs support institutions have not
been able to adapt to the new trend – Legal systems need to accommodate
the expanding use of IP tools – IP system itself must be able to
address the evolving nature of IP use
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Conclusions • Traditionally IP rights were mostly used
for preventing others entering the market
• Some enterprises have realized the potential of IP assets
• Few SMEs have tried to consciously use IP assets to overcome financial constraints
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Conclusions • Policy makers and SMEs support
institutions should be made aware of new strategic ways of benefiting from IP assets
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Finally • THANK YOU FOR YOUR KIND
ATTENTION