security interests over ip rights: unlocking the value
TRANSCRIPT
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Security interests over IP rights: unlocking the value
Martin Brassell FRSA (not Tony Clayton!) CEO, InngotCo-author, Banking on IP?
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This challenge is the reason for Inngot
“The facilitation of security is not simply a matter of ensuring priority for creditors. The control rights provided by security will be important to a financier and this is especially the case with technologically-driven small and medium sized enterprises as the line between equity and debt finance may become blurred. When such a small and medium sized enterprise is in financial difficulty, creditors care about issues of management capability or the threat of the business over-extending itself. A security interest gives creditors a voice in these decisions.”
Secured Financing of Intellectual Property Assets and the Reform of English Personal Property Security Law, I.R. Davies, Oxford Journal of Legal Studies, 2006
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IP can look like this…
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Or this…
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Or this?
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Investment and value: UK and US
0
20
40
60
80
100
120
140
1990 1995 2000 2005 2008 2009
Tangible assets
Intangible assets
Sources: IPO/Imperial/Nesta, 2014; Ocean Tomo, 2015
1732
6880 84
8368
3220 16
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1975 1985 1995 2005 2015
TangiblesIntangibles
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Investment in assets protectable as IP
0
5
10
15
20
25
30
R&D Software Artistic Originals
Design Branding
19902011
£ billionnominal
Goodridge, Haskel and Wallis; Estimating business investment in Intangible assets and intellectual property rights 2014. http://www.ipo.gov.uk/ipresearch-intangible.pdf
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Intangibles in M&A (‘business combinations’) Deloitte sector (KPMG sector) Price % allocated to
identifiable IA (Deloitte) Price % allocated to
identifiable IA (KPMG)
(Automotive) - 34%
Chemicals & industrials (Chemicals: Industrial products)
38% 48%: 36%
(Computer & semiconductors) - 45%
Financial institutions (Financial services) 42% (banks 32%) 34%
Food & beverages: Household goods ((Consumer products & services)
39%: 29% 55%
(Internet & e-commerce) (Software) - 33%: 28%
(Life science & healthcare) - 45%
Media (Entertainment & media) 34% (range 20%-50%) 43%
Retailers 25% (general), 5% (food/drug) -
Support & construction 27% -
Telecommunications (Telecommunications) 33% 34%
(Transportation & logistics) - 34%
Sources: Grasping the Intangible, Deloitte and Touche LLP, 2007;Intangible Assets and Goodwill in the context of Business Combinations, KPMG AG, 2010
(re-benchmarked by Inngot)
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Banking on IP?
“European investors are desperate for productive places to put their cash; this is a region, after all, where $2 trillion-worth of bonds have negative yields. The continent’s banks are also keen to jump on the bandwagon.
“But the fact that half the start-up money raised in 2014 was from America, not Europe, shows the challenge. London financiers are better at devising complex derivatives trades than organising a sensible way to fund entrepreneurs on the scale that is needed.”
[email protected], 12th February 2015
Chart from The Economist, February 2015
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Good businesses have IP
Firms holding patents appear to be around 50% less likely to fail than those without them *High growth firms have 74% more intangible assets on their balance sheets than non-high growth firms **IP-intensive industries account for 90% of the EU’s trade with the rest of the world ***Companies that manage IP are 10% more likely to have overseas turnover ****Global licensing is now reckoned to be equivalent to at least 5% of world trade *****
* Soon to be published research by UK IPO** Analysis of the 2011 Community Innovation Survey by the Big Innovation Centre** EPO/OHIM IPR Intensive Industries 2013*** UKTI New markets, new ideas: How exporting fosters innovation and growth 2011**** A multitude of sources – though how much is tax-driven?
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Characteristics
The ultimate ‘moveable object’?
Works as a bundle, but needs to be understood in its component parts
Not traded on liquid markets
Value subject to large fluctuations
• Can appreciate massively, but liable to be damaged, or disappear, when a business gets into difficulties
The key problem is one of commodification… which starts with identification… needed to facilitate notice, and establish priority
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The problem is not ‘information asymmetry’. ‘Asymmetry’ implies someone knew the answer.
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“Banking on IP” 2013
Chapter 8 covers legal aspects in some detail
Showed supply side constraints
• Firms needing credit don’t ‘tell the IP story’
• Equity capacity to cover IP investment is developing
• Debt limited by cost, risk and lack of experience
Evolution not revolution
• Not about asking banks to become VCs!
Scope to change behaviour
• Willingness to engage in a growing market
• Need tools and approaches to manage cost and risk
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What we’ve done
Inngot has built scalable online products that:
• Help businesses to discover exactly what assets they own, and communicate them to others
• Demonstrate the ‘hidden’ value in their IP (using an indicative valuation tool created with specialist input from Grant Thornton), to get the conversation on value started
• Show them ways to make their IP stronger and more marketable
Web delivery for convenience &
scalability at minimum cost
Standards to assess &
value IP, to drive down
transaction costs
A common language to capture all the intangibles companies own
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Registered IP rights
Copyright assetsContractsExternally verified,
auditable, show innovation/distinctiveness
Auditable, proof of creativity Auditable, potentially
transferable
Resources
Endorsements
Relationships
Internal, often not transferable. Includes firm-specific know-how
External, non-transferable
Intangible capital that is not firm-specific
Auditable but not unique
Clearer ownership, greater control,
transferable
Ownership unclear, less control, not transferable
Value location: a tentative hierarchy
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Singapore ‘IP Hub’
Government objectives
• To develop as an IP trading hub for the region
• To enable finance for IP-rich firms which made it through VC backed start up and don’t want to sell
What are they doing?
• IP valuation training from independent global experts
• Government support for insurance guarantees
What progress?
• Most banks involved are publicly supported
• Some deals, but still high cost / low volume
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China ‘IP Pledge’
Government objectives
• Major drive to embed IP system in business practice
• Strengthening quality and rigour of enforcement
• Enabling IP-rich indigenous firms to access finance
What are they doing?
• Setting technical standards and evaluation – via SIPO
• Government backed loan guarantee fund, locally based
What progress?
• First deal in 2006 for 1m RMB in Shanghai
• 500 loans worth 1.8 billion RMB by 2013; low failure
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US markets and insurance
Government objectives
• To avoid financial market instability
• Balancing prudential financial regulation and change in underlying asset base of business
What are they doing?
• USPTO starting to improve ownership data
• Beginning to recognise guaranteed IP as a Tier 1 asset
What progress?
• Auctions and trading platforms emerging
• Insurers still niche, but model established: deals done
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What do we learn?
An effective IP system matters
• Trust in the basic asset and enforcement vital
• Information, analysis and expertise builds links
IP backed finance usually short – medium term
• US insurance model 2 years max, with controls
• China scheme on similar basis
Making ‘due dilligence’ affordable is key
• Needs to work for firm portfolios, not patents
• Information / standardisation a driver of acceptance
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Three mainstream routes
Use knowledge of the assets and their ‘materiality’ to
strengthen credit decisions and take appropriate controls
Independently underwrite
the assets and back a minimum collateral
value with rated insurance
Unsecured lending Secured lending
Purchase assets known to be business-
critical and license them back to the company for an agreed period
Asset-backed lending
Obtain an inventory of what the company owns
Identify the available assets
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“The Big Innovation Centre’s entrepreneurial finance hub will build solutions to finance high-growth firms through the critical phases of growth”
Sherry Coutu, ‘The Scale-Up Report on UK Economic Growth’ (November 2014)
Entrepreneurial Finance Hub
3 Global Corporates
5 IP Tool Providers
3 Alternative Finance
Providers
3 Government
Agencies 2 VC’s & Business Angels
5 Incubators & Networks
3 Leading Universities
2 Major Banks
Gathering round a hub.....
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Yes Cinderella, you can go to the ball…
© Disney
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Yes Cinderella, you can go to the ball…
© Disney
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Thank you
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