Updated: May 15
Intellectual Property or IP has become a key source of value creation and an asset class of increasingly relevance as technology evolves. In a knowledge based economies, value is captured through IP systems and the rights it confers which can transform intangibles into tradable assets.
Once upon a time the majority of investment made by businesses was in people and physical items like premises, machinery; today the majority of investments goes into intangibles goods, ideas and creativity.
Up to the 1980’s, tangible assets accounted for 80 percent of company value; the rest was made up by intangibles, including IP. Thirty years later, the reverse is true with 80 percent of company value made up of intangibles.
"In today's world companies with a clear and well managed IP strategy are more likely to succeed and attract further investment"
Defining , executing and managing a clear IP strategy can result in a few challenges especially when funding is required. This fact remain of importance even in the case of the most innovative ventures, especially at their early stages. A much as tangible assets required investments, so do intangibles, and understanding the sources of intangible financing , including IP can make the difference between a project success or failure.
Type of IP Financing
Asset Finance: Asset finance is a type of finance used by businesses to obtain the equipment they need to grow. It usually involves paying a regular charge for use of the asset over an agreed period of time. The most common types of asset finance are leasing and hire purchase. Asset finance providers often specialise in a particular type of asset about which they have expert knowledge.
Mezzanine :This type of funding combines elements of debt financing and equity investment and is often described as a “hybrid” or “halfway house”. Basically, in addition to receiving fees and interest on the loan, the provider also benefits from a share of the upside when the borrowing business achieves its growth objectives.
Peer-to-Peer lending: also known as person-to-person lending is another form of crowdfunding and is the practice of lending money to unrelated individuals without going through a traditional financial intermediary such as a bank. This lending takes place online on peer-to-peer lending business’s websites using various different lending platforms and credit checking tools. Most of these loans are unsecured personal loans, made to an individual rather than to a company.
Investment funding options
Angel investment and Venture capital
Is a type of structure in which a pool of assets is transferred to a SPV that issues debt backed securities collateralise solely by the assets transferred and the payment derived from those assets.
IP securitisation is becoming more and more generally accepted by the financial markets and with the application of blockchain technology , it's rapidly becoming the method of choice for IP financing. Securitisation can offer IP holders less expensive form of finance.
Benefits of IP backed financing
IP backed financing enables companies to utilise their intellectual property as collateral
IP-backed financing offers significant benefits as follows:
Potential for value appreciation – the IP assets of a well-run business increase in value over time, whereas the value of most tangible assets depreciates
A wider pool of assets – lenders often face situations where “good” customers want to borrow more than established asset lending ratios allow. The value that core intangible assets represent provides a means to lend more with additional security
Stronger repayment incentives – where intangibles are core to business activity, they provide a powerful incentive for borrowers to honour repayment commitments.
Improved security –defining intellectual assets as part of a lending agreement puts a bank in a stronger position with an administrator in the event of financial difficulties.
Alternative to personal guarantees – IP and intangibles provide an additional source of security that is directly related to a company and not an individual, thereby making it easier to recover funds if necessary.
IP financing like any other assets, offers great opportunities for individual and businesses.
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