Innovation Finance – a bigger role for IP? February 17th, 2014 by Tony Clayton
“Have you got a patent?” ask the Dragons in the Den when deciding who to finance. But if a young entrepreneur goes to the bank for funding, they may not get the same approach.
British businesses of all shapes and sizes spend over £60 billion a year creating assets which can be protected by patents, trade marks, design rights and copyright. But when they take these investments to their bank to ask for loan finance to grow, the response is usually that ‘IP doesn’t count’.
November‘s independent report “Banking on IP?” set out to understand – with banks and others – what can be done to use Intellectual Property in finance deals. This would release the investment and growth potential of IP for firms and for financial markets.
The report found reasons why IP is not recognised as an asset for lending:
- understanding firms’ IP assets, and value, seems complicated and costly; and
- IP value is seen as too uncertain to be covered by a reasonable risk premium – especially with the business risks of new markets
The combination of high costs and high risk is what makes banks see IP as an unsuitable asset against which loans can be made. After talking through the conclusions with a range of stakeholders, four key themes for action are starting to emerge:
1. Awareness Raising: There is still much to do to raise awareness in business – especially amongst smaller firms and those in the financial services industry – and to encourage understanding of IP as an asset.
2. Facilitating Dialogue: Even when businesses understand what IP they hold, there is scope for framing a better dialogue between business and financial services professionals. Businesses need to be able to articulate what they have, how it is secured and how it supports the future cash flow of the business. There is an appetite for tools and templates to help.
3. Confidence: To lend, the financial services industry needs confidence that the business will be able to repay the loan. Greater understanding and improved dialogue will help, but the report states that insurance also has an important role of play. Insurance models for IP can be used to underwrite loans, and effectively separate business risk from IP risk for lenders. This would make decisions at credit approval faster and lower cost. We’ve seen this model develop in the US.
4. IP Markets: Feedback tells us that the lack of mature markets for IP is a problem when trying to work out the value of an individual asset. The development of these markets, with better data to underpin them, would help build confidence.
We are grateful for the time and expertise that stakeholders have given so far. It is clear that the Government cannot do this on its own. In the next few weeks the IPO will be following up these themes with willing partners, and looking to prepare a response from Government with practical solutions for implementation.