The Flywheel Effect of IP-Backed Financing
Updated: Oct 4
Credit crunches, recession, inflation, forms of credit constraints, make companies and their management jittery, with fears, at times, of not being able to make payroll, or make the cash injections to “keep the lights on”. Companies know too well that reduced access to credit means that they may “...remain stuck in a pattern of low productivity and weak growth, even after other businesses in their country have managed to upgrade their operations” (WEF).
Capital has gotten savvy: IP-backed financing
Knowing that intellectual property plays a critical role in driving innovation and economic growth, alternative financing vehicles, such as IP-backed financing (or lending), have been created for companies, holding promising IP portfolios and generating revenue, to grow. In a nutshell, “intellectual property rights can be used to secure financing, either by pledging them or transferring rights to cash flows derived from these assets. Alternatively, a company's intellectual property can provide an indicator of a firm's value and support financing decisions”. Institutions like the Business Development Bank of Canada (BDC) and others, like AON, have committed significant funds to support the business’s high-growth phase.
Stack the deck in your favour and make sure to have your IP house in order
When exploring IP-backed financing, it is imperative that you have your IP house in order - the MVIP™ way. This means having:
a well defined business and IP strategy in support of your commercialization and expansion, which should be easily messaged in a “business and IP together” approach. This includes knowing and validating your “product-market fit” and the plan to create and safeguard your “moat”, both current and future (i.e., forward-thinking) where possible. This speaks, in part, to the culture IP creation and management, as well as innovation;
Your IP rights and knowledge assets succinctly inventoried and summarized, including patents, trademarks, copyright, industrial designs, plant breeder rights, geographic indications, integrated circuit topographies, trade-secrets, confidential information, data sets, regulatory approvals, etc.;
Your corporate and financial documents, including for example: (i) minute book, (ii) financial statements (including your growth plan, forecasts, projections, P&L, budget, etc.) in support of IP valuations, if required (scroll to the bottom of the document); (iii) insurance policies (as form of risk mitigation, if any), (iv) contracts and policies (i.e., employment, customer contracts, etc.), inventoried and summarized;
Your updated competitive analysis (SWOT) and business objectives,
as they will all be subjected to a due diligence process, wherein the “skeletons in the closet”, if any, will be discovered.
Our MVIP™ process will help you in putting your best foot forward, detect any anomalies before meeting funders, and allow for a build-up of trust, maturity and confidence.
Examples of IP-backed financing/lending.
Examples of companies that have received this type of funding include, for example:
Novarc Technologies, MB1 IOT and Baanto International in Canada (Rementilla, 2023);
“PatSnap recently achieved unicorn status when it raised USD 300 million, backed by SoftBank Vision Fund and Tencent Holdings in 2021. … Another example is the leading rewards and discovery platform ShopBack, which has extended its funding round to USD 75 million with investment led by Temasek in 2020. … Other promising IA-/IP-rich technology startups that have recently received sizeable funding from VCs include Ninja Van, Carousell, StashAway, Zilingo and Eureka AI.” (WIPO)
“entrinsic bioscience, Working with Aon, Leverages its IP Portfolio to Secure Insurance backed Financing from Jefferies Funding LLC with Limited Equity Dilution … Indigo Ag secured financing after Aon brokered an IP Collateral Insurance policy for Indigo Ag’s lender in excess of $100 million, believed to be the largest of its kind.” (AON);
Amongst other unreported deals.
With respect to IP valuation, it should be noted that IP valuation may be given little weight in the overall funding decision process as, sometimes, IP may not often properly be reported in financial documentation, for instance: the amount of revenue generated from various IP assets, among other considerations. Nevertheless, for further information on IP valuation, check out the World Intellectual Property Office (WIPO) and International Valuation Standards Council (IVSC), as well as the International Chamber of Commerce’s (ICC) works on the interesting and complex topic. WIPO is expected to publish various information booklets on IP valuation at the end of 2023.
Need more information on the role of investment and IP? IP-backed financing? Contact us. In the meantime, here is some further reading:
Durand, D. et al. (2023). What’s the Big Idea? The Crossroads Between Investment and IP. In: Bader, M.A., Süzeroğlu-Melchiors, S. (eds) Intellectual Property Management for Start-ups. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-031-16993-9_8.
Rementilla, L. (2023). Intellectual Property-Backed Financing. In: Bader, M.A., Süzeroğlu-Melchiors, S. (eds) Intellectual Property Management for Start-ups. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-031-16993-9_9.
Chapter 9 - IP-Based Financing of Innovative Firms (OECD, 2015).