Adapt IP Ventures - IP corporate finance
The year 2020 will be framed by the crippling effects of covid-19 and the remarkable economic recovery from it across the globe, with historic highs in global stock markets and record initial public offering (IPO) and financing transactions. It will also be remembered for companies having to adapt and innovate to remain competitive. One economic highlight of the year was the rapid rise of merger transactions between private operating companies and SPACs. These SPAC transactions have not only highlighted the extraordinary amount of capital available for investors to deploy, but also the potential IP risks and opportunities of these target companies and their peers.
A SPAC is a publicly listed acquisition vehicle, whereby a sponsor raises a blind pool of capital with the purpose of acquiring a private operating business. The sponsor’s role is to generate value for its shareholders and partners by sourcing, structuring and transacting at an attractive price. Following the completion of the business combination, the SPAC structure effectively falls away and the entity continues to trade and operate as a traditional public company.
SPAC acquisition targets are attractive for the following reasons:
- Company size is significant, with the average SPAC IPO size being roughly $337 million.
- Relevant industries and markets should offer outsized growth opportunities.
- Typically stable asset base, reliable cash flow and that exhibit significant growth opportunities offer attractive upside potential.
- Entities are organised and structured with people, processes, risk mitigation tactics and controls sufficient to support public company scrutiny.
- Company management has a track record of success and/or a vision to execute market changing goals.
The second-half surge in IPO activity was fuelled by a boom in offerings from SPACs. According to FactSet, in the third quarter of 2020, 116 SPACs went public, representing 56% of all IPOs for that quarter. In the fourth quarter, there were 87 SPAC IPOs, which made up 52% of the total. Further, SPACs accounted for half of all IPOs that year.
Of the 54 closed-merger transactions between SPACs and target companies that were completed in 2020, the most active transactions were with companies in the following sectors:
- pharma and bio;
- capital markets and institutions;
- commercial products;
- commercial services; and
- restaurants, hotels and leisure.
Table 1 – industries represented in SPAC-led transactions
Innovation and patent portfolio review
The SPAC and the target company must prepare and file an investor presentation, which is provided to potential investors to assist with the evaluation of the investment opportunity. Like most roadshow documents, these presentations aim to show potential investors what differentiates the companies in questions from competitors and why and how their capital will be utilised for growth. Further, they highlight innovations, intellectual property and patents. Innovation and intellectual property are important assets for these companies as they represent commitments to fuel growth and protect market positioning. However, these companies still face IP-related threats to their businesses.
Innovation is an important consideration when evaluating and presenting investment objectives in a SPAC-led transaction, because investors and management are seeking ways to highlight growth opportunities and risk clearance investments. Leading research from KPMG/Innovation Leader and PWC summarises the benefits and goals of investing in innovation and are similar reasons for SPAC investors and target companies, with clear drivers being to remain competitive and grow sales.
Innovation and intellectual property highlighted in investor decks
While SPAC and target company investor presentations reflect the belief that innovation is an important term to include for public consideration, companies approach the topic in many different ways.
The term ‘innovation’ and similar terms were used in approximately 76% (41 companies) of SPAC investor presentations, whereas the terms ‘patent’, ‘intellectual property’ and/or ‘trade secrets’ was used in approximately 33% (18 companies) of investor presentations. Companies in the following industry groups (as per Pitchbook classifications) referenced the term ‘patent’ or similar terms most frequently:
- pharma and bio;
- commercial products; and
- computer hardware.
In a few cases, ‘innovation’, ‘intellectual property’ and ‘patents’ were referenced as part of key team members’ backgrounds and in many other cases, the references to these keywords related to overall corporate strategy, competitive differentiators or were tied to specific products.
Examples of the use of terms ‘innovation’, ‘intellectual property’ and ‘patent’ that appeared in SPAC/target investor decks are as follows:
- Grid Dynamics (an engineering IT services company) and Tattooed Chef (a plant-based food company) – two companies and industries that could not be more different. Both led their peer companies in their use of the term ‘innovation’ or ‘innovative’ in their presentations:
- Grid Dynamics: “Proprietary Delivery Model: Client co-innovation - Significant US staff leads to closer collaboration with clients and access to innovation programs”;
- Tattooed Chef: “The growth in the frozen food category has been primarily driven by the recent product innovation as a response to the growing demand for great tasting, clean label and convenient options”;
- Romeo Power discussed joint-venture projected financials and included a detailed note discussing potential IP licensing value: “Tiered IP license agreement paying Romeo Power a $7mm flat fee royalty and 0.75% of Revenue over $500mm in 2025E”; and
- Skillz identified a specific patent underlying their platform: “Skillz uses a patented Skill Classification Algorithm to determine skill of video game” (Skillz patent: US8882576).
Patent portfolio review of SPAC targets
The active patents of each company were also reviewed. Results from the dataset of completed SPAC transactions and reviews of each company’s patent portfolio (if any) are as follows:
- fewer than half of the companies held active patents (roughly 37% of companies);
- issued and pending US patents accounted for approximately 30% of total active patents compared to other geographic regions; and
- issued and pending non-US patents accounted for approximately 70% of total active patent assets.
Note of caution is that companies often hold patents in separate entities that cannot easily be tracked to the ultimate owner. In addition, patent applications may have been filed but not yet published. The companies with and without patent portfolios were further studied to determine characteristics of companies that appeared to value patent rights more than others.
The industries that are represented most heavily are not surprising, considering that commercial products and pharma and biotech companies are generally active filers. Reasons for this higher patenting activity include more patent litigation threat among competitors and the protection of product exclusivity. Companies categorised under transportation, computer hardware and software should see a greater focus on increasing patenting activity to protect innovations and build their patent portfolios relative to incumbents. The table below summarises the industries that lead by companies with patents and the aggregate number of patent assets per industry.
Table 2 - Industries with identified patents and their active patent asset count
Below is a list of the companies that held identifiable patent portfolios, ordered by the largest number of US granted patents.
Table 4 - Active patent counts per studied company
Vertiv (NYS: VRT)
Immatics (NAS: IMTX)
Vivint Smart Home (NYS: VVNT)
Luminar (NAS: LAZR)
QuantumScape (NYS: QS)
Desktop Metal (NYS: DM)
Velodyne LiDAR (NAS: VLDR)
DaniMer Scientific (NYS: DNMR)
Skillz (NYS: SKLZ)
Hyliion (NYS: HYLN)
Clene Nanomedicine (NAS: CLNN)
Eos Energy Enterprises (NAS: EOSE)
Nikola Motor Company (NAS: NKLA)
Fisker (NYS: FSR)
DraftKings (NAS: DKNG)
180 Life Sciences (NAS: ATNF)
Canoo (NAS: GOEV)
Opendoor Technologies (NAS: OPEN)
Digital Media Solutions (NYS: DMS)
Rush Street Interactive (NYS: RSI)
The global patent strategy of the represented companies varies significantly. The top filers of active patents include the United States, Germany, China and the United Kingdom. Across all represented industry groups, active US assets account for an average of 30% of the total active patent assets. As the table below illustrates, the proportion of US live assets to non-US live assets ranges from 100% of patent assets being filed in the United States (in the services (non-financial) industry group) to more than 75% of patent assets being active outside of the country (energy services (87%), pharma and bio (80%) and restaurants, hotels and leisure (75%) of assets being kept outside of the country).
Table 5 – Geographic distribution of active patents by industry
SPAC-led transactions will continue to be an important source of financing and deal activity throughout 2021. Parties will continue to search for and demonstrate capabilities to innovate and how they can harness innovation into financial returns.
Parties will need to understand and assess innovation pipelines and patent portfolios both internally and across peer sets to remain competitive. Gaps in patent portfolios will need to be addressed by organic patent filings built on internal innovations, partnership expansions and IP acquisitions.
The role and importance of managing and mitigating IP risk within these growing, newly funded companies will grow and likely there will be additional team members required to protect and capitalise on new IP opportunities.