What are the key challenges that Inngot helps its customers tackle?
Most CEOs and CFOs do not lie awake at night worrying about what their intellectual property is worth (at least, not yet), but there are many transactions that demand, or can be improved by, an understanding of intangible asset portfolio composition and value. Of course, companies know whether they have registered rights such as patents or trademarks, but innovative businesses often find it challenging to identify and describe all their other intangibles that drive value, regardless of their size.
Inngot has always focused on building the right language to communicate what these intangible assets are; our platform can now catalogue over 80 distinct types. Our valuation focus has always been on commercial risk and opportunity. When there is a deal to be done, asset quality and value must be explained in a way that both parties can understand.
The main reason companies come to us is finance. Our specialism has thus become helping businesses use their non-physical assets to raise debt and equity finance, which is not a new idea by any means. Back at the turn of the 20th century, Thomas Edison was using patents to help fund General Electric. There is no doubt, however, that IP-based finance is now becoming a buzzword.
Banks face two main challenges in lending against intellectual property and intangibles: high transaction costs and uncertainty over recoverable IP value. With the backing of Innovate UK and our investors, we are confident that our new platform has cracked both. IP-based finance has long been niche; we are making it mainstream.
How has IP-based financing developed over the past decade?
It has now been 14 years since Kenan Jarboe and Roland Furrow of Athena Alliance succinctly expressed the need for IP-based finance:
Just as physical assets were used to finance creation of more physical assets during the industrial age, intangible assets should be used to finance creation of more intangible assets in the information age.
I do not think anyone has put it more elegantly since.
It has been nearly 10 years since I co-authored the “Banking on IP” report, published by the UK Intellectual Property Office (UKIPO). In 2013, many financiers recognised that taking effective security over intangibles like intellectual property was beneficial, but most were unconvinced these assets had realisable value that could be leveraged. There is now better recognition of the real importance of intellectual property, and an improved set of tools and approaches have emerged to capitalise on this.
It is now abundantly clear to the finance and insurance industries that companies simply do not own or use bricks and mortar and other tangible assets in the way they used to. Also, these supposedly liquid assets can be problematic to dispose of in practice. If the global financial crisis did not prove that pure real estate lending represents highly correlated risk, the pandemic has certainly done so.
While accounting rules have some catching up to do, the time for intellectual property finance has come. It is good to see that WIPO has recently acknowledged this by launching its own IP finance initiative.
Work must still be done to help the finance industry understand that the value of intellectual property lies in its uniqueness, which means you cannot expect to dispose of it like a commodity. More lenders are now recognising that there is enduring value in good-quality intellectual property, even in a distress scenario.
What types of IP finance are now available to businesses internationally?
In the early 2000s, I would have said venture debt was the closest thing to IP-based finance. Providers of this type of funding are generally adept at using security interests to influence borrower and investor behaviour. Whether these structures really attribute value to intangibles is a different question, but for an IP-rich business with strong prior equity backing, this remains an attractive way to bridge between value inflection points.
Specialist film and music library finance, where the IP assets are (or will be) revenue-generative independent of any business, has also been around for a while. This is the simplest type of IP-based finance, provided there is confidence in the future royalty streams – but it is unlikely to be high volume.
Fortunately, three further approaches now sit in between these two alternatives:
- asset-based finance – buying the core intellectual property from the business and licensing it back. We have worked extensively on this structure and it has a number of benefits, though companies can take a little persuading on its advantages;
- IP-enhanced cashflow lending – our IP profile and valuation tools fill the gap in lender knowledge by helping them understand a company’s balance sheet and where value lies. We have been facilitating this type of approach for over a decade, and it works well for strongly cash-generative businesses (we are currently supporting HSBC UK with its £250 million growth lending initiative on this basis); and
- using intellectual property as collateral (ie, attributing a recoverable value to it). In the last decade, most activity in this area has been reliant on government-backed guarantees; schemes in China, Korea, Malaysia and Singapore have generally followed this approach. Specialist financiers have also been working alongside banks in the United States to stretch their appetite into this area.
The most promising development here, I think, is collateral protection insurance. This has only ever been applied to large loan sizes (generally $50 million and above), but we have been working with Aon for some time to determine a way to use it with portfolios of smaller loans. This approach gives insurance carriers the advantage of being able to obtain a spread of risk.
What is different about Inngot’s approach?
We have much in common with other commercial valuation firms. The methods we use to identify value are all grounded in international standards, and we always pay careful attention to purpose and input data quality.
However, there are two areas where I feel Inngot can justifiably claim to be a pioneer. The first is the fact that we have always delivered IP identification and valuation primarily as an online platform. We have achieved this by standardising as many aspects of the process as possible and continuously refining our approach to make the most of new data sources. The second is that everything our platform does is informed by published research, much of which we have led.
By investigating the barriers to unlocking asset value with IP offices like the UKIPO, international accounting bodies such as the Association of Chartered Certified Accountants and non-governmental organisations like the Organisation of Economic Cooperation and Development, we have acquired first-hand knowledge of IP assessment, valuation and financing practices across the world.
How is it possible to deliver reliable, credible valuations online?
I fully accept that bespoke reports have their place – especially when a company is pre-revenue or early stage. We have helped scores of companies pitch for, and obtain, investment by writing them.
However, standardisation (ie, consistency) is vital for scaling up IP-based debt finance. SME lending works on tight margins, to predetermined credit appetite rules, in a competitive environment where time is of the essence. An investor may find a 50-page valuation report useful, but a bank cannot process it. Lenders also need to know that the approach is not only robust but also consistently the same – anything else is treating customers unfairly.
Currently, Inngot is the only company that has believed in this opportunity enough to invest the necessary resources to realise it. Over the past three years, we have comprehensively redesigned our platform to support collateralised IP-based lending; a market that can only uncover its potential if it is based on data science and sound principles.
We have overhauled our profiling software to make it easier for companies to build a comprehensive intangibles portfolio. We reworked our Sollomon valuation engine, which we first developed with specialist input from Grant Thornton UK LLP in 2010. Now, it can deliver insights not only into present-day value, based on investment and opportunity, but also consider how that value may develop – or diminish – over a loan’s typical lifetime. We have focused on refining our estimates of the value at which assets could be marketed in an orderly disposal scenario.
Crucially, we have added a completely new system to consider collateral suitability. All our research has concluded that an asset portfolio must pass three tests: separability, saleability and strength. Separability considers whether the assets could survive a business failure, saleability looks at whether anyone would want to buy them if they became available and strength considers whether they would stand up to scrutiny in the event of a sale.
We do not rely on the platform to do everything – it remains critical to moderate the inputs provided by the company to ensure they are as accurate as possible. It is also crucial to set out how the results have been obtained. Our customers would have no confidence in a black box process we could not explain. AI has massive potential, but it needs to be explainable.
What effect does growing consciousness of environmental issues have for the IP financing space?
Intellectual property and intangibles are non-physical assets. While we would not claim they have no carbon footprint, they are in a different league from the types of tangible assets banks are used to financing or using as collateral. Any financier or investor interested in green credentials or sustainability should be thinking carefully about the type of asset they are backing.
We also need innovation to meet carbon reduction targets. Existing technologies are not yet at the point that they can solve our crisis, but a tremendous amount of promising intellectual property exists out there that could fill the gap. These new technologies need funding – initially, to prove their effectiveness, and subsequently to scale them up.
IP tools, systems and offices can also contribute to net zero. We have just concluded a study for WIPO Japan on the initiatives being taken by national and regional IP offices to promote sustainable development goals.
It is evident that the pandemic has accelerated the shift towards more efficient ways of communicating and working remotely. Almost everyone now expects to be able to do most things online. That is another way Inngot has been ahead of the curve, I would say!
As founder and CEO of Inngot, what are you most proud of?
Being proven right, I guess! There was scepticism when we first introduced our standardised, online approaches to IP identification and valuation, which has been replaced by acceptance. Standardisation is vital to unlock IP value at scale – particularly if we expect lenders to harness it. The global financial crisis and pandemic may have delayed this realisation, but they could not stop it.
Now, we have a global opportunity in front of us. As most economies now recognise, innovation is central to achieving growth. It is difficult to see how any nation can harness this creativity and inventiveness properly if it cannot leverage IP value.
Personally, I have been involved with IP-rich companies since the early 1990s, both as a director and an advisor. I have seen the difference intellectual property can make to a business’s exit potential. Being able to harness that value without having to sell the business is the real breakthrough.
Professionally, I am grateful for the opportunity to meet and learn from so many international companies, financiers, IP practitioners and policymakers while building our business. I have found the different ways in which China, Korea, Japan and other Asian economies have sought to encourage IP-based finance every bit as instructive as the approaches being applied in the United States, the United Kingdom and Europe.
Overall, I am proudest of the dedication and loyalty of our team and investors; we now have tools and services available in 15 countries. It shows what can be done when you put quality resources behind an innovative idea – one I would argue is vital to drive the knowledge-intensive economy of the future.