UK Government to Drive Action on IP-Backed Funding

The UK Government recently launched a program via the UK IPO to encourage banks towards lending finance to small and medium enterprises (SMEs) with Intellectual Property (IP) and use their IP as collateral.

Funding rounds and growing capital can be challenging for businesses that rely on their IP assets to obtain funding. Despite having a high number of active investors who recognise IP assets in the UK, SMEs still face obstacles when it comes to using their IP assets to raise business finance. IP assets are seen as intangible assets as they lack physicality, i.e., they cannot be seen or touched, and this can introduce uncertainty for financiers.

With SMEs accounting for just 1 % of UK companies by size but adding over £1.2 trillion to the UK economy, SMEs are seen as a main driving force in the UK economy and provide enormous potential for generating even greater economic returns. Being able to use IP assets to locate funding at the right time may be critical for the growth and success of a young business.

So, what are the steps for acquiring IP-backed funding?

In order for an SME to benefit from the IP-backed funding discussed in the Government’s report, the business will need to gather information about all their IP assets for an IP valuation to be conducted. The valuation of IP assets (e.g. patents, trade marks, copyright, and designs) will provide a business with collateral that can be used to attract non-dilutive follow-on (debt) funding from banks. As the Government report details, the bank’s position on IP-backed funding will be determined by both regulation and the confidence and familiarity of IP as an asset class.

An IP portfolio can be valued based on the future economic benefit it brings and, in particular, the asset’s ability to exclude competitors from a particular market. In order to be able to quantify an IP assets value, such asset must generate a measurable amount of economic benefit to the owner and may enhance the value of other assets that it may be associated with.

IP Valuation – what to expect?

IP valuation can be conducted based on many factors, and it is advisable to perform the valuation of your IP portfolio using more than one method. There is no easy way to reach a definitive figure, and valuations can vary widely, but the more prepared you are by understanding your portfolio and researching your market, the better the outcome is likely to be.

A selection of methods available are summarised below.

• The cost method establishes the value of IP assets by calculating the cost of developing a similar (or the same) asset. This can look at the reproduction cost or the replacement cost of such assets, both of which include determining the cost of any expenditures and opportunity costs in the development of an IP asset.
• The market method compares the current actual price paid for an IP portfolio containing similar IP assets being used/developed/sold under comparable circumstances. For this IP valuation to be accurate and reliable, information on the costs of a comparable asset in an active market is required.
• The income method determines the economic income an IP asset is expected to generate. This can be achieved by projecting the revenue flow that the IP asset is supposedly generating or is expected to generate over the remaining period of protection provided by such asset, including potential licensing revenues. The revenues must then be offset by any costs directly associated with the asset, and any risk must be accounted for.

There are still concerns about the uncertainty of IP assets when applying for funding, namely whether the asset will become successfully commercialised and for how long the commercialised product will be protected by such IP rights. These concerns can be addressed by performing due diligence, hopefully reducing any associated risks, but cannot guarantee the full success of an IP asset. 

The UK IPO is looking to support the program by raising the profile of IP financing and identifying methods to improve investment by:

• Establishing an advisory working group including experts from the financial sector, IP profession, and academia to help shape policy;
• Create an annual report of regular and consistent metrics to improve market insight; and
• Improve the process for recording charges against registered IP at the IPO.

If you would like help with a valuation of your IP portfolio or are interested in any other points raised in this article, please contact us at mail@stratagemipm.co.uk.

The full report issued by the UK Government can be found here:

https://www.gov.uk/government/news/report-launched-into-uks-ip-backed-finance-landscape