IPM Ventures

Raising funding for intangible assets

The biggest challenge for knowledge based businesses is raising funding for intangible assets

The infamous ‘equity gap’, where an investment opportunity is too small for institutional and corporate investors but which can appeal to business angels, is no more obvious than for knowledge based businesses who have an innovative product or service and who need to raise finance. How many times has UK plc been the place of invention, only for an overseas company to turn it into a mass market product and to reap the rewards of commercial exploitation?

Bankers and investors find it difficult to fund knowledge businesses unless it has legally protected its intellectual property rights, and has a clear business strategy and understanding for building value.

The most valuable assets of every business are its name and reputation, its technical and product know-how, its staff and customers. To the world of accountancy this is goodwill, and intangible assets when shown on the balance sheet are quickly discounted by accountants and bankers alike. How can this be in the age of the knowledge economy and when there are such spectacular success stories?

Consider how valuable brands like Manchester United, Virgin, and Formula 1 are today, or designs like Chris Dyson’s vacuum cleaner. Patents now extend to software and not just mechanical inventions, and designers can register their designs in just the same way as you can register a patent or a trade-mark. Publishers build valuable copyright portfolios, and database rights exist as a new legal right.

In the last decade huge benefits have been exploited by large companies when they focus on actively managing and exploiting their know-how. Knowledge Management, and the value of Intellectual Capital, are now important tools and measurements of value, and stock markets recognise these hidden values by the simple fact that most quoted companies trade on a significant premium to their net tangible assets. So the markets are recognising that earnings depend on the know-how of a business, and that the physical assets are playing a less important role in terms of valuing a business. The same applies to smaller businesses.

For SME’s and start-ups, how does the entrepreneur protect and exploit its know-how? More importantly, how does an entrepreneur raise venture capital when all the business has is an innovative product or service, and little or no tangible assets for an investor/lender to secure against?

Valuation Management, part of the Valuation Consulting group, advises businesses on protecting, managing and exploiting know-how to change knowledge into profit and to create real shareholder value. VM takes a practical staged approach:

First, identify what know-how you own. Intellectual Property Rights include patents, designs, trade-marks, copyright, database rights, and confidential information. Intangibles include contracts supporting joint ventures and strategic alliances, domain names, affinity marketing programmes to exploit databases and much more.

Second, protect those assets by securing the most appropriate form of legal protection, but first make sure you are taking a practical and commercial approach. There is no point registering and paying for a patent if you cannot make money from it.

Third, manage those knowledge assets. If you do not know or care about your company’s know-how and its costs and values, why should your staff, suppliers or customers care or value it? So define and communicate your IP management policies to staff and customers so they understand its value, and that you will police and challenge any unauthorised use.
Create audit trails so if anyone copies or misuses that know-how, you can challenge and stop them quickly. Link IP management into the business and marketing plan, so costs and revenue are identified.

Fourth, set a clear exploitation strategy. There are many different licensing strategies, and the best feature of intellectual property rights is that it can be exploited in different ways. Issues include setting the right royalty rate, transferring IPR to low tax jurisdictions, and developing contracted income streams so a banker will lend against those Rights.

Finally, understanding the valuation of a business and its intellectual property rights is vital. There are different ways to value know-how, and it is a specialist field. Valuation will be supported by how rigorous the IP is protected and managed, and the marketing strategy and channels to market to be used. Understanding and defining value is not just to support a fund-raising or sale price. It should also be an important measurement to drive investment decisions in the business, so that the management can track how shareholder value is being built and demonstrate to outside investors how the business strategy will deliver investment returns. The valuation of the company’s shares can also support the pricing of share options for key staff.

For investors who want to buy into a growth business where there is a clear opportunity to exit from the business and realise their investment within typically 4 to 7 years, they want to understand present and future valuations for the company’s know-how. When they make their investment, they and the entrepreneur will negotiate a price for the deal.

Investors often say entrepreneurs are unrealistic, and entrepreneurs complain venture capitalists are greedy. Perhaps they are both right, but an understanding of valuation, and a clear business strategy for protecting, managing and exploiting its know-how, will bridge the equity gap.

William Baillieu is a director of Intellectual Property Management Ltd
E-mail: bb@ipmventures.co.uk

2 Responses »

  1. The best information i have found exactly here. Keep going Thank you

  2. The article is ver good. Write please more

Leave a Reply