Krutarth Shah is CEO of Avon River Ventures Intellectual property (IP), such as patents, trademarks and copyrights, is becoming increasingly important and lucrative in business. A report by Semico Research forecasts that worldwide IP revenues will approach $10.3 billion by 2025. China and the United States saw an overall filing count of 3.4 Million Patent applications in 2022 as per the World Intellectual Property Indicator Report published in 2023. As a subset of the intangible class of assets, IP occupies a complex niche within the asset appraisal space when compared to tangible assets. Here are some considerations that companies looking to navigate the valuation, benefits and risks of IP-backed financing can keep in mind.
IP-backed financing can benefit startups and lower- or middle-market companies in numerous ways. Startups are constantly seeking funding opportunities. Today, when startup valuations have shrunk, they need to get their IP valued to showcase a third-party valuation. This helps startups gain investor confidence and eventually determine the correct valuation for their company. Considering the Indian Venture Capital Market, startups have seen a decline in global VC capital deployment, with an overall investment tally dropping from $25.7 billion in 2022 to $9.6 billion in 2023. Startups worldwide have been constantly searching for capital to finance their growth.
To back their enterprise valuation, startups must know their assets' intrinsic and terminal values. It takes some financial engineering to determine the value of intangible assets compared to tangible assets. Hence, getting an IP portfolio valued by a known and credible IP valuation firm is imperative to gain investor confidence and support enterprise valuation.
Aside from primarily knowing the worth of the IP assets, we cover infringement analysis. We also often create an IP valuation report, which allows startups to work with their legal counsel on damages reports to file lawsuits against infringers. Startups can achieve huge lump sum non-dilutive compensation on successful claims with no payback obligation.
Lower- and middle-market companies often seek additional insights into the strategic development of their patent portfolio, such as information on what patents to let go and what new patents to add. IP valuation reports can help identify such opportunities.
Since there isn’t a lot of market-comparable data on which to base analyses, IP is more challenging to evaluate and value. There are various methods of determining the value of an IP asset portfolio, such as cost, market and income approaches, and each comes with its strengths and weaknesses.
For instance, someone might evaluate their IP portfolio to appease investor interest, in which case we choose a forward-looking lens. In contrast, if a lender wants to evaluate an IP portfolio for vesting a security interest, we would take a more conservative approach in case the loan defaults and part or all of it needs to be liquidated.
Suppose an IP portfolio is evaluated for shareholder analysis. In that case, the appraiser will employ an income or market-based approach, which factors in the known market comparables such as M&A events or a similar technology family sale.
One important point is that companies may not know all their IP assets, such as unique experiences and trade secrets. This can lead to undervaluation or missed opportunities, which can undervalue an IP portfolio.
Determining the value of IP is subjective and challenging. Market fluctuations, technological advancements and changes in consumer preferences often impact IP asset value. To minimize the risk of improperly valuing IP, insurers can use various market-comparable techniques and assess the actual asset value by understanding the price the market is willing to pay, both today and in the coming years.
The demand for products or services associated with IP can change, which can, in turn, affect its value. For example, a decline in market demand or the introduction of newer, better technology could reduce the asset's worth. To mitigate such risk, we encourage borrowers to diversify their pool of IP assets by constantly innovating to spread the risk across different technologies and patent families.
If a borrower defaults on the loan, we may face significant challenges in monetizing the IP collateral if its value has depreciated or if there are legal encumbrances. Lender protection insurance policies and other structured insurance products can help protect against the risk of default. As IP increasingly shapes market dynamics, understanding the intricacies of IP-backed financing is critical. Companies can leverage their IP assets strategically by understanding the complexities of benefits, valuation and potential risks associated with IP collateralization.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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