IP funding could be the key to unlocking your startup’s growth
When you think of a startup’s assets, you might think of money in its bank account, or even physical assets like equipment and property. But most of what makes a business worth today is intangible – from brands and trade secrets to algorithms and source code.
These digital assets are called intellectual property (IP), and just like physical assets, IP can receive a monetary value against which startups can take out loans – this is called IP financing.
“Intellectual property financing is the ability to use your intellectual property and other intangible assets as collateral for a loan,” says Will Kier, head of risk and insurance in the Intellectual Property Solutions department of Canada. ‘Aon. Aon is a professional services firm – who takes care of everything from insurance and risk management to intellectual property valuations – for whom Kier helps clients use their intellectual property as collateral to access financing.
“When you go to get a residential mortgage, the bank has a charge on your house,” he says. “As a rich IP company, you say, well, I have this software, I have these patents, I have well protected trade secrets. There is a lot of value there.
In fact, this value represents 84% of value of S&P companies in 2018 – a figure according to Kier is likely to be similar for scalings.
Why take advantage of your IP
In order for early-stage, high-growth startups to get funding, they often have to divest part of their business as equity. or actions.
“It’s a pretty painful experience for a company closely owned and led by its founder,” said Ian McCaw, head of digital M&A and intellectual property solutions for Aon’s EMEA business. “Because you are ultimately giving up some of your equity on each round of external investment. ”
“It’s a pretty painful experience for a company that is tightly owned and run by a founder, because you end up giving up some of your equity with each round of external investment. ”
Instead of or in addition to traditional round tables, he says companies can use their intellectual property as a “real asset,” which can be used to secure a loan.
Kier says one of the best ways to leverage your intellectual property and determine its value is to use insurance, so lenders have a sense of what they’re getting into. Aon calls it Insurance Enhanced Intellectual Property Financing.
Insuring intangible assets is a good way for high growth companies to raise additional funds without diluting their stake, he says. This means that companies can access more capital, without losing equity or shares.
“The lender has a greater level of confidence to complete the transaction because the insurance has helped crystallize the value of the intellectual property,” says Kier. “Instead of using their own in-house method of valuing intellectual property… they know that with the benefit of an insurance policy and additional levels of diligence, a reasonable valuation has been assigned.”
“When you get a residential mortgage, the bank has a charge on your house. As a rich IP company you say, well, I have this software, I have these patents, I have well protected trade secrets. There is a lot of value there.
McCaw told Sifted that the first deal his Aon team was able to announce using insurance, as the structural improvement was done with a Boston-based agricultural technology company called Indigo Ag, which has summer capable of raising over $ 100 million using a portfolio of patents and intellectual property as collateral for the loan.
The deal, concluded in October 2020, was considered the largest of its kind, and the team has since closed four more deals in space with an average deal value of over $ 50 million.
How to start
The first step is for founders and companies to be really aware of their intellectual property, so that they can start building their “intellectual property portfolio,” says Kier.
“How do you exploit your intellectual property? Well, you have to have some intellectual property there in the first place, ”he says. “If you’re a software company, make sure your code is clean, that it’s truly differentiated, that it’s protected. If you are a manufacturing technology company, you may have filed some patents.
“If you’re a software company, make sure your code is clean, that it’s truly differentiated, that it’s protected. If you are a manufacturing technology company, you may have filed some patents.
Aon has a screening process that can quickly determine if IP funding is an option. If the answer is ‘no’, Aon can work with the startup to improve their strategy so that they are ready for IP funding later in their growth journey.
Especially when using insurance-enhanced IP financing, Kier says it is very important to file and approve patent and trademark applications. He says not all companies will be able to leverage their intellectual property with insurance because they won’t have a strong enough wallet to use as security.
“You have to explain to a lot of different parties what your IP address is and how it matches your business,” he says. “You have to engage with your lender, with your IP specialists and with the insurance market. “
“I would certainly expect this company to make or facilitate billions of dollars in loans over the next two years.”
Despite its potential, McCaw says Aon sees intellectual property as an “underserved asset class,” and says Aon works with insurers to help them feel comfortable with it, and with banks. and alternative lenders to ensure they understand intellectual property assets.
“It’s an economic problem that needs to be solved, so we’re working on it,” he says. “I would certainly expect this company to make or facilitate billions of dollars in loans over the next two years.”
To see if your business might be suitable for an IP finance transaction, contact the Aon team. here.
Aon Intellectual Property Solutions – “The World’s Leading Authority on Intellectual Property as an Asset Class”