Last week, the European Commission proposed a new European Innovation Act to “help Europe’s most innovative ideas to be developed, financed and scaled up in Europe”.
The proposal aims to tackle two key challenges holding back innovation in Europe by establishing a more innovation-friendly regulatory framework. First, the difficulty to value IP and to use it for financing as collateral for IP-backed debt or to attract venture capital. The second is the lack of common procedure for R&D procurement.
Having been involved in the commercial and financial aspects of IP over the last 25 years, I am particularly interested in the measure which will “promote a common EU framework to value IP and to create a digital marketplace connecting buyers and sellers of IP and offer expert support to help companies bring their ideas to the market”. This is meant to unlock €10.2 billion per year of additional financing through IP.
Having a common IP valuation framework will help executives become more familiar and comfortable with IP valuation reports. Creating a marketplace should in theory facilitate the sale of the IP assets taken as debt collateral when a bank or other lender need to recover value if the company becomes insolvent and is not able to repay its loan.
Through my career I have been involved in numerous valuations of IP assets for lenders and also when things have not gone according to plan and when there is an insolvency / restructuring scenario. The IP owners were based in the US, UK and the EU and the lenders in the US and the UK.
To really take advantage of the Commission’s measures and leverage their IP assets for financing, EU startups and scaleups will have to start building their IP portfolios with a very different mindset so that their IP portfolios are actually valuable for financing. What I have always noticed as a difference between US and European companies with a comparable revenue size is that the IP portfolio of European companies tend to be much smaller than their US counterparts. The quality of patents is important but a portfolio needs to have a significant size to be valuable and saleable. This will require additional IP budget and to see IP as investment in business assets rather than just legal protection.
In addition, due to restricted budgets patents filed by European companies tend to be too narrow and focused on protecting their specific technology implementations / product features only rather than also covering the broader enabling technologies that would be of interest if the IP assets were available for sale in a liquidation scenario. Furthermore, trade secrets are generally not catalogued and have therefore little collateral value as they would not be transferable.
In addition to the content of the IP portfolio a key factor that European companies will have to prepare for in order to benefit from IP financing is the way it is positioned in the overall financing narrative and communicated to financial executives. The IP team is usually inexperienced in pulling together slides explaining why the IP portfolio is valuable and what companies could be interested in acquiring it if it had to be sold. Preparing for a thorough IP DD also requires significant additional work in order to have all the supporting documentation available in an organised way to avoid delaying the transaction process.
Please get in touch if you’d like to discuss how Dehns Consulting can support you in your IP financing journey.