As a small business, getting access to finance is a common challenge. But it becomes even more difficult without any physical assets. For many startups and small and medium-sized enterprises (SMEs) in the intangible economy—where ideas and innovation are often the main products—this is the harsh reality. According to the European Central Bank, 26% of SMEs in the EU face challenges in financing due to intangible assets. So, what does a company do when its biggest asset is an algorithm or a design?
Solving the IP-Puzzle
This is where Intellectual Property (IP)-backed financing comes in, as a potential game-changer for innovative businesses. This approach allows companies to use their intellectual property—such as patents, trademarks, and copyrights—as a form of collateral. Those intangible assets can be leveraged to help businesses get the funding they need. According to a joint report by the European Patent Office (EPO) and the European Union Intellectual Property Office (EUIPO) report, SMEs with at least one registrable IP right are 21% more likely to grow and 10% more likely to become a high growth firm. Options like collateralisation, securitisation, sale-and-leaseback deals, and other financial instruments are opening new doors for these businesses. Pioneering organisations such as Natwest and HSBC have recently launched an IP based lending offer.
Overcoming the obstacles
IP-backed financing is still in its early days. Several challenges need to be overcome before IP-backed financing becomes mainstream. For one, there aren’t many secondary markets where IP-backed financial instruments can be traded. Then there’s limited data on how often companies default on these loans, and how easy it is to liquidate them. The absence of global standards for valuing IP also makes investors a little wary. Key players such as the World Intellectual Property Organisation (WIPO) and national IP Offices are working to fill these gaps, with evidence that firms with strong IP and other intangible assets have better credit performance, all other things being equal. Another initiative includes the Singaporean Intangibles Disclosure Framework that outlines principles for businesses to disclose and communicate their intellectual assets such as brand value, patents or registered designs in a systematic and comprehensive way. This helps encourage firms to value and use these intangibles as assets.
Making the most of IP
“All things being equal, between two startups with a similar product, the one with a solid IP portfolio and IP management strategy is more likely to succeed and therefore also obtain financing from investors who are mindful of the role of IP.”
While these efforts may take some time, there is cause for careful optimism for intangible intensive SMEs, and the reason is the following: even within the current reality a solid IP management strategy helps improve firms’ performance, reduce risks, maximise prospects and ensure scalability of valuable products and services. These in turn are exactly what investors are looking for. All things being equal, between two startups with a similar product, the one with a solid IP portfolio and IP management strategy is more likely to succeed and therefore also obtain financing from investors who are mindful of the role of IP.
From the investors’ point of view, IP may function both as a form of insurance and a stock option. It provides a company with the freedom to operate. It secures an exclusive market segment with fewer competitors, and it ensures scalability if the product succeeds. This can be especially valuable in technology driven winner takes all markets, with a strong network effect. These factors are well taken into account by investors though not always by entry level startups and SMEs. According to a joint report by the EPO and the EUIPO, startups in the seed or early growth stage with registered trademarks are 4.3 times more likely to secure funding. Additionally, those with registered patents are 6.4 times more likely to attract venture capital (VC) funding compared to startups without these intellectual property assets.
Working with WIPO’s IP Management Clinic Program
Yet despite these clear benefits, many startups and SMEs overlook IP management. To tackle this, WIPO’s IP for Business Division launched the IP Management Clinic Program, specifically designed for SMEs and startups. This program pairs businesses with IP management experts who help them develop robust IP strategies that are intertwined with their overall business plans. A big part of the program is teaching these companies how to pitch their IP strategies to investors, showing them how protecting and managing their intangible assets can boost their business’s success.
The results are encouraging. One success story is School of Concepts (SOC), an innovative Singaporean education company using an award-winning multisensory method to teach more than 200,000 children subjects like English, math, financial literacy, STEAM, wellness, and sustainability. Joining the IP Management Clinic’s MINT program (WIPO in collaboration with the Intellectual Office of Singapore), SOC leveraged its IP for franchising and licensing, securing international trademarks and partnering with a Japanese company to co-develop educational experiences. This strategic IP management enhanced SOC’s market presence and attracted interest from investors, paving the way for a successful Series A fundraising round.
IP-backed finance is a market on the move, and for businesses willing to harness the power of their ideas, that means the future looks bright—and well-funded.
Mr. Guy Pessach is the Director, IP for Business Division (IPBD), IP and Innovation Ecosystems Sector (IES), World Intellectual Property Organization (WIPO). Prior to joining WIPO, Guy was a Law Professor at the Faculty of Law, Hebrew University of Jerusalem, specializing in Intellectual Property, Law & Technology and the Creative Industries. Guy was a Fulbright Scholar, Residential Fellow at the Information Society Project, Yale Law School; a Visiting Professor at Columbia Law School, City University Hong Kong, UBC and the Center for Transnational Legal Studies, Georgetown University Law School and also an Erasmus Mundus, Visiting Scholar at the Center for Law, Society and Popular Culture, University of Westminster.
Prior to his academic career, Guy clerked for Justice Zamir at the Israeli Supreme Court and has worked at the Economic Department of the Israeli State Attorney's Office; The Israeli Antitrust Authority; the Bank of Israel and as a private legal counsel, in the area of Intellectual Property, including counselling to technology transfer offices, startups, technology and media companies.