IP-backed financing
- publish258
- Aug 8
- 9 min read
IP rich with the potential for high growth? Matthew Rodgers at Stratagem reports on how the financing gap for scale-ups is starting to close and how IP is establishing itself as an asset for early-stage ventures to raise money without diluting control
Matthew Rodgers
In IP-backed financing is a mechanism by which companies seek to raise money against intangible assets, notably intellectual property rather than the more traditional tangible assets, such as land, buildings and machinery. This article aims to provide a brief understanding of what IP-backed financing is, why it is needed and the mechanisms by which it can implemented.
For a number of years the existence of a financing gap has been recognised between traditional companies that are rich in tangible assets, for whom traditional debt financing is routinely available, and more modern, often smaller and faster moving companies, which may not have many tangible assets, but whose business model is backed by intangible assets such as IP (British Business Bank, 2023). A subset of these companies, high-growth SMEs, in fact represent less than 1 percent of companies in the United Kingdom by volume, but add £1.2 trillion to the economy (WIPO, 2023). Such companies have huge potential to deliver further growth to the economy but have fewer avenues by which to raise money. As the economy moves away from traditional industries towards ones based more on services and technology, this finance gap represents an important impediment to growth, both for the companies themselves and to the economy as a whole. The challenge then, is how do companies raise growth funding, when they have few traditional assets against which banks are typically prepared to lend money?
In the absence of hard assets, the traditional funding route for early-stage companies is equity-based finance from crowdfunding, business angels, venture funds and private equity. At this stage of growth, these companies choose to trade a proportion of the business for the funding necessary to move the business forward. In 2022, a ScaleUp Institute survey indicated that, of high-growth companies that did use equity finance, around 58 percent used venture capital, 58 percent used financing from business angels and 9 percent used crowdfunding.
Whilst IP is a factor in decision-making for equity finance, it is not the most important consideration; equity investors tend to invest in companies and the teams that manage them, not specifically in IP assets, although of course the presence of certain types of IP may be indicative of a strong market position and an analysis of a company’s IP position will be a key part of the decision to fund. In some areas, such as technology-focused companies, a strong IP position is a requirement, but this may simply be the ownership of a single key patent application.
Equity finance, of course, dilutes the ownership and control of founders and early investors, so in later rounds of fund raising, companies may not wish to use this approach. Debt-based financing may be the preferred route at this point, because, at least, it keeps the growing company in the hands of founders and early investors. The same ScaleUp Institute survey indicated that some 36 percent of companies chose not to take this route because of issues related to dilution.
Whilst debt finance may be considered the most appropriate route to finance the scale-up phase of some growing companies, banks have traditionally shied away from loaning money against intangible assets such as IP, although it is recognised as an asset, and may be recognised to greater or lesser extent in the decision-making process. At the lower end, IP may simply be one of a number of recognised assets over which a bank may take a security as part of a debt financing deal. At a higher level, a lender may give active consideration to the IP and its value as part of the process, but does not link the loan value to any realisable value of the IP. IP-backed financing falls into a third class, where the IP is given a more formal value and financing is structured around the use of the IP as collateral.
The difficulty that banks face in structuring loans around IP itself is due to a number of factors, including regulatory requirements that govern the criteria for use of assets as collateral, but also because of the difficulty of understanding the value and risks associated with a particular portfolio. With some notable exceptions, IP portfolios are difficult to understand and complex to value, the risks associated with them are perceived to be high, and the ability to realise the asset in the event of default is unclear.
The nature of IP means that its value, in large part, hinges on the value of the market for which it provides exclusivity, the breadth of that exclusivity and the availability of alternative products in that market. Thus a portfolio of patents that effectively excludes competitors from entering a high-value market (and therefore protects a high-value revenue stream) is of greater value than a similar portfolio for a device with several alternatives in a crowded market.
The value of an IP right or indeed a portfolio of rights can change significantly over time for a number of reasons, not least, because some rights, such as patents, copyrights and design rights, have a limited life span and remaining life will have a significant bearing on value. Moreover, those rights that arise from an examination process (eg, patents, designs, trade marks) may fail the examination process or be significantly reduced in scope. It may then not serve to exclude competitors, or worse, it may no longer actually cover the product itself. Once granted, the validity of rights may be challenged by competitors looking to clear the way for their own products and, when asserted in litigation, the rights may be invalidated. On the other hand, the value of a single patent application filed for a pharmaceutical product can increase many fold as the drug passes various development gates towards approval. Robust methods of IP valuation are therefore key to establishing a functional IP-based lending ecosystem.
Parameters for the valuation of tangible assets are well established and, since these types of assets are regularly traded, surveyors have access to models and a large quantity of comparative data. In contrast, the valuation of intangible assets relies on a variety of developing methodologies, often with several distinct methods being used and compared to provide a final value. The analysis relies on detailed accounting approaches but three approaches can be generalised. These are:
A market-based approach: appropriate for specific asset types that are traded or licensed and whose value can be approximated by comparison with recent deals. This approach has been applied to broadcast rights, for example.
An income-based model: this is the most commonly used approach, but, in reality, is a mixture of approaches that takes into account the income, cash flow and/or savings attributable to the IP asset in a variety of ways. These include: an excess-earnings approach that values the asset on the basis of the value of cash flow attributable to the asset after excluding the proportion attributable to other assets; a relief from royalty method that values the asset on the basis of the royalty that would be payable if the asset were licensed from a third party; and a with-and-without method in which the value of a business is calculated where the asset concerned is deployed against the situation where it is not, the difference being the value of the asset.
A cost model: this assesses the cost of replacing the asset. It is obviously a poor model of the value of some types of asset, whose value is many multiples of the cost of replacement or where the asset is a one-off and irreplaceable, but has been used for in-house developed software, where the cost of development is fairly well definable, for example.
In recent years, international standards for the valuation of intangible assets have been developed under the International Valuation Standards Council and are regularly reviewed and updated. The standard relating to intangible assets is International Valuation Standard (IVS)-210.
There is an increasing recognition on the part of governments, including the UK government, of the need for an alternative model for financing the growth of potentially high-growth but tangible-asset-poor companies. This recognition, allied with the understanding that a key subset of these companies have IP assets of a high recognisable value, has encouraged financial institutions to develop mechanisms by which this IP can be used to raise debt finance and to bring IP-backed financing into the mainstream. WIPO has taken an interest in this challenge and has published several discussion documents5 and encouraged member states to report on their experience as part of a series, Unlocking IP-backed Financing. The UK’s own report in the area was recently released.6
There is now a growing number of financial institutions worldwide offering IP collateralised debt financing options and a number of approaches have emerged, adapted to the type of IP and the borrowers’ characteristics. Some examples are provided below.
Pullman bonds: copyright in music
This is a pioneering mechanism developed to leverage royalties in music back catalogues. The approach was developed by David Pullman and David Bowie in 1997 to leverage the rights in 25 of Bowie’s early albums as the underlying asset. Rights to his royalties were securitised into ten-year bonds issued at $1000 each. The bondholders were entitled to a share in the royalties on these albums for ten years, after which the bonds matured, the principal was repaid and the royalties returned to Bowie. The approach has been used by a number of other artists since.
Use of IP as collateral with licence back
In this approach, the lending institution takes a charge over the IP which is used as collateral for a loan. The IP is licensed back to the company exclusively. The bank has control over the IP and so is in a strong position should the company require restructuring. Several case studies are reported in the UK’s WIPO report, two of which are summarised below.
Eseye
Eseye is an IT company working in cellular networking interoperability, whose founders were serial entrepreneurs having previously founded and sold the company that developed the Zigbee near-field communication standard. The company’s IP assets included 19 patent families and a number of national and international trade marks. Eseye raised £4 million in venture debt financing through Virgin Money, facilitated by IP valuation. The money raised put Eseye in a position to achieve the growth needed to close a new equity raise, worth £15 million. The company value appreciated considerably between its equity rounds, enabling it to reinvest more in the business with less dilution.
Inspiretec
Inspiretec is a software company licensing its product into the leisure industry. Its revenues stem from a core base of recurring revenues from ongoing software licences to its platform supplemented by customisation and bespoke development work. The company worked with Lombard who took an ownership interest in the software platform, licensing it back to Inspiretec exclusively. This approach freed up an initial £2.5 million that was primarily used for debt restructuring.
Insurance-backed loans using the IP as collateral
A further approach is emerging particularly in the United States, in which the financing company makes a loan to the borrowing company and this loan, in turn, is covered by an insurance policy, paid for by the borrower, but for the benefit of the finance company, and designed to pay off the loan if the borrower defaults. Using the borrower’s IP assets as collateral means the lender will be able to leverage the value of the IP in a restructure, refinance or other scenarios in the event of non-recovery. The cost of the insurance as a one-off premium, which is typically included in the loan along with other costs, such as those for legal, advisers and underwriting.
Example products in the UK
NatWest high-growth IP loan
This product offers loans of £250,000 to £10 million, using IP assets as collateral. It involves NatWest taking a fixed and floating charge over the company’s IP assets at a maximum of 50 percent loan to value. Consequently, IP-backed funding from NatWest is only available for businesses with an IP valuation of £500,000 or more. The IP assets are monitored throughout the life of the loan with a full revaluation performed annually, so NatWest can consider growth or impairment. If the IP value goes up after revaluation, it may give the lending business an opportunity to take on more debt. Current fees associated with the Natwest IP-based loan include: a 1 percent set-up fee; a 0.4 percent annual revaluation fee and an interest rate of 3-4 percent over base rate.
HSBC growth-lending, IP-based loan
Launched in July 2022, this loan product is backed by a £250 million (rising to £350 million) fund directed at start-ups. But, like similar funds, the company must have already raised significant equity. In this case, the company must have already raised a minimum of £25 million and have a proven business model and sales track record with more than 20 percent growth over the last two years.
Virgin growth finance
This is a venture debt product offered to IP-rich, high-growth companies with a growing annual recurring revenue of over £2 million which already have a strong professional equity backing and, of course, backed by IP or other proprietary technology. However, the borrower company does not need to be profitable or cash generative at the point of borrowing.
In summary, it is clear that a level of funding is now available to address the finance gap experienced by companies that are IP rich, but tangible-asset poor, looking for non-diluting funding to finance the needs after start-up for scaling the business. However, the criteria for consideration illustrate that these products are aimed at quite late-stage companies with significant IP that is clearly able to support the loan. Earlier stage companies with higher risk remain the domain of less risk averse providers, such as venture capital and business angels.
• 'IP-backed financing', an article by Matthew Rodgers, first appeared in Managing Intellectual Property Today, 2025 edition, published by Novaro, ISBN: 978-1-0685644-1-3. See here for further details.
Sources
Using Intellectual Property To Access Growth Funding, a report by the British Business Bank, 2018, available at: british-business-bank.co.uk
‘Country Perspectives: The UK’s journey’, Unlocking IP-backed Financing, a WIPO series, 2023, available at: wipo.int
ScaleUp Annual Review: Scaling Beyond Frontiers, ScaleUp Institute, 2022, available at: scaleupinstitute.org.uk
Intangible Asset Finance: Moving intangible asset finance from the margins to the mainstream, WIPO, 2022
‘Country Perspectives: The UK’s journey’, Unlocking IP-backed Financing, a WIPO series, 2023, available at: wipo.int
