In Antarctica, the Conger ice shelf collapsed. But it is not just ice shelves that are crumbling. As we cross the Pandemic gateway into carbon neutrality and digital economies, banks have embraced a culture of considering intangible assets, including patents, formulas and trademarks as viable financing collateral. The IoT is melting away vintage prerequisites like brick and mortar edifices to finance innovative business ventures. Already, working capital lines of credit, and contracts that guarantee sales, have been swept under by a deluge of intangibles spanning trade secrets, copyrights, industrial designs, and geographical indications (GI).
Driven by quantifiable outcomes, IP legal finance is fast becoming a preferential IP financing vehicle for mega financiers. Companies must adapt and incorporate IP finance into their overall business plans to ensure long-term success in a world where intangibles are key. Venture capitalists (VCs) now embrace a culture of intangible assets as viable financing collateral and value creation. It is a shift that embraces the use of IP in asset-backed lending. For the modernisers building the metaverse, the strategy requires the creation of IP moats.
Such moats will span the coverage and strength of IP fortifications across three dimensions. Defensibility: measures the coverage and strength of IP around specific products. Enforceability: measures the coverage and strength of the IP regarding the merchandise of competitors. Opportunity: measures the potential of the IP to capture white spaces in that market segment. IP moats will buttress the system and generate a competitive advantage.
Securitizations using IP is mushrooming. IP royalty securitizations expect an IP owner to sell an IP-related income stream over an agreed period of time in exchange for a non-dilutive, upfront payment in cash. The differentiator between an IP-backed loan and a securitization model is that the owner of the IP is not borrowing money. Rather, they are selling a stream of future cash flows. Alternatively, under a credit-enhancement structure, IP financing may attract venture capitalists by lowering the borrower’s risk profile once the IP is transferred to a special purpose, bankruptcy-remote investment vehicle. Risk tolerance is critical and will drive investors looking to ensure the security of their future cash flows in this direction.
IP-backed finance empowers innovators and entrepreneurs who do not have tangible assets or cash flow to support traditional credit solutions. Capitalizing these projects mirror the structure of conventional asset-backed loans on real estate, equipment, or inventory. VCs may secure a security interest in the company’s IP assets as collateral for a loan in exchange for interest payments. IP-backed lines of credit are typically determined by the percentage of the IP portfolio’s liquidation value and overall risk as determined by the VC. This new stream of credit will intrigue innovators and entrepreneurs who are always looking for new ways to utilize resources in better ways.
Another model involves an IP sale-leaseback agreement that mimics a real estate sale-leaseback arrangement. An angel financier may seek to acquire the IP, and the seller pays a lease or licensing fee. This financial model offers the holders of IP with immediate liquidity. The IP sale-leaseback transactions may also include a repurchase option that allows the seller to buy back the ownership within a stipulated time frame. This option, therefore, provides sellers with the ability to retain a certain degree of control. As the COVID accelerant quickens digital transformation, the rate of innovation is quickly correlating to patent and trade secret infringements.
IP legal finance structures now allow titleholders of IP to advance funds against the future value of their outstanding IP infringement disputes, including those related to cultural appropriation or industrial designs. The finance may be used for operating expenses, as well as for mounting a successful case against infringing parties. After investing heavily into IP, legal finance offers a means for companies to protect their IP assets while offloading the cost and risk of doing so.
IP from ride-hailing and work collaboration was part of mobile evolution. The latest doorway to the internet is metaverse – made from shared, programmable collections of 3-D virtual experiences and environments linked to a perceived virtual universe via AR using VR tools. Niantic, Valve, and Meta Platforms (Facebook) are building a completely immersive experience on the internet. Shaan Puri describes the metaverse as a point in time. A moment at which our digital lives – our online identities, experiences, relationships, and belongings – become more meaningful to us than our physical lives.
This outlook shifts the focus on the human experience, making the transition to the metaverse a sociological shift, not a technological one. The metaverse is also depicted as a place. A location where users can connect and transfer themselves and their possessions across multiple digital locations. Gaming and creator platforms like Roblox and Fortnite already allow players and their avatars to seamlessly transition from one virtual world to another.
This paradigm shift increases the likelihood of the use of intangible assets as viable financial collateral to drive innovation around extended reality devices, processors, haptics, displays, AI chips, imaginative environments, consumer applications and enterprise solutions. The last decade gave rise to crypto entrepreneurs. The next decade paves the way for a culture of intangibles as viable financing collateral.