Protecting your Intellectual Property: The answer could be right under your nose

By Martin Brassell, Chief Executive, | Computerworld UK |

Compare a company’s market capitalisation with its tangible assets and you’ll find a gap of up to 75%, which IP experts assure us rests in intangible assets.

However, in a survey, the Intellectual Property Office who issue patents in the UK found that 86% of UK businesses were either ignorant or misinformed about how to protect and make best use of these “valuables”. The survey was conducted in 2006, but there is little evidence that things have improved since.

If UK plc is to pull its way out of recession based on innovation (as the government seems to believe), companies need to get better at understanding their intellectual assets, and leveraging their knowledge and technology to get finance and business through the door.

The IPO says the problem is particularly acute among smaller businesses: “SMEs and the mass of micro-enterprises (businesses with 0-9 employees) which form the cradle of IP and future large companies are in the main effectively unaware of the IP system”.

This assessment does seem unduly pessimistic, and reflects the fact that current debate too often focuses on formal registered rights, especially patents, as being synonymous with IP.

There is no doubt that for some businesses patents are helpful or even essential, but they do not sit well with knowledge economy companies, especially those whose innovations lie in software.

The patenting process often requires specialist expertise, making it costly (officially estimated at up to €50,000 for an EU patent) and time-consuming: the fastest I have personally encountered took some 17 months from filing to publication date, and 2-3 years is more normal.

In a world moving towards increasingly open models of innovation, this combination of high cost, lengthy time to market and defensive intention makes patents an appropriate option only in a limited number of situations.

In fairness to the IPO, strong rights should be backed by rigorous processes, and these will take time – once an application has been submitted, the IPO checks it against existing published patents, and if the application passes this process then a patent is granted, normally in the two to three year time period.

But many small firms now question how advantageous these rights really are in practice, given that their large competitors often have sufficient financial muscle to render patents very difficult to enforce.

Surely the answer is broader and simpler – it’s to make more of copyright. While it’s recognised that copyright is fundamental to creative works, many of which are now digital, its importance as the underlying right to protect all types of software is not well understood, other than in the context of piracy.

Copyright is automatic and it’s long lasting; it’s remarkably consistent internationally; it can be used to sell, assign, transfer or licence intangible assets; it can even be assigned in works that are not yet complete.

In working with young businesses over many years I learnt to be wary of any proposition that seemed to require legislative change. The good news for business in the digital age is that we already have the legal framework we need – we just have to capitalise on it better.

Martin Brassell is CEO of inngot Limited- It provides a safe and secure place for IT companies to register their intangible assets enabling companies to ‘showcase’ their IP to find customers, partners and investors.
He is also a South East England Development Agency (SEEDA) Hub Director, working to assist high potential new ventures.

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Attitudes to secured lending: Are we living in the past?

How can identifying your companies intangible assets benefit your organisation?

It’s no use trying to address 21st Century funding needs by focusing on 19th Century assets for secured lending. We need to learn lessons from the past, and apply them to the challenge of growing the knowledge economy

Given the current turmoil in the Eurozone, there’s no shortage of commentary on structural issues facing markets. The finger is being firmly pointed at the connection between low-cost debt and burst property bubbles. Meaning banks are sitting on portfolios that no-one can shift.

We’ve blogged before on the fixation that financiers seem to have on what they see as solid assets. But in fairness, we should explain that secured lending has a long and honourable tradition. In fact, there is a lot it can still teach us.

Back in the industrial age, in the 19th century (and much of the 20th), the most important assets in a business were indeed tangible ones. Companies created value by mechanising processes which had hitherto taken large numbers of people to accomplish, and allowed goods to be produced on a scale and to a quality never before seen. This required big ‘things’ like factory buildings and equipment, and companies often lacked the cash reserves to acquire use of the assets they needed in order to expand.

Secured lending emerged as an imaginative and highly effective solution to this problem. It enabled businesses to leverage both the assets they wanted to acquire, and the assets they already had, thereby providing the security banks needed to lend money for growth. A real win-win.

These assets were crucial when the key determinant of a company’s success was its ability to multiply manpower. Businesses were well motivated to repay their loans, and from a bank’s viewpoint, if things got sticky and company A got into difficulties, there was a good chance company B could use the same tools or machinery productively.

So how does this translate into the knowledge economy, where competitive advantage is about offering something unique and distinctive – about multiplying brains, not brawn?

In theory, rather well. While the key value-producing assets are now intangible not tangible, they are assets nevertheless. All the most important ones (patents, brands, distinctive designs, software copyright and so on) all have property rights associated with them which means they can be bought and sold (or charged, or leveraged) just like anything made of metal. Supply problems with any of these assets will interrupt value production just as surely as a hardware failure – the difference being that you can’t simply bring in a new machine to solve it. So that’s good news for secured lenders, as it means these assets are more business-critical.

So why, on the rare occasions that lenders do acknowledge intangibles within a deal, do they take such ineffective security over them, like a floating charge? The truth is that they find intangible assets difficult to understand. The detailed appraisal process that will go into assessing a tangible ‘thing’ is not entered into with intangibles, meaning there is no ‘clear line of sight’ – and we all now know how dangerous that can be.

In a nutshell: as the seat of value has shifted – decisively so, in the last 40 years – companies have moved with it, but lending habits generally have not. There is only one thing wrong with 21st century asset-backed lending: it is still focused on 19th century assets.

As the US-based Athena Alliance has put it: “Just as physical assets were used to finance creation of more physical assets during the industrial age, intangible assets should be used to finance creation of more intangible assets in the information age.”  We couldn’t agree more.

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New Intellectual Property resource centre for innovators – IP Central

Inngot is working with the Technology Strategy Board and the Intellectual Property Office to provide IP Central, a community network providing resources on all aspects of IP, hosted on the TSB’s _connect platform.

The aim of IP Central (which can be found at is to provide convenient access to the practical Intellectual Property information and advice needed by innovators, with a special focus on those seeking to partner and collaborate. This is a requirement for the TSB’s challenge-led funding programmes, but often appears complex and challenging to those approaching it for the first time.

The _connect system now has nearly 40,000 registered individuals, and provides the online platform for all Knowledge Transfer Networks. Inngot has already provided IP support to a number of KTNs (including managing the Beacon Project on IP and Open Source for the Creative Industries KTN): it will be ensuring that IP Central has a sector-agnostic approach, welcoming contributions and questions from all creative and technological fields.

The IP Central community network is grateful for the support of the Intellectual Property Office, who have kindly provided a range of useful documentation. This ranges from basic guides to patents and trade marks to the latest Lambert Agreement templates to help organisations formulate successful licensing agreements.

Membership of IP Central is free. The community network can be found by clicking the link above, or searching “ip central” on the connect platform.

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Inngots profiling system explained – Intellectual Property

A video on intellectual property based around inngots recently new and improved Profiling system which helps identify and capture organisations innovations.

It can sometimes be hard to separate an organisations intellectual property from the rest of the company. Inngot’s profiling system helps separate your intangibles from your organisation; a crucial part to utilising and making the most of your IP.

Identify, explain and promote your intellectual property and intangible assets. Our web tools will help you capture and identify not only intellectual property like copyright, patents, designs and trade marks but also value producing intangibles like trade secrets, special processes, specialist technical know-how and brand reputation — over 40 different types in total. Up to 75% of a company’s value can be hidden within its intangible assets. Make the most of yours by using Inngot’s profiling tool today.

Check out our new video and let us know what you think. Subscribe to our blog to keep up to date with future posts.

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Intellectual Property video

We’ve just created an interesting and innovative video with the help of our animator. Take a look and let us know what you think.

It helps describe the benefits of the inngot approach and also covers the importance of identifying your Intellectual Property.

Try it in HD to see the true representation of our animators hard work.

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The real security question – banks evaluating a loan application

For any bank evaluating a loan application, the first consideration is whether the business in question can afford to repay the amount being sought. This is sometimes called serviceability. Without evidence that sufficient cash should be available to meet the resultant debt and interest, the verdict will always be ‘no’. Most business owners would probably agree that this approach is perfectly fair and reasonable.

Hot on the heels of serviceability comes another factor: security. This is about the collateral which a company can provide as a safeguard. And to be honest, if you ask a business to describe their discussions with banks about security, their first words are pretty unlikely to include ‘fair’ or ‘reasonable’. So what’s the problem?

Security is partly a question of identifying secondary exit routes – lender-speak for assets that can be sold off if needed to repay debt. Banks have become accustomed to using tangible assets that have resale potential, like commercial property, for this purpose.

At first glance, this policy seems perfectly sensible. The ability to realise value in extremis seems particularly important in a period of economic uncertainty and low growth.

However, to rely on tangible asset security solely for this purpose would be to have an extremely short memory. Over-exposure to tangible assets that people thought were valuable is not only one of the practices that got half the world into its current mess, but also continues to be one of the reasons we can’t get out of it.

No, the real reason for taking security is because lenders know the importance of their customer having ‘skin in the game’ – showing their intention to repay by putting something of value at stake.

Banks want, and need, the businesses in question to make a real commitment of their own; but as is widely reported, security is the place where many conversations between banker and business currently fall down. In the absence of available, tangible, company-owned assets, directors generally get asked to put up their personal assets to fill the gap.

This seems to be borne out by ONS data (see blogs passim). Not only is the lack of collateral the biggest single reason for declinations being given; but also, where loans are provided and guarantees are obtained, they come from owners and directors in 94% of cases.

The data also points to one (although only one) of the reasons why the Enterprise Finance Guarantee scheme falls short of the mark. EFG is great in theory as it recognises that many companies don’t have enough of the kind of security a bank traditionally likes to see. However, the scheme can’t be used unless all other avenues – including personal assets – have been exhausted, which is why it hardly features in ONS data.

What’s needed to create good quality security is an asset class that is truly core to the business and as closely associated as possible with the way it generates value, rather than a commodity that the company can do without or easily replace.

Anything come to mind…?

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Merlin’s spells need more work – sector specfic bank lending

Project Merlin has hit the headlines again in the past few days. Despite news that all the large players (bar one) reached or exceeded their SME lending commitments under this Government deal, there still seems to be ample anecdotal evidence of unmet company need.

What’s really going on…?

One set of data that was released by the Office of National Statistics in October 2011, and referenced in the Chancellor’s Autumn Statement, is quite enlightening. It contains evidence from a Europe-wide survey comparing the financing experiences of a large sample of businesses, across a range of sectors, in 2007 and in 2010.

The headline is that demand is up and approvals are down. This is no particular surprise (though the increased demand shown in the ONS data seems a little at odds with bank surveys, which consistently suggest that companies overall are choosing to repay existing debt rather than request more). However, the scale of the change in loan approval rates for certain sectors is quite striking.

Reflecting the shape of the UK economy, the majority of the companies in the sample were service businesses. 32% of these sought finance in 2007, which grew to 37% in 2010. Of those seeking finance, the main source was bank lending. Again, so far, so unsurprising. But approval rates for bank loans to these businesses were running at 84% in 2007: in 2010 the approval rate fell to 61%.

The position for ICT businesses is worse, where demand for finance has grown more strongly (28% to 36%), and bank loan approval rates have fallen more sharply, from 85% to just 45%. And this is puzzling, when 70% of construction industry applications were still approved in 2010.

The same picture emerges on less formal lending via overdraft. 2010 approval rate for construction companies, 73%: for ICT firms, 63%. And if you are unlucky enough to be a service business looking for an overdraft, the ONS data shows that your chances of getting one in 2010 fell to a barely credible 26%.

So your prospects of bank funding seem to vary markedly by sector. Which suggests that the underlying issue may be a process problem as much as any overall lack of appetite.

After all, at the same time as banks are being told to take more risk by increasing their lending, they are also being required to strengthen their capital adequacy ratios, a message strongly backed by the Bank of England. The Basel III regulations undoubtedly encourage, and arguably compel, banks to do more of their lending to lower risk, better secured customers.

The largest single reason obtained by ONS for loan declinations in 2007, and in 2010, is lack of collateral. And what is the key difference that separates the manufacturing and construction sectors from the service and ICT sectors…?

Virtually all businesses, including manufacturing ones, have valuable intangibles which generally do not feature on the balance sheet. There are solid accounting reasons why they don’t, but the omission has the effect of making these assets not only intangible, but invisible. Trouble is, wherever these intangibles do appear in a company’s accounts, credit teams tend to attribute a nil value to them. This is a bit of a problem, considering that intangibles are the main source of corporate value and the main focus for company investment.

The ONS data seems to point to a pretty fundamental disconnect between the access to funding needed to build a successful, competitive, knowledge-based economy and the steps that have to be taken to reduce the risk of further financial shocks. It’s a dilemma that must be resolved, because as nearly all commentators agree, growth is essential if structural debt is to be reduced.

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Seeing the value of intangibles

Just how important have intangible assets become in business?

Ultimately, everyone knows there is only one true arbiter of how much a given set of assets is really worth: how much someone else is prepared to pay for them. This maxim is even more applicable to intangible assets, which don’t (yet) have the same ready market as the tangible commodities companies own.

However, that doesn’t mean it isn’t possible, and necessary, to understand the quantum of value now resting  in businesses’ Intellectual Property (IP) and other intangibles – even if these assets (or companies) in question aren’t currently for sale.

To get a sense of the contribution they make, we can look at how much companies spend on intangibles; how these assets appear to influence share values; and what happens when firms sell stakes based on an intangibles-backed offering.

Helpfully, the 2011 UK IP review by Professor Ian Hargreaves provides some (fairly) recent data on investment in intangibles. The report quotes Government statistics from 2008, showing that UK businesses now spend about one-third more on intangible assets than they do on tangible ones – £137bn vs. £104bn. A key contributor within this asset class is IP, estimated to account for around £65bn of this investment.

What about share prices? One of the organisations looking regularly at intangible values is Ocean Tomo in the USA. Its analysis suggests that the “80/20” rule now provides a good shorthand when thinking about the level of value in intangibles (read more here).

Back in 1975, the implied intangible asset value of the S&P500 (derived by looking at book value as a proportion of market value) was 17%: in 2010 it came in at 80% when measured on the same basis. The company attributes this “total economic inversion” to the growth of the knowledge economy, and points out that these implied values are holding up, even during a period when total R&D spend is falling (though it is still increasing slightly if viewed as a % of revenues).

Similar exercises have been done in Europe. The introductory section of the 2006 Gowers Review draws the same conclusion from an assessment of top companies quoted on the London Stock Exchange. The European Commission said in 2010 that “intangible value has accounted for approximately three-quarters of corporate value as far back as 1995.”

None of their findings should surprise us. Rewind to the 1970s, and Western economies were still largely dependent on generating value from manufacturing capacity – multiplying the power of human effort. Now it’s much more about multiplying brainpower, not brawn.

It is also clear that the characteristics that make companies attractive purchases have changed. With so much production capacity offshore or subcontracted, it’s the brands, customer relationships, service formats and software code that buyers want. Recent flotations of technology and web-based companies have generated plenty of initial interest despite very challenging market conditions; and while the initial gloss has faded from some of these offerings, the fact that they got away at all is undoubtedly due to their shiny intangibles, not their shiny servers.

It seems the pendulum has swung decisively towards valuing assets that are unique, rather than types of property that are common across many businesses. Determining an appropriate value for them poses new challenges for investors, lenders, acquirers and licensees.

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