Often, tangible assets such as property and inventory are used for loan security. However, businesses can also utilise non-traditional assets such as intellectual property (IP) as a means to secure funding. Startups, particularly those in the technology sector, are often rich in IP but may possess fewer tangible assets at the beginning of their growth journey. As such, IP can be a key way to demonstrate value. In fact, from 2011 to 2020, 58% of venture capital went to startups with patents or patent applications.

In current economic conditions, businesses with strong IP are often more appealing to lenders because they can achieve higher gross margins and are more likely to be able to increase prices in an inflationary environment, making them more resilient. Research has also shown that companies rich in IP are less likely to default on loans and have more stable cash flows, which can be forecast with higher accuracy.

Despite the appeal to lenders, IP-heavy businesses do come with challenges too. Intangible assets, such as software, are much harder to value than physical and financial assets. With no established market in which IP can trade from which data can be drawn, lenders face challenges when assessing loan security. Furthermore, IP is difficult, and often expensive, to safeguard. Consequently, businesses with IP but lacking in other assets, often encounter greater difficulty when fundraising.

This begs the question; how do business owners illustrate the value of IP to investors?

Firstly, companies need to demonstrate that their IP is safeguarded with an IP protection strategy. This should outline the steps that the business has taken to protect assets, such as obtaining a patent or registering a trademark, and how it is mitigating any associated risks, for example through confidentiality agreements, if assets are not yet at the stage to be formally protected. Highlighting that action has been taken shows investors that a business is serious about its proposition and makes securing a loan against IP assets less of a risk.

Providing clear documentation of the assets and their protection, as well as proof that they’ve undergone the necessary legal due diligence will help to further mitigate risk.

Business owners should also look to evidence the market potential of their IP. For example, through market research which shows an addressable need or gap. Quantifying the size of the target audience and the scale of the revenue opportunity will also help to demonstrate value.

Similarly, investors will want to understand how the IP assets provide a competitive advantage for the business. Whether its unique features or functionalities, exclusive rights to key technologies or a barrier to entry to competitors, setting out how the business stands out from the crowd will be crucial to funding success.

Ascertaining the value of IP can be a challenge, but business owners should try to determine the value of existing patents, trademarks, copyrights, and trade secrets. To add to this, companies can also articulate how the IP assets contribute to revenue generation, for example, through licensing agreements, royalties, or increased sales due to product differentiation. Determining the value of IP will likely require the support of a valuation firm.

Finally, when pitching for investment, business owners should provide insight into the company’s long-term IP roadmap and how they plan to continue leveraging, innovating, and expanding their IP portfolio. For example, new patents that have been filed for, R&D initiatives or partnerships with other innovators.

As businesses begin to come out on the other side of a challenging economic period, the demand for capital to fuel growth is increasing. For business owners who think that they lack the assets traditionally used to raise finance, reviewing their IP offering could be one route to attracting the attention of alternative lenders increasingly aware of the value that IP-rich businesses bring.