In these post credit-crunch days, there is a lot of pressure on banks not to lend – not just to startups, but to anyone at all. That includes lending to business angels, many (if not indeed most) of whom are both wealthy and illiquid.
Yet at the same time, the innate growth logic of young business itself has not managed to magically sidestep the need for capital through some kind of hitherto-unknown financial engineering trickery. (Oh, and you can shout “Lean Startup” at me here until you’re blue in the face, tell it to the hand coz the wallet ain’t buyin’ it).
So, what kind of security could a startup offer a bank? This is something I’ve long thought about, ever since I first heard about “Bowie bonds”. Love or hate his music, you have to admire the former Ziggy Stardust’s timing, in that his financial advisors found a way to sell future revenue from Bowie’s back catalogue, all packaged up in the form of bonds. Which, given that CD sales tend to spike when rockstars die, would seem to be a neat way of profiting now from your own future death (whensoever that may arrive).
And so I wondered whether a startup could effectively secure loans against their patent portfolio – in other words, securitize their IP. As I understand it, the only UK bank that ever did this to any appreciable degree was Lloyds TSB, which for a while had a London office specializing in IP securitization. It was never really for startups, though: and my understanding is that the cost of performing an external valuation on a patent via a specialist patent valuation house is somewhere between £25K to £50K. Even then, most of what such companies do seems to involve looking at the financial inflows directly arising from patents, which isn’t exactly financial rocket science.
The short answer, then, would seem to be that startups can’t obviously securitize their patents.
Yet just now I read an American case from Massachusetts, where patent agents were owed $109,000 by an advertising agency that had gone bust. They believed that they had a lien on the patents that were gained through their work, but the liquidators handling the bankruptcy subsequently backtracked (having sold off the patents). The patent agents pursued their claim to the SJC, which in 2009 found fairly comprehensively in their favour.
The moral of the story (if anything to do with American attorneys can be said to have a moral) is simply that the outstanding money owed to the patent agents by the bankrupt agency was effectively implicitly secured against its patent portfolio, even from before they were sold.
The even bigger macroeconomic picture is that the shadow banking sector – where such securitization is now utterly commonplace – was worth $60 trillion as of late 2011. Yet it is not clear to me that even a cent of that is going to non-traditional funds trying to support startups. All of which strikes me as a massive market inefficiency – the part of the economy that has arguably the greatest capacity for rapid growth in the economy is being run in a way that consciously reduces its access to finance, just in case that kind of funding accidentally proves to be an inflationary bubble. And the one thing that they genuinely have – IP – is excluded from the whole game. It makes no sense.
At the same time, the whole shadow banking sector is coming under increasing scrutiny from lawmakers and economists. It is now widely believed (with plenty of justification, I think) that the way that shadow banking is largely unregulated may well have been the root cause of much of the credit crunch (and don’t even start me on rehypthecation churn, I’ll be typing here all night).
But securitization against patent assets would go against this trend, in that it would be adding assets to the world’s trade balance sheets rather than simply trading against multiply leveraged existing collateral. (And we all know where that led to not so long ago).
I therefore wonder whether groups of startups specifically with patent IP could pool them into securitized funds that were somehow partially liquid, for them to loan against from the fund.
But if they could, they would almost certainly need patent administration removed from each startup’s day-to-day running to prevent it accidentally messing the application up (and thus trashing the fund’s collateral). Yet the requirements for this kind of arrangement would probably run counter to the ownership requirements of the new Patent Box tax regime coming in. So it could be that the Patent Box works as an effective mechanism to prevent companies from looking for ways to securitize their patents. All very confusing!