Last time, I explained how intangible assets and IP have come to replace tangible items like buildings and machinery as the most valuable assets that many organisations now own. I also outlined some of the historical reasons why this has happened over the last thirty years or so. It is pretty clear – once you understand these reasons – that this trend is set to continue.
This article continues with the theme of IP value, by starting to look at some of the basics you should be thinking about if you want to grow and ‘lock-in’ the value of these assets. But first, let’s look at one reason why you might want to do that.
Traditionally, banks and other business lenders have secured company loans against tangible assets. Buildings are the classic example, and despite the harsh lessons of the last decade, property continues to be a popular choice for banks. However, physical buildings decrease in importance the more we move to a service-driven economy. Worse still, increasing numbers of younger entrepreneurs have been unable to get onto the domestic property ladder. This means there is not only less commercial property available, but less property that can be used as personal security too.
It is, of course, possible to use other tangible assets as security, like vehicles and computers or stock-in-trade. But the more we move to services in the cloud, the less these assets are required, and available.
As a result, it is increasingly difficult for lenders to identify suitable security assets. The knock-on effect is that small and medium sized businesses operating in sectors like software and other forms of tech development are finding it harder to get funding for growth at affordable rates.
The more encouraging news is that, as an innovative valuer of IP, we are now receiving increasing interest from a variety of large and specialist financiers who are starting to find ways to take IP and other intangibles into account for lending. There are still some challenges to be overcome before these assets are likely to be used regularly as collateral, but once it is possible to show why a firm’s balance sheet isn’t telling the full story, and how much value is missing because it’s intangible, it is at least possible to have a conversation.
This means that by adopting a strategy for growing and locking-in the value of your IP and intangibles, your organisation will not only increase its attractiveness as a proposition for equity funding from private investors, but also its ability to raise growth capital from a variety of sources further down the line. And of course, IP is also one of the areas of most interest to any prospective acquirer of your business.
If that all sounds interesting, let’s take a look at how you might start to do it.
You may already be familiar with formal types of IP, such as copyright, designs, patents and trade marks and – maybe – closely associated things like trade secrets. However, there are a wide variety of other intangible assets, associated with most organisations, that have potential to add and lock-in value; these range from the simplest assets, like websites and domain names, to more complex things like proprietary processes and exclusivity agreements – which is a lot to think about. We have a free profiling tool that can help you work out what they all are.
Second, a warning. I’ve been involved with innovation and new product development (on and off) for the best part of thirty-five years. In that time, I’ve lost count of the number of inventors I’ve met who have had an idea, convinced themselves it’s brilliant, jumped feet-first into the whole ‘gotta-get-a-patent’ mindset, only to run out of money before they’ve even created a prototype.
So, let’s take a step backwards.
When you think you have a great idea for a new product or service, there are two things you must do immediately. Keep it to yourself. And find out whether it really is a great idea.
In theory, of the two things, not telling anyone is the easier thing to do. In practice, the first thing you’ll probably want to do is talk to anyone who’ll listen about your great idea, in the hope that they’ll validate it, by saying:
“Wow! That’s a really great idea!!” Unfortunately, although this is nice to hear, this is not the same as actually finding out whether your idea is a great idea; also the more people you tell, the more chance you have of either a) someone pinching it, or b) invalidating it (for instance, preventing it from being patented) by putting it into the public domain.
Even if you are the sort of person who can keep something like this to yourself, there are times when you will need to reveal things to other people, who can help you bring your idea to fruition. Being too cautious can be as damaging as not being cautious enough. An extreme example of this relates to a gentleman named Maurice Ward and his amazing invention.
Mr. Ward, a hairdresser by trade and amateur chemist, created his ‘Starlight’ insulation material (a thin, paint-like coating), which was effective enough to protect a raw egg from exposure to the sustained blast of a gas blow torch, so well, that the egg remained completely raw and capable of being handled with bare hands, as soon as the flame was taken away – even after several minutes of exposure to the intense heat. Unfortunately, Mr. Ward refused to reveal details of his secret formula to anyone else and, despite having obvious and huge commercial potential, it was never commercially exploited and was lost forever, when he died in 2011.
As I said, the above is an extreme example, but it should be obvious that it will be necessary to reveal something about an idea to start the development and commercial exploitation process: and that’s where the non-disclosure agreement (NDA) comes in handy.
An NDA is a fairly simple piece of documentation that is signed by both parties (i.e. the party revealing the information and the party receiving it) and binds the person receiving the information to secrecy; these agreements will often include a non-circumvention clause, which also prevents the receiver from trying to engineer a way around the agreement. Standard NDAs are available online and may suit your needs, but – as with most IP-related things – it may be worth talking with your legal adviser or attorney, especially if you are worried that a standard agreement may not offer sufficient protection, or if you’re unsure about your longer-term IP protection strategy.
Once you’ve armed yourself with a suitable NDA, you can be more confident about discussing your ideas with others, although it is still best to minimise both the amount of information disclosed, as well as the number of people you disclose it to. It is also important to keep a register of the NDAs, along with records of what has been disclosed and to whom. By doing this, you’ll have taken one important step on the path to locking-in your IP value.
The next logical step is to start to try to work out whether your idea really is as good as you think it is, which is what I will talk about next time.