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IP financing: What it is, and why your startup might need it

Most of what makes up today’s business’ value is intangible, like patents, trademarks and algorithms. So how can you use these assets to get financing?

By Steph Bailey

Credit: Data transfer in network connection.

When you think of a startup’s assets, you might think of the cash in their bank account, or even physical assets like equipment and property. But most of what makes up today’s business’ value is intangible — from trademarks and trade secrets, to algorithms and source code.   

These digital assets are called intellectual property (IP), and much like physical assets, IP can be given a monetary value which startups can take out loans against — something called IP financing.

“IP financing is the ability to use your IP and other intangible assets as collateral for a loan,” says Will Kier, head of risk and insurance at Aon’s IP Solutions department. Aon is a professional services firm which handles everything from insurance and risk management to intellectual property valuations for which Kier helps clients use their IP as collateral to access financing. 

“When you go get a residential mortgage, the bank has a charge over your house,” he says. “As an IP-rich company, you say, well, I’ve got this software, I’ve got these patents, I’ve got some well-protected trade secrets. There’s a lot of value there.”

In fact, this value accounts for 84% of the value of S&P companies in 2018 a figure Kier says is likely to be similar for scaleups. 

General Motors, Dell and Kodak have all used it — so how do you know if it’s right for your startup?

Why leverage your IP

For early stage, high growth startups to get funding, they often have to give away chunks of their company in the form of equity or shares. 

“It’s quite a painful experience for a closely held, founder-led business,” Ian McCaw, head of digital M&A and IP solutions for Aon’s EMEA business says. “Because you’re ultimately giving up a slice of your equity at every external investment round.” 

“It’s quite a painful experience for a closely held, founder-led business, because you’re ultimately giving up a slice of your equity at every external investment round.” 

Instead of, or in addition to, traditional funding rounds, he says companies can use their IP as a “true asset”, which is an asset that can be used to get a loan. 

Kier says one of the best ways to leverage your IP and determine its value is to use insurance, so lenders have an idea of what they’re getting into. Aon calls this insurance-enhanced IP financing. 

Insuring intangible assets is a good way for high growth companies to raise additional funds without diluting their equity stake, he says. This means companies can get access to more capital, without losing equity or shares.

“The lender has a greater level of confidence to do the transaction because the insurance has helped crystallise the value of the IP,” says Kier. “As opposed to using their own internal method to value the IP… they know that with the benefit of an insurance policy and the additional layers of diligence, a reasonable valuation has been ascribed.” 

“When you go get a residential mortgage, the bank has a charge over your house. As an IP-rich company, you say, well, I’ve got this software, I’ve got these patents, I’ve got some well-protected trade secrets. There’s a lot of value there.”

McCaw tells Sifted the first transaction his team at Aon were able to announce using insurance as the enhancement to the structure was with an agtech company based in Boston, called Indigo Ag, which was able to raise over $100m using a patent and IP portfolio as security for the loan.

The deal, done in October 2020, was believed to be the largest of its kind, and the team has since closed four more transactions in the space with an average transaction value of over $50m. 

How to get started

The first step is founders and companies really being aware of what their IP is, so they can start building out their “IP portfolio”, says Kier. 

“How do you leverage your IP? Well, you have to have IP there in the first place,” he says. “If you’re a software business it’s making sure that your code is clean, it’s truly differentiated, it’s protected. If you’re a manufacturing technology company, you may have filed certain patents.” 

If you’re a software business it’s making sure that your code is clean, it’s truly differentiated, it’s protected. If you’re a manufacturing technology company, you may have filed certain patents.” 

Aon has a pre-screening process that can quickly determine if IP financing is an option at all. If the answer is ‘no’, Aon can work with the startup to improve their strategy to be ready for IP financing later in their growth journey. 

Particularly when using insurance-enhanced IP financing, Kier says having filed and approved patent and trademark applications is very important. He says not all companies will be able to leverage their IP with insurance because they won’t have a portfolio that’s strong enough to use as security.

“You need to explain to a lot of different parties what your IP is and how it maps to your business,” he says. “You need to engage with your lender, with your IP specialists and with the insurance market.”

“I would certainly expect this business to be doing, or facilitating, billions of dollars worth of loans in the next couple of years.”

Despite its potential, McCaw says Aon sees IP as an “underserved asset class”, and says Aon is working with insurers to help make them comfortable with it, and with banks and alternative lenders to make sure they understand IP assets. 

“It’s an economic problem that needs to be solved, so we’re working that out,” he says. “I would certainly expect this business to be doing, or facilitating, billions of dollars worth of loans in the next couple of years.”

To see if your business might be a good fit for an IP financing transaction, get in touch with the Aon Team here.

Sponsored by

Aon's logo

Aon’s Intellectual Property Solutions – “World’s leading authority on intellectual property as an asset class”

Learn more.