With the chancellor’s confirmation in the recent Budget that firms are set to benefit from a tax break on intellectual property, businesses and inventors would, you would imagine, now be welcoming the benefits that strong IP can bring. 

The “patent box” introduced in the Budget aims to encourage innovation by levying a reduced 10 per cent rate of corporation tax on income received from patents.

Recent responses on the matter however have been very mixed, with some companies challenging the cost-effectiveness of the process for gaining patent protection and suggestions that intellectual property (IP) is an impediment to industrial growth and prosperity.

 Even though some businesses are resistant to protecting IP, there is sound evidence that those companies with strong strategies and IP portfolios are outperforming those without.

Recent research of early stage VC-backed businesses shows that companies with high-quality IP ratings are over six times more likely to be business winners than losers.

The long-term benefits should far outweigh the costs. 

European businesses are having to examine their business models and in some cases reinvent themselves because of the slowdown in demand, and their situation is not helped by lack of funding. 

In February this year, the European Central Bank (ECB) published its report on the results of the “Survey on the access to finance of small and medium-sized enterprises in the euro area – second half of 2009″. 

The survey was conducted between 19 November and 18 December 2009 and covered 5,320 firms in the euro area.

The survey found that in the second half of 2009, while half of the SMEs reported an unchanged need for bank loans, a quarter of them reported an increased need, compared with the preceding six months.

However, the availability of bank loans to SMEs deteriorated in the second half of 2009. 42% of SMEs reported deterioration. 

An important aspect of any small company obtaining a loan or investment is for the company to be able to show clearly what assets are securing that loan or investment.

One aspect of investment that is often not given sufficient weight is the intellectual capital of a company, and this can be crucial when trying to predict how well an investment will succeed.

Both the company seeking funding and those providing it need to understand the IP value of the organisation in question – but this does not always happen. 

A recent survey we undertook showed that there is an overreliance on the part of investors on the ability of an organisation’s management team to make the investment a success, at the expense of undertaking due diligence of the quality of that team, and of commercial issues and intellectual property.

This is leading to unpredictability in assessing returns on investment. It is vital to understand all the factors that have a bearing on an organisation’s future success. 

It is therefore vital that organisations understand the assets they have – and if necessary, they should work with an intellectual property expert who can help them to identify those assets – so they can make  clear to potential investors the true value of their company.

It is crucial to understand where the value lies in the business – many organisations – both investor and those seeking funding – do not know how to evaluate this and put a tangible value on it – or how to protect and commercialise that value. 

In good practice companies, the CEO and CFO take a strong lead to understand how their IP protects their products and how its value can be built and optimised to increase company performance and shareholder value and how changes in business direction need to be reflected in their intellectual capital (IC) portfolios.

IC is recognised to be too important to leave to the company technologists or legal advisors.

They also take specific action to understand where their IP fits in the ‘IP landscape’ – the IP held by other players in their market – as it is not unusual to find a competitor with an alternative IP strategy hiding around the corner.

Those planning to invest in organisations need to satisfy themselves that the IP of the company is being fully protected.

One way of doing this is to appoint an outside IP specialist who can provide clear and definite opinions, both commercial and legal as to the status of the IP that underpins a potential investment.

Such opinions can take the form of informal and brief headline summary of the key issues right the way through to a formal legal opinion.

You should look for an organisation that will provide valuations and evaluations of IP as required to underpin the deal and to provide you with additional reassurance on the potential returns, both short and long-term. 

This should take the form of both valuation and evaluation of IP at all levels from initial assessment through to full due diligence so that you have a clear overview as the basis for your business decisions. 

Companies also need to understand the differences between intellectual property, intellectual capital and intellectual assets.

By Intellectual Capital we mean the intangible assets of a company which includes the Intellectual Property (IP) that provides the legal underpinning to company operations.

However, the role of Intellectual Assets (IA) includes workforce skills, business processes and know-how. 

These people-based assets are often the key to successful business operations.  In addition, the wider intellectual capital of business relationships, branding and reputation provides the route to commercialisation.

Successful businesses need a mixture of all three – IA, IP and IC, working together, along with finance to provide investment and working capital. 

An example of how a company sought and received help is the work Coller IP Management undertook for Icos Capital, an Amsterdam-based fund manager of closed end venture capital funds, with a focus on technologies that promote sustainability of human beings and the environment (cleantech). 

The investment team had extensive experience of successfully investing in the next generation of global businesses.

As part of its due diligence process, Icos Capital commissioned Coller IP Management to undertake an IP-based review of a technology business seeking development funding. 

The work involved assessing the IP landscape around the technology developed by the business and the activities of competitors; reviewing the robustness of the business’s patent applications and providing a valuation on the basis of market benchmarking, to assess the royalty rate in a proposed IP assignment agreement.

The work we undertook revealed important information about the market place and technology developments on a worldwide basis, which was previously unknown to Icos Capital, and also third-party patents relevant to the business.

Our valuation took into account of the various factors identified from our technology and market analysis and from other licensing deals identified as comparable to that being evaluated.

We were then able to provide a royalty benchmark appropriate for finalising the assignment agreement. 

Those companies who are demonstrating best practice today have a member of the Board who understands the value of the intellectual capital within all aspects of the business.

In “Today’s Company” this is increasingly the Financial Director, supported by a Chief Intellectual Property Officer who drives strategy from a combined technical, commercial and legal perspective and who takes advice as required from professional advisors on relevant aspects related to intellectual capital. 

Coller IP Management is a specialist in commercial IP management and valuation. 

Jackie Maguire, CEO, Coller IP Management