Over the past few decades there's been a shift in the economy from a tangible-based economy to an intangible-based economy, where most of the companies have IP, says Joseph Rossi, AVP, Aon Intellectual Property Solutions at Aon. Speaking at the Philadelphia Smart Business Dealmakers Conference, he says one problem IP-heavy companies face is that venture-stage or earlier stage companies have a harder time accessing the debt markets because they don't have the traditional form of acceptable collateral that many years ago companies would leverage to access to that market, like property and equipment.
"That necessitated the push to better understand and value IP with not only more fidelity but also more efficiency," says Rossi.
At a high level, a structure Aon developed has a team perform a comprehensive evaluation of a company's intellectual property portfolio, backstopping the value of that IP with an insurance wrap and then arranging a term loan leveraging the IP as collateral. The reasons he says companies are doing this is because it's minimally dilutive or completely non-dilutive in some cases, which speaks for itself when you're talking about a company that could potentially ramp up 3x to 7x over the next three to five years and potentially get themselves to the liquidity event that they're planning for. And it also typically gives companies access to more capital than they would otherwise be able to obtain through a more traditional loan.
And there's really two reasons for that. The first reason is that through the process of valuing intellectual property, oftentimes it unlocks or recognizes a lot of the value that others aren't, putting the company in a better position, he says. The other reason is the insurance wrap on the back end, which provides the credit enhancement, not only gives the company access to more types of capital, but when viewed from a risk-adjusted performance perspective, it makes sense to give companies more capital because of the risk mechanisms through that insurance.
"Traditionally, many years ago, companies, when they would raise early-stage funding, they would spend a lot of that money on physical assets, whether it be equipment, whether it be property or the facilities," Rossi says. "And now they're spending that money on their technologies and the IP that supports those technologies, whether it be data, whether it be software, patents, trade secret development, those types of things."
Mark Fox, managing partner at Ghost Tree Partners, recently completed transaction with a company called Blue Spark Technologies, which had developed a body temperature medical device that tracks a person's body temperature over 72 hours remotely. The company had purchased battery technology from Energizer a decade ago. They continued developing it for a decade, got FDA clearance, spent multiple years doing clinical trials, and spent tens of millions of dollars to get to that point. Now, they're ready to monetize that asset, but all they've really created is IP.
"There isn't any traditional asset," Fox says. "So, from a lender perspective, I would normally walk in and say, there's not much I can do here. And it would be up to an equity provider or maybe a VC venture debt provider plus an equity provider to provide that capital. Well, now we can say there's an actual valuable asset here that's been created. We wrap it with insurance companies underwriting the value of those assets and we were able to provide a $40 million loan to that company that can allow them to build out their sales and marketing team and bring themselves from a $2 million revenue company to what hopefully will be a $100 million to $150 million dollar company in basically a non-dilutive way."
The company was facing an interesting prospective path for the next couple of years. But if they took equity at that point, Fox says, they were going to give up massive amounts of equity. This solution is a new way for lenders to think about lending and it's a solution that he says could gain a lot of traction as those IP-heavy companies realize this is an option versus just going to VC market or just going to the venture debt market.