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«Research commissioned by the Intellectual Property Office, and carried out by: Martin Brassell, Kelvin King This is an independent report ...»

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other VC firms do not? Whitehead explains:

Octopus has done quite a few deals where it sees a really impressive management team, which is attracting great people around it, but the company is still very early stage. Under these circumstances we may make a seed investment and syndicate with a few other investors. The advantage of investing at this very early stage is that if the company requires series A funding within a year or so, we are ideally placed to participate in it through our funds.

In terms of the role of IP within these investment decisions, Whitehead comments:

It really depends on the company: the sector it is coming from, and how critical it is to the business plan. How far is the business reliant on IP as a means of preventing other businesses coming into its space?

There will be some software companies where the IP is less important than the business concept, the quality of the team and the route to market; our in-house team will probably look at these. Whereas for other companies, IP is absolutely critical. In these cases, we will outsource a full strategy review including looking at the IP itself and the IP landscape to see what else is being developed and whether the company is treading on anyone’s toes.

110 The role of intellectual property and intangible assets in facilitating business finance

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Chapter 5 The IP & intangibles owned by SMEs Key points IP is a broadly held asset class which supports the business models of a substantial part of the UK SME population As well as IP, which is manifestly under-registered, SMEs use a wide range of other intangible assets to generate cash There is a clear connection between expenditure on IP and intangibles and high growth, and therefore with the continued development of a knowledge-based economy However, much more needs to be done to help businesses identify that they own these assets which often have significant ‘presentable’ value Introduction This chapter sets out to consider how widely are registered and unregistered IP and intangibles are owned by UK businesses now, in order to establish whether closer attention to these assets could make a meaningful difference to economic growth.

This report looks at a number of existing and new data sources which provide insights into the breadth and depth of IP ownership. It starts from the most recent IP awareness survey, followed by the analysis of rights that are registered, using newly collated information from the IPO. This provides the hardest factual evidence, but which cannot by definition consider other important rights such as copyright and unregistered design right.

Consideration has therefore also been given to extracts from the data available as a result of the increased availability of sponsored IP audits during 2012-2013, and information available from two other sources, namely the Inngot directory of IP and intangible asset profiles (with particular emphasis on universities, environmental technology companies and software businesses) and recent research conducted by the Big Innovation Centre with the benefit of a dataset on company intangible asset ownership provided by Experian.

Levels of IP awareness

In 2006 and 2010, the Intellectual Property Office published the findings of UK Intellectual Property Awareness Surveys, conducted by Dr Robert Pitkethly of the Oxford Intellectual Property Research Centre, in conjunction with the IPO’s Business Outreach Team. In 2010, this 112 The role of intellectual property and intangible assets in facilitating business finance

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Dr Pitkelthy notes:

Confidentiality agreements and lead-time over competitors are seen as at least as if not more effective means of protection than patents and some other IPRs. This reflects findings of the UK Innovation Survey and is broadly similar to findings regarding the relative effectiveness of IPRs, lead-time and secrecy by Levin and Klevorick69.

Use of databases for rights checking The survey asked which sources firms chose to consult when they wanted to make sure they were free to use a company or a product name. This suggests a better degree of awareness of

the need to ensure that trade marks are taken into consideration than might be anticipated:

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However, when the survey asked whether a company had ever used or searched patent, trade

mark or other IP databases, the picture which emerges is somewhat different:

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Involvement in litigation One of the questions asked of businesses is whether they or their companies have ever been involved in a legal dispute relating to IP rights. This is interesting in terms of the risks faced when using IP as security. There was no breakdown between different types of IP rights.

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The difference in responses by size may perhaps reflect the fact that litigation is more likely to be brought by, and against, larger businesses where sufficient sums are at stake that the potential rewards are perceived to offset the likely costs.

69 Reference is to Levin, R. C., Klevorick, A. K., Nelson, R. R. & Winter, S. G. 1987. Appropriating the Returns from Industrial Research and Development. Brookings Papers on Economic Activity, 783-831.

114 The role of intellectual property and intangible assets in facilitating business finance

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When examining the IP landscape, it soon becomes apparent that while some companies amass a wide variety of intellectual property rights, a far larger number do not own anything that is formally recorded. This does not mean that they do not own IP. However, since registered rights are the easiest to measure, it is important to understand their distribution.

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• Trade marks included were those registered prior to 2011 with renewal dates after 2011, and all those registered during 2011.

Data on these IP rights was then matched with the FAME database from 2011. There was a comparatively small percentage of firms with rights identified on the IPO database that could not be matched with a corresponding organisation listed on FAME (approximately 8,500 “implied” firms out of a total of nearly 2.2 million, or around 0.4%).

The nature of the FAME database is that it only lists companies registered at Companies House.

Accordingly, of all the rights identified on the IPO’s systems which meet the bullet pointed criteria above (consisting of 450,000 UK trade marks, 108,000 live and pending GB patents, and 1.04m live and pending European patents), only a subset of 255,000 registered rights can confidently be associated with UK companies. The remainder represent rights and applications made by firms registered outside the UK, by businesses in the UK that are not limited companies, and by individuals.

It should be noted that the research has not attempted to interpret relationships between members of wider company groups, so all firms shown at Companies House as being separate legal entities are included within the totals shown below. In the following summary, figures are rounded to the nearest 1,000 (for counts of more than 1,000), and to one decimal point for percentages.

The most important point to note, however, is that of necessity these statistics entirely exclude copyright assets, which as the awareness data and other sources below indicate is the most widely held type of IP right by some considerable margin.

Overall UK ownership of patents and trade marks Of the 450,000 trade marks on the IPO database, there were 154,000 instances where a mark (but not a patent) was matched with an individual firm. There were 19,000 instances where a granted or pending GB or EP patent (but not a trade mark) was matched to a company; there were 82,000 instances where a match was found with both a patent (granted or pending) and a trade mark.

The level of multiple rights ownership becomes much clearer when the overall number of companies holding any rights at all is analysed. In overall terms, 61,000 firms have either a trade mark, a patent (published or granted) or both – meaning that the average level of rights ownership (where rights are owned at all) is in the order of four per company (being 61,000 as a proportion of the total 255,000 rights which were matched).

Further analysis comparing multiple IP rights ownership across the patent and trade mark landscape shows that there are just under 5,000 firms which have a single patent and 31,000 firms which have a single trade mark. However, the frequency of multiple ownership is shown by the counts of businesses which have between 2 and 10 trade marks (21,000) and between 2 and 10 patents (4,000). There are only 380 UK registered companies that have more than 50 trade marks and just 127 that have over 50 patents.

116 The role of intellectual property and intangible assets in facilitating business finance

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Applying the three standard definitions of business size (referenced in Chapter 1) to the available data on UK companies is not straightforward, chiefly because the statutory returns companies are required to provide annually do not necessarily reference two of the indicators, namely turnover and employee numbers.

Balance sheet data is more widely available (as even the abbreviated accounts submitted by many SMEs do include it), and is therefore the principle measure used here71. While it is helpful to provide an idea of rights distribution by company size, it is important to point out that this method of segmentation is imprecise, both due to timing issues for company reporting, and the absence of a cross-check against other criteria (for example, firms would seem quite likely to exceed the employment criteria for a micro-business but fall below the balance sheet threshold).

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However, there are vastly more micro-businesses in the UK economy than there are large companies (over 2 million compared with around 26,000). Accordingly, when taken as a group, micro businesses unsurprisingly have the lowest level of patent and trade mark ownership at just 2.1% (and due to their sheer number, it follows that they have a strong effect on the overall percentage of businesses that have registered rights).

As businesses increase in size, their propensity to hold trade marks and patents increases substantially. Based on balance sheet analysis, over 9% of small businesses have patents and trade marks, rising to 14.5% of medium sized companies and just under 17% of large companies.

In the minority of cases where a similar analysis can be successfully performed using employment data, the figures are considerably higher: 13% for small businesses, 22% for medium-sized companies and over 34% of large companies can be positively identified as IP rights holders.

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Ownership of patents and trade marks by business sector As well as variations by business size, the varying ‘knowledge intensity’ of different sectors would seem likely to lead to different outcomes in terms of propensity to obtain registered

rights, as the table below indicates:

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To compile this table, the instances where IP rights were successfully matched to UK registered firms were broken down by sector according to two-digit SIC code. The number of businesses found to be owners of IP rights were then compared with the total population of firms associated with that particular SIC code, to get a view of the ‘IP intensity’ of individual sectors.

Given that just 2.9% of total firms were confirmed by the sample as owning IP rights, it was unsurprising to find a large number of sectors which emerged as being considerably more intensive, as is summarised in the following tables (any sectors with less than 1,000 associated businesses were ignored for these purposes). What may surprise is that the majority of the most IP-intensive industries overall are in manufacturing, traditionally associated with tangible asset ownership and the ‘old economy’.

When the UK registered company populations of the more IP-intensive sectors highlighted in the table and commentary above are added up, they total 88,000.

Outside the manufacturing and scientific R&D sphere, trade mark ownership also emerges as being of much greater frequency than average in wholesale trades (7.8%), publishing activities (6.8%), information service activities (5.2%), advertising and market research (5.1%) and membership organisations (5%). These add a further 132,000 businesses to the total above.

118 The role of intellectual property and intangible assets in facilitating business finance

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During the course of 2012/13, the IPO offered fully subsidised, professional audits to approximately 200 companies identified as being high growth by partner organisations across the UK. In England, this was the GrowthAccelerator coaching programme; in Scotland, Scottish Enterprise; and in Wales, the Welsh Government.

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Across the sample of 67 businesses, the companies that were audited owned 21 patents, though one manufacturing firm accounted for one-third of the total. A further 23 patents were in progress, though again, eight of these related to a single scientific company. In addition, the audits identified 55 further patentable inventions across every sector; these were mostly opportunities to apply for one or two patents, though in the case of one scientific company, no less than nine potential patents were found (compared with its one current application). These patenting opportunities were spread across companies who already had patents granted or pending, and firms with no patenting history at all.

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