«Research commissioned by the Intellectual Property Office, and carried out by: Martin Brassell, Kelvin King This is an independent report ...»
• At each level of Megascore Grade, from A (best) to E (worst), the subsequent insolvency rate is consistently lower for high growth businesses than non-high growth businesses of the same grade • Since the Megascore is based on financial accounts, similar to the credit ratings used by lenders in making financial decisions, it is therefore likely that high growth businesses may find it harder to get credit at attractive rates than they actually deserve • Indeed, examining typical components of credit ratings individually (profitability, cashflow, gearing, liquidity) confirms that at any level of each of these variables, high growth firms have lower insolvency rates than non-high growth firms Propensity to close The insolvency analysis was then extended to include all business closures. This showed similar results: whilst there was more of a size effect, with larger firms being much less likely to dissolve than those at the smaller end of the population, the closure rate during the recession was significantly higher than pre-recession, and again, high growth firms emerged as being much less likely to close than non-high growth firms.
Experian also applied its Commercial Delphi analysis, a 1-100 score which draws on more sources of data than the pH assessment and is calibrated to predict all closures rather than
insolvencies. Its findings were that:
In both cohorts, high growth firms are slightly more poorly scored in Year X than nonhigh growth firms, but improve at a faster rate to have a lower chance of closing by the end of their growth period and thereafter.
132 The role of intellectual property and intangible assets in facilitating business finance
Finally, Experian sought to assess subsequent growth beyond the three-year period used to establish which businesses conformed to the high growth definition.
When measured by employment, this showed that a significant proportion of firms remained stable in terms of employment, but that high growth firms showed more volatility. Pre-recession, some continued to grow more strongly while others declined; during the recession the high growth firms found it more difficult to maintain growth than non-high growth firms.
However, when measured by turnover growth, the results were somewhat different:
The employment and turnover growth figures were then combined to study the populations of firms that were expanding (growing both turnover and headcount), becoming more productive (growing turnover but not headcount), becoming vulnerable (increasing headcount but not turnover) and contracting (shrinking both), against a population of stable businesses with less than 5% deviation in either. Not surprisingly, the number of expanding firms is less in the recession, but high growth firms are more likely to be expanding and less likely to be contracting – they are more likely to become productive.
In Experian’s view83:
The report reached some interesting conclusions on liquidity and debt, showing that high growth businesses operate with significantly lower levels of liquidity than non-high growth businesses, and operate with higher levels of debt in order to fund their growth though the incidence of new charges being recorded at Companies House has declined steadily over time (perhaps reflecting the general trend towards deleveraging).
Demand side case studies Introduction This section uses a number of examples drawn from financiers and individual companies to examine funding journeys that relate to IP-centric businesses, or which have been financed using IP and intangibles. It starts with two sections on science and technology-intensive businesses regarding very significant amounts of development capital, and moves on to consider other funding contexts, including the relatively small amounts of finance sought by many SMEs to grow their businesses.
UK IP-rich companies: investment timelines The experiences of Cambridge Display Technologies (CDT) provide an interesting overview of an
IP rich company and its financing rounds through the various stages of growth:
• 1987: first patent filed (light-emitting polymers) • 1989: initial discovery of organic electroluminescence from polymers by a research group at the Cavendish Laboratory of Cambridge University • 1991: first working displays developed (3 x 5 pixels) • 1992: CDT is founded by Cambridge University and seed venture capital • 1996: the company enters into its first licence agreements • 1997: $10m raised • 1999: over $133m raised; sold to US private equity groups • 2000: CDT and Seiko-Epson demonstrate the world’s first colour active matrix ink-jet printed PLED display • 2001: $28m (internal financing round); Sumitomo takes a licence to CDT materials IP and invests • 2002: CDT announces a new $25m Technology Development Centre and the first high profile commercial PLED product when Philips launches its shaver with electronic display • 2004: NASDAQ flotation
• July 2004: capital restructure involving $15m debt capital • 2006: P-OLED technology developed substantially for use in printers, scanners and similar • 2007: Toppan Printing and CDT show roll printed display at SID - another world first • 2007: CDT acquires assets of Next Sierra and wins an organic semi-conductor industry award for research and development for its Total Matrix Addressing. Sumitomo Chemical company, a long-term partner, acquires CDT in September CDT (as part of Sumitomo) continues to be a leading developer of technology on polymer light emitting diodes (P-OLEDs). By raising cash through collateralising IP via debt, credit and various 134 The role of intellectual property and intangible assets in facilitating business finance
As one example, Circassia Holdings, a biopharmaceutical company based at the Magdalen Centre on the Oxford Science Park, originally received seed funding from Carbon Trust Investments, the Low Carbon Seed Fund of Imperial Innovations and from Nesta, each of which invested some $540,000 in August 2009. This was followed by an expansion capital round in August 2010, in which all three original investors participated joined by an unnamed fund managed by Invesco Perpetual in a round totalling nearly $4.7m. Thanks to a subsequent third round, the business’s funding has now increased to over $150m.
• In 2010, Kymab and The Wellcome Trust investment division announced a £20 million Series A equity financing. Kymab is a biopharmaceutical company focused on the discovery, development and commercialisation of novel monoclonal antibody medicines. The company is a spin-out from The Wellcome Trust Sanger Institute, Cambridge, a leader in the Human Genome Project and genetic studies to determine the function of genes in health and disease.
• Also in 2010, Freehand Surgical Limited was launched with new funding of £3.25 million and a strengthened management team to acquire Prosurgics. The aim of the company is to exploit the laparoscopic (keyhole) surgery market in the UK and the US. The new money came from funds managed by Chord Capital, Hygea VCT and the Norwegian fund Fritas AS. Existing investors include UK based VCTs, business angels and high net worth individual investors.
Significant personal investments were also made by the management team.
Sale of IP ‘vehicles’
There is a growing and significant volume of merger and acquisition activity that relates to ‘pure’ IP companies. Although these transactions only identify specific IP in the accounts of the acquirer, if compliant under IFRS 3 (AIM and fully listed companies), these deals illustrate the intrinsic value that intangible assets can have. They also demonstrate that there is an ability to create exits, identify positive cash flow with good predictability over time and relate these cash
flows to the IP. Readily available statistics from the US in the oncology sector illustrate this trend:
Debt investments involving Clydesdale Bank’s Growth Fund Chapter 3 highlighted the availability of venture debt and mezzanine-style finance to selected high growth companies. The following three examples provide an indication of how IP has been factored into the lending decision.
Cambridge Semiconductor (CamSemi) is a privately-held, fabless integrated circuit company focused on developing more cost and energy efficient power conversion products. The company is backed by multiple venture capital investors including DFJ Esprit, Scottish Equity Partners, Carbon Trust and NES Partners. CamSemi is headquartered in Cambridge, UK and has operations across South East Asia. The company was formed in 2000, and in 2012 had revenues of £9.7m.
136 The role of intellectual property and intangible assets in facilitating business finance CamSemi is an emerging leader in power management integrated circuits for cost-efficient mains power conversion products, helping power supply and solid-state lighting manufacturers develop products that are smaller, lower cost, more energy-efficient and easier to manufacture.
CamSemi is a key supplier to many of the world’s top networking, consumer electronics and mobile phone brands, holding multiple industry awards for its innovative technologies and products, as well as its international sales growth.
The multi-million pound Growth Finance package was initially advanced in July 2011, consisting of a mix of term loan and non-amortising invoice finance together with ancillary facilities used to fund the costs of expansion associated with a considerable increase in customer demand.
Since then, further funding has been advanced to the business, in partnership with their equity providers, to support continued product development and working capital requirements.
CamSemi holds a portfolio of around 50 granted and pending patents across geographies such as the US, UK, China, Japan and Australia. CamSemi’s strong and visible intellectual property portfolio, along with the significant revenues the porfolio was helping to generate, gave Clydesdale Bank significant comfort that these assets were valuable and could be leveraged.
DisplayLink operates in the semiconductor and software solutions sectors. The company develops both hardware and software solutions enabling easier connectivity between monitors and computing devices over standard interfaces such as USB and wireless networks. The technology dramatically improves the user experience and economics of multi-monitor computing, bringing added productivity benefits to personal and professional users.
DisplayLink has a wide suite of intellectual property rights including more than 20 granted or pending patents, copyrighted proprietary software and firmware and proprietary chip designs.
Speciality European Pharma Limited (SEP) is a privately owned marketer of specialty pharmaceutical products. Founded in 2006 by Advent Venture Partners, SEP’s purpose is to acquire, develop, register, and commercialise therapeutic products in the growing European market.
SEP markets therapeutics focused primarily in urology and uro-oncology markets to treat a range of diseases and disorders including prostate cancer, bladder cancer, overactive bladder and acute variceal bleeding. The Company’s products are marketed directly in the United Kingdom, Germany, France and Italy, as well as through commercial collaborations with expert partners in certain other key territories throughout Europe. SEP has grown through the acquisition and licensing of approved pharmaceutical products and its portfolio consists of Plenaxis, Mitem, Regurin, Haemopressin and more recently Bulkamid and Aquamid following the acquisition of Danish company Contura.
The Growth Finance package comprised a £2.5 million term loan together with ancillary facilities for four years through to December 2015 and is used by SEP to fund expansion plans and assist in delivering a period of forecast growth.
SEP has a diversified sales mix of both established, branded generic drugs with seasoned revenue streams and on-patent products that have strong brand recognitition and considerable IP protection. The company holds a series of granted and pending patents and trademarks across its product portfolio, including Europe, the United States, Japan, Australia, and Canada amongst other countries. The strength of this IP gives confidence to the bank of the enterprise value of SEP and in turn the underlying security position.
IP in equity investments made by the Business Growth Fund
The Business Growth Fund (BGF), examined in Chapter 4, has invested in a number of IP-rich businesses. The following two examples relate to companies producing products with less of a scientific emphasis where IP is an integral part of their revenue generation strategy. In both cases, it needs to be strongly defended.
Wow! Stuff (Wow) is a toy, gift and gadget development business which markets and sells products direct to retailers in the UK, Europe and the US. The business markets its products with licences from The National History Museum, Science Museum, Doctor Who, Top Gear, Mensa, Wallace & Gromit and Animal Planet. The business was founded in 2006 and has a strong focus on innovative product designs and its commercialisation and marketing capability.
Wow has appeared in the Fast Track 100 and its CEO Richard North won HSBC Business Thinker of the Year award in 2010.
Wow owns the IP or rights to the IP on the majority of its existing and “in development” toy products. The design and creative input is all UK based, with final manufacture usually being done by selected factories in Asia. Wow works with its advisors in UK to ensure all relevant intellectual property (IP) is registered both in UK and abroad and as of 2013, it has registered at least five patents. In addition to the IP Wow generates itself, it also takes licenses from inventors to turn their ideas and IP into commercial reality.