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A huge opportunity cost is imposed on the U.S. economy when such a large source of potential financing is locked up. Because intangible assets are not generally available as a source of investment and risk capital, innovative companies may face higher capital costs or even a dearth of capital to fund new ideas. [...] there may be a systemic failure to properly price loans, insofar as the lending institution cannot properly value the intangible assets or applies exceedingly low LTV ratios that do not accurately reflect the risk but are a function of the lending institution's lack of information.
K E N A N PAT R I C K J A R B O E IAN ELLIS Intangible Assets Innovative Financing for Innovation For innovative companies to have adequate access to capital, accounting and lending standards must be updated to accurately assess the value of intangible assets such as intellectual property and other forms of know-how. F inding funding for a new business or idea acknowledge the real value of these intangible assets and to is almost always challenging. With the provide innovative companies with the funding they need recent near-collapse of the financial sys- to capitalize on them. tem, however, funding innovation is even In the United States, more than $1 trillion annually is more difficult. Credit to businesses has invested in the creation of intangible assets, and in 2005 their tightened dramatically. The market for ini- total value was estimated at $9.2 trillion. However, only a tial public offerings is moribund, and ven- portion of that value shows up in company financial reports. ture capital has been reduced to a trickle. As a result, the Likewise, intangible assets rarely merit consideration in “valley of death” between a promising idea and a mar- the financial system. As a result, companies are unable to ketable product appears to be even more of an unbridge- obtain the capital that they could use for business innova- able chasm. For many innovative companies, funding to move tion and expansion. from a promising new concept to commercialization is Currently, companies can raise money based on their simply not there. physical and financial assets. Such assets can be easily bought One sign of hope is the emerging practice of providing and sold, borrowed against, and used to back other finan- funding to companies on the basis of their intellectual prop- cial instruments. They provide companies with a source of erty (IP) and other intangible assets. Although IP, effective the investment funding needed for the U.S. economy, allow- management, worker know-how, and business methods are ing it to grow and prosper. widely recognized for their role in propelling the growth of In contrast, the $9.2 trillion in intangible assets is largely the U.S. economy, the country is still largely failing to hidden and therefore unavailable for financing purposes. A WINTER 2010 75 huge opportunity cost is imposed on the U.S. economy the upfront cash, and the bond holders are paid off over time when such a large source of potential financing is locked up. with the royalties. Because intangible assets are not generally available as a In a variation known as revenue interest securitization, source of investment and risk capital, innovative companies no cash flow has yet been derived from an existing license may face higher capital costs or even a dearth of capital to or royalty agreement. The investor is willing to step into the fund new ideas. Unable to use their
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