Intellectual Property and Venture Capital: The Secrets to building Innovation Ecosystems: a special report
From our good friend Janice Denoncourt (Nottingham Law School) comes this report, specially commissioned by IP Finance, on a fascinating event which we all wish we'd attended. Janice writes:
First Ever Symposium on IP and Venture Capital?
Research on entrepreneurship, innovation and governments’
attempts to stimulate economic growth was the concept of the Intellectual
Property and Venture Capital: The Secrets to building Innovation Ecosystems. The international symposium was organised by
Professor Toshiyuko Kono of Kyushu University and held at the prestigious University
of Tokyo on 4-5 September 2014 (details here)
The Symposium was divided into several sessions: (1) IP and
Finance in Innovation Ecosystems; (2) Venture Capital and IPOs; (3) Does Law
Matter?; (4) International and Cross-Border Developments; (5) Future Policy
Directions and finally, (6) Theory meets Practice.
Speakers from around the world comprising a mix of
successful venture capitalists, academic and practising lawyers and even an
entrepreneurial journalist, tackled questions concerning the structure and
dynamics of ‘successful’ innovation in Silicon Valley, Europe and Japan. The integral role of IP in value creation and
how it relates to VC financing of promising start ups and early growth phase
small and medium-sized enterprises (SMEs) was considered.
The key note speech was delivered by Hironori Higashide,
Professor of Entrepreneurship at Waseda Business School. He presented the results of his empirical
research on entrepreneurs’ multiple intelligences and behaviours and their
impact on the performance rate of their ventures. The behaviour of ‘partiers’ outperformed the
musicians, the philosophers and the introverts.
Professor Shinto Teramoto of Kyushu University presented his
research concluding that entrepreneurs should accumulate as many IP rights as
possible in order to maintain the discretion to choose the most suitable
Steve Seuntjens, a successful venture capitalist with over
20 years of global experience in building and developing new businesses (see www.phsfund.com) clarified that in practice, financial
resources are nevertheless limited, despite seemingly significant VC investment
and leads to the business focusing on
acquiring those IP rights that are most likely to generate a financial return.
James Mawson, founder and Editor-in-Chief of GlobalCorporate Venturing, a monthly magazine and website containing news and data for the in-house VC
units of business agreed that while VC finance is important it is only one of a variety of methods of finance. In his view, VC finance is limited by the
fact that it primarily serves the capitalist interests of VCs over the public’s
interest in supporting innovation. In
other words, what VCs choose to invest in may not take into account the public
interest and ultimately may limit choice in the innovation ecosystem. He called for the government to take a more
active role in scrutinising and shaping the activities of VCs to increase the
likelihood aligning VC financial interests to innovation policy.
There was a broad consensus that while IP rights are a
resource that appeals to venture capitalists, a variety of finance options area
needed by start-ups and SMEs need given the decline in VC investment since the
onset of the financial crisis in 2008.
Improving access to additional public and private capital is where the
government, IP debt finance and secured transactions law have roles to play. Further
highlights from the Symposium proceedings are summarised below.
Erik Vermeulen, Professor of Business and Financial Law at
Tilburg University and Senior Counsel Corporate of Philips International B.V.
in the Netherlands confirmed that presently there are fewer markets for initial
public offerings (IPOs) as companies are able to stay private for longer
periods of time.
Takashi Shimizu of the University of Tokyo supported this
view explaining that in many jurisdictions, especially in Asia, the IPO market
is small and immature.
Shiaw Jia Eyo of Hosei University added that the amount of
investment by Japanese VCs is very small compared to the US and Europe. Accordingly, companies are increasingly
obtaining finance outside the VC arena.
However, transferring valuable VC experience of how to deal with IP to
other finance platforms will be a key skill in the modern innovation ecosystem.
Ryu Kojima of Kyushu University emphasized the significance
of using IP as a financial instrument.
Shinji Hino, founder and CEO of Patent Finance Consulting Inc., outlined his experience of successful patent-backed
debt finance transactions with Mitsubishi Bank, the Development Bank of Japan and
Fukuoka Bank. According to Hino, as the Japanese economy moves out of recession
and begins to expand, IP finance is returning to pre-2008 levels although
lenders are insisting on lower loan to value (LTV) rates of circa 30% coupled
with tighter annual monitoring of the secured IP assets.
Janice Denoncourt of Nottingham Law School spoke on ‘IP debt
finance in the EU and Beyond: Does law matter?’
She argued that increased voluntary corporate disclosure relating to IP
assets by start-ups and SMEs should assist to facilitate credit appraisal and potentially
favourable lending decisions, reduce transaction costs and support annual IP
asset monitoring by banks, opening up an existing but underused path to
liquidity for entrepreneurs, start-ups and SMEs.
Spyridon Bazinas, a co-author of UNCITRAL’s Legislative Guide on Secured Transactions Supplement
on Security Rights in Intellectual Property (2010) reiterated the
importance of IP financing on the basis that IP has an economic value and using
IP as collateral will lead to start ups and SMEs being offered better credit
terms than unsecured credit. He
explained that there are various types of IP financing practice depending on
the type of IP asset involved. For
example, lending practice may differ as between the use of patents to secure pharmaceutical
borrowing, movie or software financing or trade mark inventory financing. The key objectives of IP financing are: (1) to
allow IP owners to use their IP rights as security for credit to the extent
permitted under IP law; and (2) allow secured creditors to obtain a security
interest in an IP right, determine its priority and enforce it within the
limits of IP law. The IP Supplement clarifies the position
whereby if secured transactions and IP law apply to the same transaction and
lead to different results, then IP law prevails. This increases legal certainty for all actors
within the IP finance transaction, supporting confidence in this method of
Professor Neil Cohen of Brooklyn University reminded us that
lowering legal risk should also lower the cost of credit. However, he noted that the IP Supplement is not law although it is
a very good model for states to implement, with one exception. He disagreed with the subordination of
secured transactions law to IP law as set out in section 4(b) of the IP Supplement on the basis that IP is
not sufficiently different to justify materially different rules with respect
to secured transactions.
Stefania Bariatti, Professor of Private International Law at
the University of Milan, introduced the European dimension on security
interests in IP and Unitary IP rights.
She concluded that where the proprietor of the IP right is not the same
as the guarantor (eg if the security interest is created by a licence) the
security interest and the substance of the Unitary IP right might be governed
by different national laws. This is an example of as yet unresolved legal
uncertainty within the EU with respect to security interests.
Professor Orly Lobel, one of the sharpest minds in research
at the University of San Diego and author of Talent Wants to be Free (Yale University Press, 2013) submitted that
the reach of IP has been extended under the radar to include the new cognitive
property ie human capital. She pointed
out that non-compete clauses in employment agreements aimed at protecting companies’
IP and preventing misappropriation negatively impact on regional brain gain and
ultimately entrepreneurship within the innovation ecosystem.
Professor Toshiyuki Kono of Kyushu University, the
conference organizer and final speaker, spoke on future policy directions to
support the innovation ecosystem in the post-recession economy. He advocated a triple helix solution whereby
governments are set to play a new role in encouraging and funding innovation
In conclusion, the first ever Symposium on IP and VC was designed to identify and
explore opportunities for and experiences in using IP as a business and
financial tool, as well as current research in the
field of IP finance. Potential
improvements to the innovation ecosystem from differing viewpoints and areas of
expertise were shared and debated with the aim of informing future IP finance policy. While the views presented at the Symposium
reflect the opinions of the individual participants and are not necessarily the views of all conference participants, there is little
doubt that financial innovation will continue to play a critical role in
shaping successful IP dependent start ups and SMEs.
I think what is missing from the debate is what changes the finance people would make to the IP system if they could. For example should it be easier or more difficult to revoke potentially invalid patents? In what areas is more predictability needed? Should we have specialist small courts that only construe claims (giving more certainty to scope)? That would be the start of making IP more finance-friendly
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