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 commercialization strategy.  

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 finance.    

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 and entrepreneurship.  

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.