Licensing and patents are an untapped source of cash for young companies

19 Nov 2014 | News
Selling ‘knowledge assets’ can help fund growth and lend start-ups credibility with investors. As China educates a new generation of innovators about intellectual property, Europe needs to raise its game.

Companies struggling to raise capital may find bankable gems by trawling through their own portfolio of inventions. Licensing technologies and knowledge to other companies can provide a dollop of growth capital - something Europe badly lacks in the race to build global champions.

Before the financial crisis of 2009, start-ups could convince investors to provide capital based on future performance. But when the crunch came, says Raymond Hegarty, the Dublin-based managing director of Intellectual Ventures International Licensing, “Investors no longer were interested in promises of future performance.”

Licensing demonstrates value. It shows a product is “proven and viable,” says Hegarty. “At the same time, because you bring cash in, you may not need give away a piece of your company to investors anymore – you might be able to fund it from licensing those ideas.”

Investment imbalance

Supporting innovation has become a core goal of European Union leaders striving to rekindle growth after six years of stagnation. The EU is also banking on a landmark trade deal with the US to create jobs and lift competitiveness. But the Transatlantic Trade and Investment Partnership (TTIP) also exposes some of Europe’s competitive disadvantages, including a market that lags the US in generating venture capital to fund new products and technologies.

Seed and early-stage funding for innovation and start-up companies is showing signs of recovery in the EU following a sharp contraction, yet investment is still one-fourth of that in the US. The value of venture capital investments in the EU jumped 19 per cent in 2013 to $7.4 billion, according to a study by the accounting firm Ernst & Young. This is put in the shade by the $33.1 billion invested by US venture firms last year.

More broadly, European Commission President Jean-Claude Juncker calculates there has been a 20 per cent decline in investment on average in the EU since 2007. In a speech to the European Parliament before taking over the EU executive on 1 November, Juncker announced he would unveil details of a €300-billion investment package by year’s end, noting: “Economies that do not attract investment cannot grow. And economies that do not grow cannot provide jobs.”

A Science|Business Innovation Board study conducted by Aalto University plans to analyse the growth-capital gap across key technology sectors in Europe and explore the potential impact of that deficit on EU competitiveness.

Robert Brauneis, a law professor and co-director of the Intellectual Property Program at George Washington University, says government support makes sense in the early stages of research. “But as you get closer to revenue-producing products, there’s a real value in venture capital,” which brings expertise in the area and commitment to helping companies go global.

“Without that kind of motivation, even the hardest working, most well-intentioned government bureaucrat is likely not to produce the same result,” said Brauneis, who also teaches at the Intellectual Property Law Centre in Munich.
Patent rivalry

Asia poses a new risk as China seeks to educate a new generation of innovators and lead in 21st century technologies.  China recently surpassed Japan as the leader in issuing new chemical industry patents, and overall last year, the country registered 6,597 new patents. That’s still well behind Germany (16,605 in 2013) but the figures mark a 600 per cent growth in China compared to 53 per cent for Europe’s patent leader. Nearly 303,000 patents were registered worldwide last year, according to the US Patent and Trademark Office.

More broadly, China is seizing the initiative on education, technology and resources – backed by a government commitment to innovation and intellectual property. Hegarty says Europeans risk underestimating Asia’s determination to close the innovation gap with the west.

“The one question that people aren’t asking enough about is what’s happening in Asia,” said Hegarty, who points out that China has poured money into education in innovation and making its universities globally competitive, “all in a very short time.”

The stereotype is that the Chinese don’t respect intellectual property, he said. But that is changing. “Even six-year-olds in elementary school being taught about IP.”

Japan, historically the second biggest issuer of patents after the US, is also pushing invention as a way to jump-start its stagnant economy. “We’re seeing a high level of consciousness of IP in Asian countries that we’re not seeing in Europe,” Hegarty said.

Innovation is “one of the key factors of the creation of new industries and the revitalisation of existing ones, in both developed and developing countries,” according to the World Intellectual Property Organization’s IP handbook. Some 20 per cent of existing international trade relies on new patents, it says, adding, “In a globalising economy, the competitiveness of industries can only be maintained by continuous innovation.”

Europe’s unitary patent

One positive change for Europe is the recent agreement on a single patent and unitary patent court. After three decades of haggling, Europe now has the framework to streamline the process of protecting an innovation in the EU’s 28 member states, dramatically lowering the cost of patenting a product in Europe. More than 44,200 European patents were issued in 2013.

But hurdles remain to implementing the single patent.  There is no agreement on how much it will cost to file a patent. And so far only Austria, Belgium, Denmark, France and Sweden have ratified the unitary patent.  Thirteen EU countries must ratify the agreement for it to become effective.

Still, Hegarty says the legislative process in Europe has prompted healthy debate on the patenting process. “Normally it’s such a boring subject that people don’t even talk about it.”

Greater transparency and lower costs through a single European patent “would be good for innovation in general,” Hegarty said. “Lots of the costs at the moment are going into translations, attorney fees and patent office fees. And if those [costs] could be reduced, it would mean a transfer back to inventors [and] it would mean that the public would get innovation at a lower cost.”

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