An article published by The Guardian on 4 May 2014
Written by Professor Birgitte Andersen, CEO, Big Innovation Centre
Featuring: Big Innovation Centre estimates suggest that high-growth firms have 74% more intangibles and IP on their balance sheet than their slower-growing counterparts. But they don’t get much financial support.
Innovative companies make for riskier investments than buy-to-lets, but they are infinitely more important to our future.
Everyone agrees that Britain needs as many fast-growing innovative companies as it can get. We need our bankers to be as enthusiastic about lending to them as they are to buy-to-let property companies.
The problem is that while buy-to-let offers the security of bricks and mortar with the possibility of rising prices and rising rents, innovative companies offer little but risk and uncertainty – but they are infinitely more important to our future.
Innovative companies can have significant value in their intellectual property, usually a copyright or a patent. But unlike a buy-to-let property there is no confident market price for a patent, or even a well-functioning market. Banks don’t lend against collateral they can’t value, and which even the company may not be able to value. But we live in an era in which intellectual property and so-called intangibles – everything from databases and computer programmes to brands and management know-how – are ever more important.
Large companies know what it means to thrive on their intangible assets and intellectual capital. Pfizer’s bid for AstraZeneca is partly designed to secure all-important IP and intangible assets – chiefly the British firm’s drugs pipeline.
Big Innovation Centre estimates suggest that high-growth firms have 74% more intangibles and IP on their balance sheet than their slower-growing counterparts. But they don’t get much financial support. From 2001-07 the centre’s calculations show that the total capital raised in the UK financial system increased by more than £1.3tn – but investment in innovation over the same period increased by just £26bn.
And innovative firms are finding it ever harder to get funding: 57% of innovators had trouble obtaining finance in 2012, up from 38% in 2007.
For high-growth small and medium-sized firms the financing problems are especially serious. They may be forced to sell shares too quickly and cheaply, hampering their ability to scale up. Often they sell to foreign companies for all the wrong reasons, at a loss to UK economy. Yet if the problem could be solved the returns would be great.
For decades accountants and economists have reduced the notion of intangibles to the catch-all term “goodwill”, to explain why investors are willing to pay a price which far exceeds companies’ book value. In a world in which investment in intangibles now exceeds tangibles (buildings, machines and raw materials) – UK annual intangible investment has grown from £50bn to £140bn since 1990, while fluctuating around £80bn for tangibles – that is no longer good enough.
We need a much more sophisticated understanding of intangibles across the board – how they are accounted for and how they are valued – along with new institutions that unlock this weightless gold.
The coalition is creating the Business Bank, but without any capacity to lend or address this fundamental problem. What is needed instead is an innovation bank that can do three things:
• Develop insurance schemes that underwrite the value of the intangible assets of growing companies so that bankers know they are lending against an asset with a calculable worth.
• Work to create and improve the markets for IP so that innovative companies and their financial backers can realise the value of their ideas.
• Mentor UK high-growth innovative business and all the providers of finance – banks, venture capitalists, crowd sourcing and corporate accelerators – so they better understand the value of what they have. Aspiring companies often do not know how to sell the ownership of their intellectual property assets to prospective financial backers.
Modelled on the successful pre-privatisation 3i – a public-private partnership, but embedded in the private sector – the innovation bank would become a key institution for a 21st-century industrial policy.