The primary drivers of corporate value have changed over the past few decades, yet financing alternatives for these companies have not kept pace. Intangible assets such as intellectual property (IP) now make up the overwhelming majority of assets that drive growth. But it has remained difficult for early-stage companies, especially those with limited cash flow, to secure financing. An innovative new financial market has emerged, with tremendous momentum and potential to help unlock previously untapped value.
Historically, companies seeking financing for their high-growth, IP-rich operations have had essentially two options: accessing debt in the private credit market or raising money through dilutive means like venture capital equity. Each method has advantages and disadvantages. For example, while debt can be less dilutive and therefore less expensive, it can bind a company to a restrictive repayment schedule. It also tends to be more limited in size of capital raise. Alternately, while venture capital equity can be much larger in size of capital raised, it can dilute ownership, making it potentially prohibitively expensive. It can also take longer to fund.
Lenders face a dilemma as well. While IP-backed loans historically have had very low default rates, accounting practices for valuation of assets like IP have not kept pace. This inhibits many lenders from pursuing this asset class as potential collateral.
With much of the value of a company attributable to intellectual property, an innovative method to value these assets and provide lenders with risk reduction options to make IP-backed loans was necessary. Enter Aon, and its collateral protection insurance (CPI) solution. Aon uses proprietary tools to value intellectual property at speed and scale. This valuation process helps to enable insurance underwriters to provide an insurance policy that can help protect the residual value of that collateral, thereby helping to protect the lender’s potential downside and enabling them to extend an IP-backed loan. Ultimately, these solutions unlock IP as an asset class.
With this innovative IP-backed lending marketplace, created by Aon, companies can access the financing they need to help scale their operations with potentially less dilution. Lenders can fund these companies making loans that are informed by the innovative valuation of the collateral together with the backing of insurance available on these transactions, which in turn can enable larger deal sizes.