The Future Is Intangible. Who's Going To Finance It?
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By Matthew Bradley.
Intangible assets — things like Research and Development (R&D) capabilities, Intellectual Property (IP) and software, know-how within organisations, brand — form an important part of company value. Asset-based finance — borrowing money against hard assets — is the way in which finance has worked for centuries but this needs to change.
The future is intangible
“Software is eating the world” as Marc Andreesen of a16z said back in 2011. This was and is prophetic. If software (an intangible asset) businesses continue to rise, and software/know-how becomes an increasingly large component of the value of every company, there’s an opportunity for forward-thinking financiers to lend against these new stores of value.
As an example, some of the largest companies in the world have huge stores of their company value in intangible assets: Amazon at 93% and Microsoft at 90%.
Existing finance approaches don’t work
A Bank of England survey found that over 90% of lending to corporates with annual revenues less than £500m was secured against some sort of collateral. Over 60% of lending was collateralised by property claims against plant, equipment and vehicles. Reading between the lines here it’s reasonable to think that banks’ preference for collateralised lending may make access to credit hard for the vast majority of companies with a high proportion of intangible assets.
The Opportunity
New approaches to finance are always in the works. Marketing advances — the like of which Forward Advances provides — touch on this issue but there’s room to go further. There are other ways to provide financing for ‘reliable’ cashflows.
Alex Danco recently made a case for software companies looking to securitise their MRR. This points squarely at the opportunity. There will need to be some infrastructure for this market too: those companies building a dataset relating to software intangibles (market value of R&D, stickiness of MRR) will be valuable.
If the underlying data is there to understand risks and exposures, dreaming for a moment, there could be a real winner with a company that cracks the code for financing intangibles in its broad sense — Research and Development (R&D) capabilities, Intellectual Property (IP) and software, know-how within organisations, brand — could be onto a massive market opportunity.
If you’re working on a business in this area or near-to-it, please get in touch with us here.
