News Column

Birgitte Andersen: Analysis Invention versus bricks and mortar

May 5, 2014

Everyone agrees that Britain needs innovative companies. We need our bankers to be as enthusiastic about lending to them as they are to buy-to-let property merchants.

The problem is, buy-to-let offers the security of bricks and mortar with the possibility of rising prices and rising rents, while innovative businesses offer risk and uncertainty - but they are 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 a well-functioning market. Banks do not lend against collateral they can't value. But we live in an era in which intellectual property and so-called intangibles - from databases and computer programmes to brands and management knowhow - 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 pounds 1.3tn - but investment in innovation over the same period increased by just pounds 26bn. And innovative firms find it harder to get funding: 57% of innovators had trouble obtaining finance in 2012, up from 38% in 2007.

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 pounds 50bn to pounds 140bn since 1990, while fluctuating at about pounds 80bn for tangibles - that is no longer good enough. We need a much more sophisticated understanding of intangibles - 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 intellectual property.

* Coach UK high-growth innovative businesses and all the providers of finance - banks, venture capitalists, crowd sourcing and corporate accelerators - to better understand the value of their intangible assets.

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.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Guardian (UK)

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