Update : 16.12.2020
*as part of Patent Salon’s IP Advent Calendar 2020 special edition introduced by one of AIVAS members
In cooperation with the Financial Services Agency (FSA), the JPO has been promoting IP finance since 2015, a policy that encourages local financial institutions to provide loans and business support to small and medium-sized companies that lack real estate and other assets by using intellectual property such as patents and trademarks as a starting point to measure the companies’ technological and sales capabilities.
IP Finance Goals
One of the major projects of IP Finance has been launched to provide free IP business valuation reports prepared by specialized research companies (14 organizations from A to N in 2008). The process involves taxpayers paying for the experts’ valuation fees to help financial institutions understand that IP has a value and that it can be used for management through the IP business valuation report, which in turn can be used to support SMEs. In fact, the IP business valuation report has been proved to be useful in providing loans and business support to SMEs.
Source: https://www.nikkei.com/article/DGXMZO29324270S8A410C1L31000/
http://www.18shinwabank.co.jp/announcement/18bank/backnumber/news/topics/2017/2018_008.html (Japanese only)
How does IP business valuation report process work?
When a financial institution prepares an IP business valuation report for a customer (small or medium-sized enterprise) that owns IP, it first decides which research company to use and later applies to the secretariat. The names of the research companies are not disclosed, but it seems that real estate appraisers, certified public accountants, patent attorneys (patent firms), management consultants, and the Japan Patent Attorneys Association have been registered.
The secretariat will request the selected survey company to prepare the valuation report, which does so by interviewing financial institutions and target companies as necessary (about one month). The IP business valuation report is provided to the financial institution through the secretariat.
After examining IP business valuation reports samples from various research companies, pur team found out that they ranged from those that emphasized their areas of strength and had an ingenious layout to attract the interest from financial institutions (so that they would choose them) to those that simply laid out the necessary information in a straightforward manner.
Overview of the research companies and IP business valuation report
IP Business valuation report shows that research companies are roughly categorized into those that are strong in the valuation and analysis of intellectual property and technology, etc. and those that are strong in business models. The Japan Patent Attorneys Association and patent firms are probably in the former category, while management consultants and certified public accountants are in the latter. Real estate appraisers are somewhere in between.
Going back to the column theme, which is monetary valuation of IP, one of the important aspects of IP business valuation report is economic valuation (quantitative valuation) of target IP/technology, etc. Out of the 14 survey companies, 10 conducted quantitative evaluations and only one (Company X) focused on it.
The five-year period from 2015 to 2019 (the first phase) could be called a run-up period to popularize IP finance. Perhaps for this reason, the IP Business Valuation Report project did not have the regional limitation emphasized in IP finance, and financial institutions and companies in the Tokyo metropolitan area and urban areas were also widely targeted (or rather, they were more prevalent).
The second phase, which started this year, consists of two stages: traditional IP business valuation report and a new IP business proposal. The number of survey companies has been reduced to 11 (companies A to K). The samples show that the number of companies which conducted economic valuation (quantitative valuation) of target IP/technology, etc. has been reduced to five. Furthermore, one of the companies simply calculated the value based on the total assets of the company using the 25% rule and the profit trichotomy method, so only four companies conducted IP valuation.
There also has been an increase in business potential valuation and strategy analysis (SWOT). In terms of the above categorization, we can see that companies which are strong in IP/technology valuation and analysis are gradually shifting toward business models.
This does not mean that the importance of IP valuation has declined or that it has become sufficiently pervasive and widespread, but rather there seems to be a psychological resistance of financial institutions which do not want to be constrained by the IP valuation and the policies of the relevant ministries (Patent Office, Ministry of Economy, Trade and Industry, and Financial Services Agency). It is reasonable to believe that while patent rights do have a value, it is not the same as being forced to invest more than 100 million yen just because it is valued at 100 million yen. Since companies started placing less emphasis on monetary value in the middle of the first phase, the change of policy in the second phase is to be expected.
On the other hand, this trend of decreasing presence of IP valuation is only limited to the IP business valuation report business. There is an ever-increasing need for IP value assessment in other IP finance situations, specifically in various situations such as M&A including business succession, licensing, trading, investment, and inventory.
The Japan Patent Office and the Ministry of Economy, Trade and Industry (METI) have been trying to promote the distribution and liquidation of IP through various means, including the utilization of unused patents by large companies, IP collateral loans, IP distribution, the intellectual creation cycle, and open strategies, but it cannot be said that IP is still being actively distributed. If we look at the examples of used cars, real estate, and stocks, the distribution of IP in the true sense has been realized only when an open distribution market is established where the market price (objective price) is determined by the balance between supply and demand. To achieve this, I think it is necessary for third parties other than the parties concerned to accumulate a track record of objectively measuring the monetary value of IP, even in relative transactions, and to widely share (publish) the results.
For example, in China, financial institutions are required to obtain a valuation report from a professional when a company that owns IP applies for a loan on a local government basis. The cost of the valuation is borne by the financial institution. The neighboring country of South Korea has already been utilizing government-led IP valuation software. All of these countries are several to ten years ahead of Japan in terms of IP value assessment. There is no doubt that the Japanese government officials are aware of this but what is preventing them to move forward? As someone who has been involved in IP distribution and valuation for many years, it is disappointing that IP valuation seems to be left behind by the government.