IP/C/W/692  
 
29 September 2022  
(22-7321) Page: 1/4 
Council for Trade Related Aspects of Intellectual 
Property Rights  Original: English  
 
INTELLECTUAL PROPERTY AND INNOVATION : 
ROLE OF IP TO RAISE FINANCE FOR START -UPS 
COMMUNICATION FROM AUSTRALIA, CANADA, CHILE, THE EUROPEAN UNION, JAPAN, 
SINGAPORE, SWITZERLAND, THE SEPARATE CUSTOMS TERRITORY OF TAIWAN, PENGHU, KINMEN 
AND MATSU , THE UNITED KINGDOM AND THE UNITED STATES OF AMERICA  
1  INTRODUCTION  
1.  Imagine that a young PhD student at a technical faculty of a renowned university comes up with 
a promising invention. Thanks to university modules she attended on how to deal with inte llectual 
property (IP), she applies for and is granted a patent for her invention. Now, together with the 
university technology transfer office, she would like to bring the invention to market. When writing 
a business plan, she soon realises that the funds  she needs greatly exceed her family 's and her 
university 's financial capacity. Where can she find funding? In this very early stage of attempting to 
commercialise an innovation, investors such as venture capitalists or angel investors might be 
possible so urces of funding and thus can be of considerable importance for a promising start -up. 
2.  Various studies show that young companies that have an active and a well -managed IP portfolio 
to show to potential investors obtain more funds and grow faster than those without.1 So if the PhD 
student from our example seeks IP protection for her invention, she will stand a much better chance 
of finding the necessary funds to turn her idea into a business.  
3.  In addition to protecting intellectual assets from free riders, IP  rights are a potentially useful 
means of raising money, especially for start -ups. In the above example, IP is used as a signal to 
investors that there is considerable substance in the young company. Furthermore, IP can be used 
as leverage or collateral fo r borrowing, or for sale to prospective buyers through sale -leaseback 
transactions.  
2  HOW TO USE IP FOR FINANCING  
4.  There are different ways to use IP for financing such as:  
• IP-backed equity finance2 
Young enterprises, especially start -ups without any cash fl ow, do not usually manage to 
obtain a loan from a traditional commercial bank. That 's why they need partners that invest 
their own  money. Such partners may even become co -owners of the business. In order to 
convince prospective investors, such as angel inv estors or venture capitalists, to invest, a 
start-up has to present a convincing business case. A promising IP portfolio may help to do 
just that.  
• IP-backed debt finance3 
IP-backed venture debt is a newer form of financing for young firms in which IP serves as 
collateral. Whereas providers of equity finance are interested in a company 's capacity to 
 
1 See Haeussler et al. (2012).  
2 See Radauer (2020), p. 193f.  
3 See Baier & Waibel (2022).  IP/C/W/692  
 
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  grow, providers of IP -backed debt are more interested in a company 's ability to pay back its 
loan. 
• IP licensing revenue4 
The classic way to generate cash f low from patents, trademarks, copyright and designs is to 
licence these IP rights, which allows the licensee to use the company 's IP. There are various 
ways of structuring a licensing agreement. For instance, this could involve an exclusive 
licence or limi tations on the circumstances in which the licensee is permitted to use the 
licensed IP rights. The licences might also be geographically limited.  
• IP royalty securitisation5 
The idea behind royalty securitisation is that the IP owner transfers the rights t o an IP royalty 
in-come stream for a fixed period in exchange for an upfront cash payment. One example 
in the area of copyright royalties involves artists who sell rights to the future royalty 
revenues from their songs or photographs. One well known case i nvolves 'Bowie bonds ' in 
which copyright royalties from album sales and live performances by the musician David 
Bowie served as collateral for a 10 -year bond.  
• IP sale -leaseback6 
This works in the same way as conventional sale -leaseback procedures, in which real estate 
may be sold and leased back. Instead of real property, IP rights are sold and then licensed 
back to the seller to provide the seller use of or access to the IP assets. For start -ups, this 
kind of IP financing has the advant age of providing immediate liquidity to the seller while 
still allowing them use of the IP. It is also possible to buy back the IP after a certain period 
if a clause to this effect is inserted in the contract.  
• IP insurance7 
Enforcing IP or defending again st an IP infringement litigation can become very expensive, 
and, in most cases, cost -prohibitive for a start -up. In order to prepare for these very real 
possibilities, companies may take out specialized IP insurance coverage. This IP coverage 
may be defens ive or offensive. Offensive IP insurance will cover the insured 's enforcement 
of its own IP, such as an affirmative IP infringement action. Defensive IP coverage will 
provide for the defense of the insured against suits alleging IP infringement. This kind of 'IP 
insurance ' may protect start -ups from having to close down their business in the case of a 
costly lawsuit.  
3  INSTITUTIONAL FRAMEWORKS  
5.  In an interview conducted by WIPO in June 2022 with a representative of Villgro Africa – a 
Nairobi -based business inc ubator and early -stage investor focused on health and life sciences – a 
representative of the business pointed out that loans often do not work for start -ups. The reason for 
this is that start -ups are small and often do not have enough collateral or revenu e to benefit from 
these types of traditional funding sources. In order to promote innovation, more equity is needed.8 
6.  Some of the requirements for a well -functioning financial IP market and some challenges facing 
start-ups are listed below.  
• Availability of venture capital  
Access to venture capital, and thus to some extent access to IP equity financing, may be 
limited. The reasons for the lack of venture capital are manifold. An unstable legislative 
environment, the risk aversion of potential venture capitalists, unfavourable tax regulation, 
and the absence of adequate IP protection and enforcement are just some of the hurdles 
that countries may face in attracting venture capital for their innovative start -ups. 
 
4 See WIPO (2021), p. 39ff.  
5 See Chen (2020) or Espiner (2016).  
6 See Jackson (2022).  
7 See Ozlutrk (2017).  
8 See Omondi (2022).  IP/C/W/692  
 
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  • Valuation of an IP portfolio9 
One of the biggest challenges when it comes to IP financing is the valuation of an IP portfolio. 
The first question is: What is the value of the IP portfolio of that company? Financial 
institutions may find it difficult to accurately value IP, and therefore often need to rely on 
external experts to carry out valuations for them. Start -ups can boost their valuations if they 
adopt good practices for managing IP. This allows them to better manage, protect and exploit 
their IP and helps them in the  financing proc ess.10 The second question, which is often even 
more important for the venture capitalist, is: What is the value of the IP portfolio if the start -
up does not survive and the investor has to sell it? This question is directly linked with the 
next point.  
• Transparent and accessible secondary markets for IP11 
If investors have to sell an IP portfolio, they depend on there being an accessible and 
functioning market for IP, as it might be challenging to find suitable buyers otherwise. As in 
the case of IP valuati on, there is a need for specialised service providers – in this case with 
regard to the buying and selling of IP portfolios.  
• Knowledge and awareness of the opportunities offered by IP as collateral for accessing 
finance12 
Last but not least, it is necessar y that both the lenders (venture capitalists) and the 
borrowers (start -ups) are aware of the opportunities offered by IP as a financial instrument. 
Such awareness is not as widespread as it should be. It is important that start -ups take IP 
financing into a ccount as a strategic component of their business plans. Likewise, investors 
need to know the fundamentals of the IP system in order to be able to properly assess the 
financial risks and opportunities entailed in investing in a start -up and its IP portfoli o. 
7.  This may sound surprising at first, but the first step in the innovation process – having a good 
idea, developing an innovative product and then protecting the IP – is often easier than the second 
step – raising the funds necessary to bring the inventio n to market. A well -managed IP portfolio can 
considerably help innovators in overcoming this challenge as it signals to potential investors that 
there is substantial value in the start -up. 
4  GUIDING QUESTIONS  
a. In your jurisdiction, where do start -ups obtain t he funds they need in order to expand and 
open up new business areas?  
b. Do companies and especially start -ups in your jurisdiction use IP financing? If so, what is 
the most common form of IP financing?  
c. Does IP financing in your jurisdiction include entities such as angel investors, venture 
capitalists, or other sources that are specialised in IP financing, such as equity finance, 
including public sources?  
d. What about IP debt finance? Are there any banks that deal with this form of IP finance?  
e. Is IP valuation a  service often used by your start -ups and, if so, who provides this service 
in your jurisdiction? What measures (e.g. programmes, initiatives or guidelines) exist in 
your jurisdiction to further educate start -ups and investors/banks about IP financing 
opportunities?  
f. What are the key challenges or deficiencies that your delegation sees at the national or 
international level concerning the role of IP in start -up financing?  
 
9 See ICC 2019.  
10 See WIPO (2021), p.19 f.  
11 See Radauer (2020), p. 195 ff.  
12 See Radauer  (2020), p. 197 ff.  IP/C/W/692  
 
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  g. What could be done in your delegation 's view to improve the situation?  
Literature  
Baier, Michael; Waibel, Alessa (2022): "Venture debt as a financing instrument for start -ups. What 
founders need to know in a nutshell ". https://www.wengervieli.ch/en -us/journal/guidelines/venture -
debt-as-a-financing -instrument -for-start-ups-what-founders -need-to-know -in-a-nutshell  
Chen, James (2020): "What Is a Bowie Bond? " https://www.investopedia.com/terms/b/bowie -
bond.asp  
Espiner, Tom (2016): "'Bowie bonds ' – the singer 's financial innovation ". 
https://www.bbc.com/news/business -35280945  
Haeussler, Carolin; Harhoff, Dietmar; Mueller, Elisabeth (2012): "To Be Financed or Not... – The 
Role of Patents for Venture Capital Financing ". ZEW Discussion Paper No. 09 -003. 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1393725  
ICC (2019): "Handbook on Valuation of Intellectual Property Assets ". Paris: International Chamber 
of Commerce (ICC). https://iccwbo.org/content/uploads/sites/3/2019/06/icc -handbook -valuation -
ip-assets -we.pdf  
Jackson, Jason (2022): "What Is Intellectual Property (IP) Financing And Why You Should Know ". 
https://www.forbes.com/sites/forbesfinancecouncil/2022/01/31/what -is-intellectual -property -ip-
financing -and-why-you-should -know/  
Omondi, Paul (2022): "Villgro Africa: helping health startups take their ideas to market ". In: WIPO 
Magazine 2/2022 ( https://www.wipo.int/wipo_magazine/en/2022/02/article_0004.html ). 
Ozluturk, Fatih (2017): "The finance of IP litigation ". https://www.iam -media.com/article/the -
finance -of-ip-litigation  
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https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_20 21.pdf  
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Intellectual Property for Business Series Number 6. Chapter on licensing, p. 39ff. 
(https://www.wipo.int/edocs/pubdocs/en/wipo_pub_961.pdf ) 
WIPO (2021): "Unlocking IP -backed Financing: Country Perspectives. Singapore 's Journey. " 
Geneva: WIPO. https://www.ipos.gov.sg/docs/default -source/resources -library/unlocking -ip-
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