381. The United Kingdom is pleased to co-sponsor this agenda item and would like to thank cosponsors and in particular to Canada for bringing forward this paper on a topic important to so many entrepreneurs around the globe. In particular, the UK would like to respond to the paper's question asking, "What specific financing needs or considerations pertain to innovative and/or IPbased MSMEs?" There were 5.3 million micro-businesses (those with fewer than ten employees) in the UK in 2021. Micro-businesses account for 95% of all UK businesses. Even though most businesses in the UK employ fewer than ten people, micro-businesses account for only 21% of employment and 14% of turnover.
382. Bank lending is often the most viable route to finance for more established businesses. Smaller early-stage businesses may, however, be overlooked by investors, and IP-intensive businesses with substantial intangible assets can often find it difficult to access debt finance. The UK Intellectual Property Office (IPO) and British Business Bank (BBB) conducted several roundtables, the results of which were published in 2018. These roundtables concluded that the main obstacles to using IP as collateral for loans were banking regulations, legal enforceability, valuation, and liquidity. I will now briefly set out these four issues:
Banking regulations
383. Banks are required to hold a minimum ratio of capital in relation to the risk-weighted assets (loans) that they hold. This is called the capital adequacy ratio, the standards for the calculation of the capital adequacy ratio are based on the international rules set out in Basel III. These standards define the eligibility criteria for inclusion as capital. Intangible assets are specifically excluded from eligibility as capital for capital adequacy. This results in IP-intensive firms finding it more challenging to obtain bank loans than firms with tangible assets such as buildings.
Legal enforceability
384. IP and other intangible assets are often difficult to separate from the firm that developed them. This might make it difficult for lenders to exercise claims on those assets or take possession of the IP in the event of a default. The lender would not then be able to sell the IP to recover its losses.
Valuation
385. IP and other intangible assets may be difficult to value, particularly if they are innovative and therefore unique. There is no single agreed methodology for valuing IP. Without a consensus approach, it is difficult to verify independently the value attributed to a piece of IP.
Liquidity
386. Transactions involving intangible assets are infrequent and not publicly recorded. The limited frequency of intangible asset transactions may in part be due to a lack of mature supporting infrastructure such as valuers, agents and value logs. The UK Government is working towards futureproofing the UK finance market so that intangible assets such as IP are considered fully as part of lending decisions. Several UK actions are outlined in the response to the next question below.
387. The UK would also like to respond to the question "What are some best practices or options in terms of IP-backed financing for MSMEs and/or otherwise for the financing innovative or IP-based MSMEs?" The UK Government published its Innovation Strategy in July 2021 that included several key actions related to finance and a commitment to "ensure innovators can access the right private finance at the right stage and provide targeted public support where there are gaps in private markets".
388. The UK Government is committed to making private markets function as effectively as possible. The UK benefits from a diverse finance ecosystem for innovative startups, including angel investors, equity crowdfunding platforms, and venture capital funds. Where private capital alone is insufficient to enable innovative companies to start, grow and scale up the UK Government coinvests alongside private investors. The British Business Bank is an important delivery partner in UK Government efforts to make finance markets work more effectively for smaller businesses. Up to the end of 2020, the Bank had supported the provision of GBP 42 billion worth of finance to 170,000 small and medium-sized businesses across the UK, excluding COVID19 debt and equity finance schemes.
389. The steps on the innovation finance journey typically involve progressing from the founder's own resources through grant funding, seed finance and later venture/institutional capital and ultimately, once a business has demonstrated it is able to generate sufficient cashflows, debt finance. The United Kingdom has an array of public interventions which, alongside private capital markets are designed to enhance the funding ecosystem, UK Government has continued to strengthen its support offer for innovative businesses. with Innovate UK and the British Business Bank playing a key role. This means that the United Kingdom is a good place for businesses of all sizes to access the funding they need for innovation.
