In every business, it’s important to scale and aim for growth. Having your eyes set on your vision serves as motivation for your company. And to reach your company’s full potential, you’ll need financing. So, it’s important to know how to leverage assets, such as your IP portfolio. Yet, some founders and CEOs might still have misconceptions about IP portfolios and intellectual property protection.
In today’s episode, Lally Rementilla joins us for an enlightening conversation on how you can use your IP portfolio for business growth. She dives deep into the different types of IP-backed financing and how they can help the future of your business. She also shares how her company provides financial support to other businesses so that they can grow and scale. Lastly, we will also be exploring the processes of valuation and creation of IP portfolios.
Are you a growth-stage business that wants to know how your IP portfolio can help you? Tune in to this episode to learn more!
Here are three reasons why you should listen to the full episode:
Find out about the different types of IP-backed financing for intellectual property protection.
Learn about the valuation process and how to create an IP portfolio.
Determine the key factors in acquiring financing deals, protecting your intellectual properties and assets, and earning patents.
Visit Christina Sjahli’s website! Learn more about innovating and scaling your business through the Her CEO Journey™ podcast.
Chat with Christina and set up a time here!
Download the Forecasting Guide so you can create a better and improved financial forecast for your business!
Connect with Lally: LinkedIn
[05:51] Lally’s Journey
Lally has worked as a senior finance head for different companies in the technology, media, and telecom sector.
In those two decades, she noticed the difficulties in raising debt financing for IP-rich companies.
She set up a “Big Hairy Audacious Goal” to raise a $100-million fund to address it.
Lally then met the team that founded Quantius and became their CFO in 2015. She eventually became this company’s CEO.
[09:15] Joining Quantius and BDC Capital
After getting their three-year track record, Quantius began looking for institutional capital.
Around March 2020, they decided to join Quantius’ knowledge and experience with BDC’s capital and reach.
On July 16, 2020, they launched their $160-million fund to help IP-rich companies.
[12:30] Deploying Funds
Lally’s team announced their first deal in February 2021 with Norvarc Technologies. They provided growth capital worth $2.6-million through IP-backed financing to this company.
This Vancouver-based company invented the world's first collaborative robot or cobot for welders.
It’s difficult to find skilled welders. And so, a cobot helps with performance and productivity while promoting a safer work environment.
[14:37] Attracting Foreign Companies
Through this fund, Lally wants to create an environment that attracts IP-rich companies to Canada. With this, there will be more economic opportunities in the country.
Case studies show that many Canadian companies that have moved to the U.S. are seeking to return to Canada.
[15:38] Defining Intellectual Property
Intellectual property is a creation, idea, or invention of the mind.
Intellectual property protection and rights are state-driven monopolies issued by a government. This is to prevent others from manufacturing or selling products under IP.
BDC Capital assesses, analyzes, and values patents to develop an investment thesis or a conviction. This helps them determine whether they should invest in a company.
“So we take those patents and really assess them, analyze them, and value them to really help us develop an investment thesis or conviction around making an investment into a company.”
Companies also often possess intangible assets, such as know-how, client lists, data, and software.
[17:14] Debunking Misconceptions on Intellectual Property Protection
IP isn’t just about patents.
You should also look at trademarks, trade secrets, and copyright. Through this, you understand how to build a portfolio that protects your business.
“Trade secrets are almost sometimes as important and can even be more important than some of the more explicit forms of IP.”
IP and intellectual property protection are not just for technology companies.
Trade secrets should be protected because they lose their value when shared beyond the circle of who needs to know about them.
[19:31] BDC on Expanding Their IP-Backed Financing
BDC’s fund is not yet set up for doing other types of IP-backed financing.
Instead, their expertise lies with patents.
They are exploring other forms of IP. These include intangible assets such as data, proprietary software, and music royalties.
[21:05] Providing IP-Backed Financing
IP-backed financing is a new phenomenon, and therefore, still evolving.
It’s a form of financing in which value is attributed to the intangible assets of a company. Through this, investment decisions are made.
BDC Capital analyzes the valuation of a company's patent portfolio. They draw insights about the company and determine their portfolio’s possible collateral.
There may be different ways of providing IP-backed financing in other countries or areas.
“It's going to be very important for a company to understand which kind of IP-backed financing model they want to use for what they're trying to achieve.”
Listen to the full episode to learn the different types of IP-backed financing models and how they work.
[24:55] The Three Methods of Valuing Assets
First is the cost-based method. This method seeks to understand the costs necessary to create a patented technology.
Next, the income-based method is focused on the future cash flow of a particular asset.
Finally, the market method tries to understand the transaction price of similar patents sold either in the public or private markets.
Valuations may differ based on the intended use of the valuation.
BDC Capital goes beyond valuation. They seek to understand how a patent portfolio can make a company unique, how it protects them, and how it increases revenue stream.
[29:22] Preparing for IP-Backed Financing
BDC’s valuation of a company is not shared with the company in question.
An evaluation is done to make an investment decision and determine the liquidation value of the patent portfolio.
Providing valuation to a company can be a sensitive conversation. There may be a disparity between what the entrepreneur believes their value is and what lenders calculate it to be.
[31:42] Doing a Scenario Analysis
Lenders are risk-focused. It can therefore be reassuring for lenders if companies have done scenario analyses.
Consider the worst-case scenario and how you can respond to it.
Scenario analyses help determine a company’s financial strength or capital efficiency.
IP-rich companies have more options to manage the downside. They can also find alternative revenue streams.
[35:33] Creating an IP Portfolio and Strategy
Having an IP strategy doesn’t need to be complicated.
First, know your trade secrets and how to protect them.
Then, determine your inventions and which ones can be patented.
Lastly, create a plan for filing trade, trademarks, or registering copyright for intellectual property protection. Make sure to track it regularly and make modifications when necessary.
BDC Capital offers tools to assess IP strategies. The Canadian Intellectual Property Organization also has a guide on conducting an IP strategy review.
[37:36] Other Factors That Influence Debt Financing
Valuation is not the sole business for making investment decisions.
BDC also looks at the fundamentals of the company. They call this the product-market moat fit.
A company’s strong value proposition to its customers also influences financing.
In structuring a loan, they determine how they can provide a financial proposal that can solve the company’s needs.
Learn how BDC evaluates a company and its process for creating a financial proposal by tuning in to the full episode!
[41:14] On Reporting Requirements
BDC requires an annual report depending on the stage of the company and the size of the loan.
They might also require monthly or quarterly reports to monitor the company’s financial performance.
Meanwhile, BDC monitors the IP space for patenting and litigation activities.
“We really try to understand what the company wants to do, what their projections look like, how their IP portfolio really adds value to them as a company, and then try to structure something that works.”
[43:35] Structuring a Financing Agreement
Patents have a 20-year time limit.
One of the key things to consider when looking at an IP portfolio is how young or old the patent is.
As you get closer to the expiry date, the value of patents decreases. But the age of a patent portfolio does not necessarily determine its value.
Thus, they look at the bell curve, where the company sits on that curve, and the transactions that are happening around it.
[46:42] Other Financing Costs to Consider
The actual financing transaction and lender’s underwriting fees are some costs to consider in IP-backed financing.
Deals also carry legal costs due to security registrations.
Adding up the costs of these different fees, larger transactions are more compelling.
[48:59] How Long Does IP-Backed Financing Take?
The main factor is a company’s readiness to enter an IP-backed financing process.
BDC’s eligibility criteria consist of an IP portfolio with IP assets and patents, a commercial revenue stream of a million dollars, and a global plan to scale.
A company should also have a working financial model and a complete list of IP assets.
IP-backed financing can take months to conduct, possibly three months and more.
Accrual-based financial statements are preferred. However, cash-based financial statements can also be presented along with them.
[53:26] Blazing the Trail for IP-Backed Financing
Lally is happy that BDC brings a unique opportunity to help Canadian companies grow.
BDC is a trailblazer in this space. They bring together an ecosystem for IP-backed financing.
“IP-backed financing is new. So there's still a lot to learn as to how we can really promote these companies and support them going forward.”
They are currently working with other like-minded agencies and founders to support the growth of companies.
Lally Rementilla is a managing partner at BDC Capital. She oversees and provides strategic guidance to a national team that helps companies accelerate their growth. She is also an Associate Fellow at Creative Destruction Lab and a member of Grand Challenges Canada’s investment committee.
After working as a financial executive in the technology sector for two decades, Lally moved into investment and became the CFO and then CEO of the commercial lender, Quantius. There, she structured and launched the company’s main fund and helped build a diverse portfolio of knowledge-based companies. She now works as the managing partner for BDC’s IP-Backed Financing practice.
Lally is a proud supporter of Canadian innovation and committed to partnering with founders and management teams to help them scale. To know more about Lally, you can connect with her through LinkedIn.
“If we really wanted to help a lot more companies, and we needed to have a larger balance sheet or a larger capital pool behind us.”
“IP or intellectual property is not just about patents. It's about other forms of intellectual property that you should also be looking into, such as trademarks, and trade secrets, and copyright, to really understand how you can build a portfolio that protects your business.”
“There does tend to be that big disparity of what the entrepreneur believes their value is and what we calculate it to be.”
“Patents have a finite life. So there’s a 20-year period in which you have that patent protection.”
“Once you add up the cost of all these different fees, then they make it more compelling when you actually have a larger transaction as opposed to a smaller transaction.”
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The entire process of IP-backed financing can be painstaking and complex. Lally goes in-depth into the factors that you’ll need to consider and the inner workings of IP-backed financing so it’s easier for you to prepare and ask the right questions for your IP portfolio and intellectual property protection. If you enjoyed today's episode of Her CEO Journey Podcast, then hit subscribe and share it!
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To fuelling the life you want to live,
Lally Rementilla: What could be the possible collateral value of their IP portfolio? Or in the case of, let's say, in equity financing, how does their IP actually drive the valuation of the company? In different other countries and in different sort of areas, there may be other ways in which other capital providers provide IP-backed financing. Ours is what I call more of a growth oriented view. We're providing working capital to help grow a company.
Christina Sjahli: Let's say you are a founder of a growth stage company with a few intellectual properties and you have been thinking, "What is the value of all of this intellectual property or IP? Is there any commercial lender that would be willing to finance your business based on your IP portfolio?" If you have been thinking about this, then this particular episode is for you.
Lally Rementilla: Oh, it's my pleasure to be here today. Thank you very much for inviting me.
Christina Sjahli: Today's episode is the fourth episode of The Intellectual Property Podcast Series. Over the last few weeks, starting with Episode 128, we share with you the different types of intellectual properties, the step you need in creating IP strategy, how to protect this asset, and a journey of a female founder who is in the trenches in building her IP strategy to get financing. Now, it's time for us to share with you how to exactly leverage those IP strategy and cash in your ideas to grow your business to the next level. Today's guest is Lally Rementilla. She is the managing partner at BDC Capital located in Toronto, Canada. Lally is an expert in IP-backed financing, and she believes IP-rich companies have a unique portfolio, global customer base, and strength to survive an economic downturn. Together with her team, they've put in the time to go very deep into understanding and appreciating businesses' IP and intangible asset. They provide the right IP-backed financing for growth stage businesses.
In this episode, Lally shares, among others, the possible type of IP-backed financing out there, the process to value an IP portfolio, the type of IP-backed financing that BDC Capital provides to growth stage companies within Canada and outside Canada, and the benefit of scenario analysis in any financing deals. If you are not located in Canada, don't jump to the conclusion that this episode is not relevant to you because this type of lending structure is not specific to Canada. You may find an alternative commercial lender within your region, so take the time to listen until the end because this episode will provide you useful tips. When you approach an alternative commercial lenders, you will be able to ask the right questions.
You're listening to Her CEO Journey, the business finance podcast for mission driven women entrepreneurs. I'm your host, Christina Sjahli. If you are new here, a big warm welcome. If we are not connected on LinkedIn, please reach out and say hi because that's where I hang out and share my business finance tips. If you have been listening to this podcast for a while, and you are a regular listener, I want you to know I appreciate you. My podcast won't be around without your support. This is a free weekly show where my guests and I want to inspire you to balance between mission and profit, to create an impact in this world, and to achieve financial equality through your business for good.
Scenario analysis is one of those tools that every founder should have within their business, especially if you are looking for debt financing. We've talked about it inside this episode. It is one of those financial tools where you can assess financial strength and agility. However, before you can get to scenario analysis, you need to build the foundation. The foundation is about forward-looking view of your financial result, what we call financial forecasting.
If you are at a stage where you realize you need to build a robust financial forecast but don't know where to start, we have a solution to your problem. Download the Forecasting Guide we have created for you and start creating a better and improved financial forecast. You can find the link to this guide in the show notes. Let's say after using the guide you think, "Hmm, this guide helps but I think it is better if I focus my time on doing what I really love which is building and growing my business. I know business finance is important, but I don't love it." That's when we are here to partner with you. We understand building a proper and robust financial forecast takes time, accountability, curiosity, and passion for your business. Connect with us at christinasjahli.com/lets-chat.
Now, let's find out Lally's CEO journey. Lally Rementilla, welcome to Her CEO Journey. It's a pleasure to have you here today. Before we dive into what is intellectual property-backed financing, let's start with your journey first that leads you to becoming an expert in IP-backed financing. And then now you are a managing partner with BDC.
Lally Rementilla: Surely, well, this is definitely something that I would consider a very non-traditional path. I started my career on really what they call the operating side of the business. I'm a two-decade veteran of the technology, media, and telecom sector, primarily working as a senior finance head or CFO of startups, scale-ups and multinational companies in that space. In those two decades, I saw a lot of inefficiency in the market.
And I witnessed firsthand the difficulty of how it is to raise debt financing, especially when you're dealing with very IP-rich companies. Very, I'd say commonly, I would go to my banker and my banker, I asked for a loan, and my banker would say, "Well, Lally, you've got all these losses. Lally, you don't have any hard assets. You don't have a lot of inventory. You don't have a building. You don't have any land. You have very little in the form of accounts receivables. And so it's very difficult for us to extend some form of finance to you."
With this reality in mind. I thought that, how can it be that companies that are going really fast, they're exporting, they're rich in intellectual property, how, how can it be that it's very difficult for them to get financing? And so around, I'd say 2013. Around that time, I told myself, I'm going to find a way of really addressing this issue. And if there's one thing I can do, and so I sort of set up what they call a Big Hairy Audacious Goal for myself, or a BHAG, it's that by the time I turn 50 years old, I want to be able to raise $100 million fund to address this. And so I went on, I was still working in a technology company at that time.
But in 2015, I had met this team that had founded a firm called Quantius. And I went actually to meet with them to try to get a loan and coming out of the meeting, they wanted to hire me as their CFO. And what Quantius did was to essentially address this issue that I had faced in my career as an operator. And so what they've developed was this unique ability to value intellectual property, especially in the form of patents, and be able to lend against it. So I made the decision that this is going to be my opportunity to really make a difference. This is something I've always wanted to do; it's going to accelerate my ability to reach my BHAG.
And therefore, at the end of 2015, I joined Quantius as the CFO, and we launched a fund and started going out into the market in 2016. And then through the course of Quantius's this journey, I actually became the CEO of the company. So from 2016 to 2019, we were very much focused on building our track record, developing our own portfolio of very high-growth, knowledge-based industry companies and backing them and making term loans of somewhere between one to five million dollars each.
So once we got that three-year track record in 2019, we were pretty much ready to start looking for institutional capital. Because it's very common in the asset management or venture capital industry that you start off with your first fund. And then try as much I mean, we were entrepreneurs ourselves, and therefore, we put our own money in and we put our friends and families money in and then started developing an investor base of high-net-worth individuals and a couple of family offices. But it is clear that if we really wanted to help a lot more companies, then we needed to have a larger balance sheet or a larger capital pool behind us. So once we got our three-year track record In 2019, I started having discussions with a lot more on what you call institutional investors. And one of those investors that I was speaking with was the BDC.
As it happens, in January, last year in January 2020, the BDC, through BDC Capital, actually wanted to launch their own IP-backed financing fund. And they saw the synergies between what we were doing at Quantius and how our team was a very high performing team. We were already out in the market. We've already shown a very successful, more than three-year track record in doing IP-backed financing. And then they had the capital to really make this happen. And so by marrying sort of those two strengths, we decided just when the pandemic was declared, I kid you not, on around March 2020, that we decided we're just going to join our forces, my team at Quantius was going to join the BDC.
And that happened in May, during a pandemic, and make this happen, because it makes such a big difference for Canadian companies. And it was just something that we knew in that sort of original Quantius group that we needed to really build the capital base. And now with the reach that the BDC has, and having clients, I think we have about more than 64,000 clients and more than 2400 employees all across the country, that it is going to be a way to make an impact in the the knowledge-based ecosystem in Canada. So we joined I remember this May 4, so May the fourth be with you?
Christina Sjahli: Yeah. I know.
Lally Rementilla: It was our first day at the BDC, there was five of us. And we each all got Purolator packages with laptops and phones coming into our in our homes. For the first three months, we were just trying to learn the bank systems, working with our internal supporting teams, such as our marketing department to get all the necessary materials in place to launch the fund. And so we did launch the fund in July. I remember this July 16th 2020, that was a Thursday, we made it clear to the I guess, to the country that we have $160 million fund that's dedicated to help IP-rich companies across the country.
Christina Sjahli: So how much out of the 160 million fund that you have deployed by now?
Lally Rementilla: We don't announce the amounts. But what we have done is we've announced our first deal, and that was announced just last February. It's to a Vancouver-based company called Novarc Technologies in the advanced manufacturing sector or industry. And what they've done is that they've invented the world's first collaborative robot for welders.
Christina Sjahli: Wow.
Lally Rementilla: So yes, for welders and one of the things to know is that there's actually a global talent shortage for welding. And it's very difficult to find skilled welders, and therefore, this is one way by which the very sort of limited pool of welders that are available there to us can enhance their performance and their productivity, and also have a safer work environment by essentially having what they call a cobot or collaborative robot help them perform their tasks. We funded Novarc with a $2.6 million credit facility. And that's something that we believe can really help get to profitability and execute on a strategy that they have on working with a global distributor in the welding space.
One of my BHAGs for this fund, is how can we also create an environment in which IP-rich companies are actually attracted to Canada because of the financing that they provide, as well as all the other great ecosystem partners that we have. So one of my BHAGs here is that, hey, if I can even attract foreign companies into Canada, and be part of our portfolio, that would make me very happy as well, because it's also shown how Canada has elevated itself into an ecosystem that is very open to and supportive of IP-rich companies.
Christina Sjahli: As you are talking that you want to attract foreign companies, technology companies coming here, do you mean that you want to invest in them to grow, to expand their market to Canada?
Lally Rementilla: Yes. So what I want to be able to do is actually tell them, "Hey, why don't you come to Canada, start an office here, create Canadian IP, hire very talented Canadians, and really be or make Canada your beachhead for whatever IP-rich, intellectual property-backed sort of operations that you have?" One or the other case studies that I've seen, and I'm actively speaking with a lot of different other companies, are Canadian companies that have actually or Canadian pallant that have moved to the US, and are now actually looking to come back to Canada, and to bring their company, and to bring their IP with them. So that would be another great case study. And again, it's sort of in BHAG territory for me.
Christina Sjahli: Maybe people don't realize that they have intellectual property. So what is considered intellectual property? And what are the common misconception that lead a business not realizing they actually have intellectual property?
Lally Rementilla: I'd say the most common and most simple definition for what intellectual property is, is essentially a creation of the mind: something that comes out of ideas, and inventions of the mind. Now within intellectual property are sort of what what we always talk about when people talk about IP is intellectual property rights. So these are what they call state driven monopolies, or given monopoly. So what that means is that a particular government will give you one of these intellectual property rights, which prevent other people or companies from using it, to manufacturing it, or selling it. So an example of this would be a patent, a trademark, a trade secret, a copyright, or industrial design.
So it is the sort of intellectual property rights, and more specifically patents, that really drive what we do at the BDC IP-backed financing fund. So we take those patents and really assess them, analyze them, and value them to really help us develop an investment thesis or conviction around making an investment into a company. And then on top of intellectual property rights, there are also other form of what we call intangible assets that a lot of companies tend to have. So that could be in the form of software, know-how, brand, client lists, data, and exclusive licenses.
When it comes to misconceptions. One of the things that a lot of companies tend to don't understand is the fact that again, IP or intellectual property is not just about patents. It's about other forms of intellectual property that you should also be looking into, such as trademarks, and trade secrets, and copyright to really understand how you can build a portfolio that protects your business. It doesn't have to be too deep into technology. I mean, you don't have to be a technology company to file for an IP right. It can be the form of a trademark, and really owning your name and owning your brand, which in some cases is very important for, let's say, more services-based companies.
The other misconception is that there's this thing called trade secrets and trade secrets have to be protected. And companies have to take very purposeful steps to actually protect these secrets. So that may be in the case of some very sophisticated companies that we've seen, may have a secret formula, where they keep it lock and key. It's in a document that has a password protection. It's encrypted. Not everyone in the company has access to it.
The only access is given to people who really need to understand and know what this trade secret is. Because once you actually start telling companies about a particular trade secret, or once it's sort of outside the realm of who needs to know, it actually loses its trade secret value. So those are, I would say, the very important things to note is that it's not all about patents, and trade secrets are almost sometimes as important, and can even be more important than some of the more explicit forms of IP.
Christina Sjahli: Now, you mentioned earlier about tangible assets: client lists, brand. And then you also mentioned about trademark and the fact that this is not only for technology business. Sometimes service-based business can do this as well. But does your company do this type of IP-backed financing on trademark, for example?
Lally Rementilla: So currently, right now, we are not set up for it because IP-backed financing does tend to rely on certain amount of expertise. Where we're very good at right now, as far as my fund is concerned, is in patents. And we are also exploring other forms of IP which we could value. And actually it's other forms of intangible assets which we could value. And so, some other areas we will be exploring are in the realm of data, proprietary software, and even, let's say music royalties. So we're not actively working on those. Those are additional steps we will look at and on a more opportunistic basis. But it is the intent to make sure that over time, were able to take other forms of IP or intangible assets as part of our program.
Christina Sjahli: At the very beginning of this conversation, you even mentioned, the company that you worked for in the past, you went to the bank, the bank is looking something like land or something like building, but IP itself is actually an asset. When I think about IP-backed financing, the first thing that came to mind is actually getting a loan from a BDC, or you know, or IP-backed financing, and use that IP, the value of that IP to back the loan. That's what I'm thinking. But is there like, other type of IP-backed financing?
Lally Rementilla: So IP-backed financing, I'd say, first of all, it's a very new phenomenon. There are still a lot of different new business models that are coming out in sort of just more general way of doing things. So I'd say every month, there's probably a new twist on how IP-backed financing is done. And there are different companies, different lenders, different funds that all do some form of IP-backed financing. At its core, and to what you said, which is, I'd say, pretty much bang on, it's a form of financing, where you're attributing value to the intangible assets of a company and using it to make your investment decision.
Now, the way we do it at the BDC is that we analyze and value a company's patent portfolio. And that analysis and valuation discipline or exercise allows us to generate insights on really understanding the uniqueness of the company, how it's differentiated, how they've created a moat, or how they've protected their business model. And in the case of debt, what could be the possible collateral value of their IP portfolio? Or in the case of, let's say, an equity financing, how does their IP actually drive the valuation of the company?
In different other countries and in different sort of areas, there may be other ways in which other capital providers provide IP-backed financing. Ours is what I call more of a growth-oriented view. We're providing working capital to help grow a company. There are some other IP-backed financing clients that are more what they call a royalty base. This happens a lot in the pharmaceutical industry, where they're doing drug royalties, as an example. So they are looking at the patents of a life sciences company, understanding what the likelihood of their recurring cash flows to be and how long these patents are valid for, and then understanding what their sort of their royalty revenue stream would be going forward.
Another type that we see a lot is also litigation finance. So this is one wherein companies are actually able to borrow in, especially companies that have a large patent portfolio, are able to borrow money so that they can litigate and claim infringement on other companies. And what happens is that that money is put to use to actually fund the litigation proceedings. And then, at the end, if the company ends up winning in the form of damages or a settlement from the other company that they're healing, then they use that to, essentially, pay off the litigation finance loan. So there's a lot of different business models. And it's going to be very important for a company to understand which kind of IP-backed financing model they want to use for what they're trying to achieve.
Christina Sjahli: Because it's an asset, there has got to be value assigned to that asset. This is where I had seen struggles, because my past career, I worked in mining. And in gold mining, sometimes we have this big property, and then we would be saying, "Here's how much gold that we can dig out from that property. And then based on the market price of the gold right now, this is the value of the property in a big picture." Now, I'm assuming that intellectual property is something similar, but I'm really curious, like, how do you value intellectual property?
Lally Rementilla: So it's good that you told me. I didn't realize that you started or had a career in mining so that that's a very, actually a very good analogy, because there's a lot of unknowns when it comes to intellectual property. And I'd say let's focus really on patents because that's what we do. And that's the kind of valuation that we conduct. So in the case of patents, first of all, patents are time-limited. So there's only about a 20-year period in which you can hold a patent, I'm making it very sort of simplistic here.
The second thing, too, is that it's a very opaque market. There's no sort of stock exchange where you know how many patents are being sold and bought in whatever price. In some cases where there is probably a public market transaction, where a public company may have acquired another public company or a private company, and they declare what the value is, and maybe you can get some sense. But it's, for the most part, a lot of these patent buying or selling transactions, they don't get reported. And so, it's really very difficult to understand what is the value of a patent portfolio.
This sort of evaluation discipline does use three types of methods, which are generic methods for valuing assets. And they're what we call the cost-based method, which is trying to understand how much it's going to cost for someone to create that patented technology as an example. The second method is the income-based method. And within that method, there are different ways of doing it. But it's essentially very similar to what you did in the mining industry, which is looking at whatever the future cash flows of a particular asset could be. And then the third method is what we call the market method, which is trying to understand what has been the transaction price of very similar patents that have been sold either in the public markets or in the private markets.
So as you can see, it's in a very opaque market. It's very difficult to do that. And so, it's a very specialist industry out there of people or firms who can actually do these kinds of valuations. And what we've also seen is that the valuations can also be different based on what the intended use of that valuation is. So meaning, if you're trying to sell your patent portfolio or your company, then there does tend to be, I would say, a preference for using something more like an income method. Because you're trying to get the high value and you're looking at to a buyer, what revenues they're going to be able to get from that technology portfolio. In the case of let's say, insurance companies, if they had to insure a particular I guess, IP portfolio, then they're going to look at a more conservative view of this, right? Because it's going to be very critical for them to really look at what we call a more actuarial-based valuation type.
And so, as we go about valuing portfolios as part of the BDC, IP-backed financing practice, what's more very important for us, it's really just going beyond the valuation itself. And also, understanding how this particular patent portfolio actually helped make a company unique. And how does it really protect the market share for the products or services that this company delivers to the market? And also, how will it drive future value or monetization potential for them? So as an example, if you look at companies that have, let's say, patents, but are collecting a lot of data as part of their overall IP strategy, we could argue that there's going to be increasing value in that portfolio over time because the more data they collect, then the more data they can monetize. And they can also have more revenue streams in the future.
Christina Sjahli: What can business owner be prepared once they approach of fund for their IP-backed financing? there's not a significant surprise in terms of the value.
Lally Rementilla: Right? So one thing to note is that if a company comes to us and would like us to look into their business plan and assess what kind of IP-backed financing we could give, when we actually go through the valuation exercise, that valuation is actually not shared with a company at all. One of the reasons for that is that again, going back to my previous point, when we conduct evaluation, it's to answer specific questions that we have to make an investment decision. In the case of a loan, then one of the questions that we have is: What would be the possible liquidation value of this patent portfolio, if for some reason, the company does not achieve their plan, and may need to sell it? And so, that value does tend to be conservative because it's assuming the fact that you're trying to liquidate something, an asset within somewhere between 60 or 90 days.
And so, I can say, is a very sensitive conversation to actually provide a valuation to a company because, and I can speak very well, having been in an operator's shoes that there is a large amount of sweat, equity, and sort of recognition in the fact that entrepreneurs have put in a lot of their time, their energy and focus into creating these intellectual property portfolios. And I would say, they always have a better view of their business. So they know where the opportunities are and what the markets have are. In our case, as lenders or investors, we're also very more risk cognizant, and we're always looking at possible risks. And therefore there's, I would say that there does tend to be that big disparity of what the entrepreneur believes their value is and what we calculate it to be, again, using the methodologies and the investment decisions that we have to make are.
Christina Sjahli: Does it help if a business or an entrepreneur do a scenario analysis and show it to a fund? Does it help you to determine if the assumption that they are using make sense or not?
Lally Rementilla: That's always a very good exercise. And I would highly recommend, so great that you brought that up, I always highly recommend when companies come, especially if they're looking for debt financing, because lenders are primarily more risk-focused. So instead of focusing on the upside, and the hockey stick kind of growth that may come out within a company, lenders will tend to really understand or try to ascertain what the risk inherent in this particular company situation is and will try to manage the downside.
So what's very reassuring for a lender is if a company has done a lot of this scenario planning and to say that, "Hey, this is our most likely business plan, and we're going to raise this much money, spend it in these kinds of investments, and generate certain revenue growth." It's always great when these same companies say that, "Hey, but if some of our assumptions on, let's say, our acquisition costs or assumptions on our ability to penetrate our market don't pan out, then we have scenario B." Which is, "Hey, this might be very tight. And the runway that we have may go from being a 24-month runway to a 12-month, or maybe even a 9-month runway."
And then, one of the other things that we also want to look at, again, as lenders is well, what is the story of the worst-case scenario? And if a worst-case scenario actually happens, then how are you going to retain enough cash so that you can have enough ability to, let's say, pivot your business or make certain changes to keep the company going? So these scenario analyses are very useful when we look at the financial strength and financial agility, or in some cases, they call it the capital efficiency of a company.
And then if you now take in the additional layer of IP, then the question is: How will your IP portfolio help drive those different scenarios? And what we've seen, especially in cases where we have very IP-rich companies, so these are companies that have a lot of patents, we've seen instances wherein they now look at those patent portfolios and say, "Hey, in the worst case scenario, maybe we can sell some of these patents, or maybe we can license out these patents. Or maybe we totally restructure our business so that we're not manufacturing everything we're selling. Maybe we're just licensing out the technology to someone who can manufacture and who can take on the distribution risk in a particular country."
What I believe is really great about IP-rich companies is that it gives them a lot of options. So there's a lot more optionality in IP-rich companies because those patents will allow them or even those trade secrets will give them additional options of what they can do with their company on the downside scenario, in some cases over time can also help them find other revenue streams, such as, let's say, licensing out their patents in order to create more upside scenarios as well.
Christina Sjahli: So the key point here that I'm hearing is for companies to have an IP strategy and then be proactive in terms of looking at the downside, not only the upside alone. When they have a strategy, and they're looking forward and looking at the downside, I think it helps for the business, and then also for the lender or the investor to understand how agile is the business, if something like COVID-19 pandemic happen.
Lally Rementilla: Correct. Exactly. And I can't stress that enough. What you said at the beginning of sort of your question, which is having that IP strategy, because that's very important, I'd say, for any company now, especially as what we sort of how we see the world is that this is really more of an intangible-based economy. And having that IP strategy can be as simple, very simple.
It doesn't need to be a 20 sort of volume type of document. It can be even like a one-pager where you're really at the sort of the very early stage of your company, really trying to understand what are those trade secrets that you have and making sure you have a plan for protecting them. What are the inventions that you generated which you should be or could be patenting? And what is your plan for filing trade, trademarks, or registering copyright for any of your artistic assets?
And there's actually in our website, so we have a website dedicated to our team, it's bdc.ca/IP. So that's the English website. And the French website is bdc.ca/PI. And we've got tools there to help you assess your IP strategy. The Canadian Intellectual Property Organization or CIPO also has tools on almost like a step by step method on how to conduct an IP strategy review. Those are great tools that entrepreneurs have access to, and they're all free to really get them a head start on actually articulating that IP strategy, putting it down on paper, and then making sure that on an at least an annual basis, they're looking at it and making modifications to it.
Christina Sjahli: Now, since we are in the area, talking about the debt financing, you know, we already talked about valuation. And is there any other factors, aside from valuation that can influence the financing term for debt financing?
Lally Rementilla: Yes, so very important question because everyone like there, a lot of people have thought, but all we do is value patents. And that is the only basis for the investment decision that we make. And that's totally not true. It's also important for us to also look at the fundamentals of a company. So there's this term that we use, and it's we call it, product-market moat fit. So by that, we're looking for a company that has developed and brought to market a product that's strong, that's unique, that's differentiated, that's addressing the needs, and is being accepted and widely accepted by a very global and growing market. And where they have created a moat and made them very strong, defensible, and differentiated, whether that moat comes through IP protection, or it can come in a very unique business model or revenue model. And then, also the capabilities of a very strong, agile, and ambitious, and capable management team and having good governance in place. So that in a sense, is product-market moat fit.
And also, underlying that is making sure that the company has a very strong value proposition to their customers: that the customers really see the compelling reason why they should be buying from this company, whether it be a product, a service, or why they should be licensing the technology of the company at hand. So that's definitely the core of what we look for when we're working with companies. And so, the company has to be able to demonstrate that as part of our, I guess the discussions we have, whether it be as we're qualifying the opportunity or conducting due diligence, those are very important for us to look at.
And then, as we go further into actually structuring the loan, then one of the things we look at is: "Okay, how can we now provide a financial proposal that can really help solve this company's needs?" And so as we look at all those different information that we get from a company, we have a lot of discussions. Now, our process is very in-depth. Like, we really go deep into understanding their IP strategy upfront: how their technology, and their IP, and their revenue streams all link together. Then we come up with a process. So is this is a company where we see debt risk or equity risk? So if it's that's that risk, where we see a lot more predictability, it's a company that we know is going to be able to become profitable within a particular period of time, then we start looking at: "Okay, let's let's come together and try to get a debt investment or debt structure."
And then we look at the different components of a debt structure. So obviously, the amount that we're going to make investment in, how much of cash interest, they're going to be paying us, how much of that interest may be what we call PIK or payment-in-kind. So it's almost like a different interest structure where they don't need to pay it till the end of the loan, or there might be some royalties that we would, we would sort of structure. And so, it's a risk share type of model, right? So they, if they make their revenue projections, then we all win.
In some cases, we know that this company is probably going to be burning a lot more cash and needs a lot more investment. And therefore, we are seeing this more as more of an equity risk type of scenario. So that's where we might be proposing more of a convertible note or convertible debt option, or actually looking to see if we can participate as a minority shareholder in the company. So we've got that flexibility, which is again, I think, also very unique in the market: of being able to make both debt and equity investments. And the approach that we take is that we really try to understand what the company wants to do, what their projections look like, how their IP portfolio really adds value to them as a company, and then try to structure something that works.
Christina Sjahli: I dealt with payment-in-kind before and royalties. And in this type of financing, well, actually, in any type of financing, in my opinion, there is a recording that a business needs to provide to the lender. Now, I'm curious from your perspective, from BDC Capital, when you deploy funds to a venture, do you require some kind of reporting requirements after you deploy the fund?
Lally Rementilla: Yes, yes. So there are, I would say there's at least an annual reporting requirement. Depending on the stage of the company and the size of the loan, it might be a review engagement, or it might be an audited financial statement engagement that we require. And then, on top of the annual reporting requirements, there are more periodic requirements that we might require. It can be either monthly or quarterly. Because what's also very important for us is to monitor the financial performance of the company. I mean, it's very similar to other financial institutions that obviously have those reporting requirements.
And then on top of that, what makes us unique is again, because we look at the IP portfolio, we also have reporting on what they've done to grow, maintain, and develop their IP portfolio even more. The company can also look at us as almost like what they call a shadow IP strategy team, meaning, because the world of IP is can be very competitive, it can be litigious. So what we would do is really just monitor the space to see if there's a lot of patenting activity that's happening or a lot of litigation that's happening, because I think it's very important for companies that are IP-rich, to make sure they have a handle on that as well.
Christina Sjahli: Talking about risk, the value of IP increases, typically over time, but sometimes there is also a risk of impairment, which is the value of the IP decreases. How do you take that into account when you are structuring or underwriting a financing agreement?
Lally Rementilla: So very good question. And if we go, let's say back to what we do really well, which are patents. As everyone knows, patents have a finite life. So there's a 20-year period, in which you have that patent protection. And after that, you lose it, unless obviously, you file for continuations, and also other improvements that can help protect or keep that protection in your company on a more ongoing basis. But one of the key things when we look at valuing a patent portfolio is how young or old are these patents.
And it doesn't mean that the younger it is, the more valuable it is. So I would say it's a bit more like a bell curve. So for some patents that are really new, it's actually, in some cases, much harder to value, especially if their technology is truly unique. Because we don't know what other technologies are out there. And if there are no other sort of similar technologies or patents are out there, then it's really difficult to understand what even the commercial market for this patent is.
And then on the flip side, if If you're looking at the very end of the life, then obviously as that expiry date comes very fast, or as you get closer to that expiry date, then you know, you're going to lose some protection, and therefore the value of those patents could sort of come down very quickly. What we do tend to do is like, look at what does that bell curve look like? Where does this company sit when it comes to the bell curve? What other transactions are happening? So to the extent that we know, there's actual active patenting that's happening in the space, and knowing who those entities are, that's pursuing very similar patterns, it gives us a sense of where the market activity is and where there may be additional avenues in which the value of that path and portfolio would grow.
Christina Sjahli: It's very interesting to me, because the value can fluctuate, and to get financing based on that intellectual property. And I guess it's similar to mining property, in a way, because the gold price is like fluctuating. And then, suddenly, if the gold price drop, well, that's have an impact somehow to the financing, the ability to pay the debt, or the value of that property. And then the lender needs to know how is that going to impact the whole structure or the prospect of the company. So in terms of looking at it from the debt financing, there is interest cost. There is probably the payment-in-kind that you mentioned. There is also possibly royalties. Is there any other financing costs that business owner should consider when they are thinking about IP-backed financing?
Lally Rementilla: So obviously, there's the costs of the actual financing transactions. And most lenders usually have some form of an underwriting fee, or some form of a processing or study fee. So they should always sort of budget for that. IP-backed financing deals also carry a lot more legal costs because of the fact that, in most cases, they're just going to be some security registrations made. So the sort of the simple ways that there might be a general security agreement. And therefore, if the company does not have an existing lender, then they just need to know that there's additional legal work that's going to be required to put in a GSA. If they already have another lender, so let's say they already have a line of credit with one of the commercial banks, then the sort of IP-backed lender will now also want to have some form of an intercreditor agreement between the bank and them. And so, now we're looking at possibly additional legal costs.
And then, if a company has more than one legal entity, so let's say it's a Canadian corporation, but has a US subsidiary, and let's say the company's patents are actually owned by the US subsidiary, then now you're looking at additional security registrations and corporate guarantees between the different entities. So legal costs are also going to factor in. And so if we're looking at IP-backed financing transactions, and this is, I'd say, just in general, because of the amount of legal work involved and due diligence costs involved, they do tend to be more skewed towards the larger transactions. So millions of dollars as opposed to let's say, $100,000 loans or investments. And the reason for that is that once you add up the cost of all these different fees, then they make it more compelling when you actually have a larger transaction as opposed to a smaller transaction.
Christina Sjahli: Now, what is the typical time? I'm pretty sure this is probably depends on the complexity of the business, but just curious from the application until the fund is deployed, like how long normally does it take? Does it take less than a year, less than six months?
Lally Rementilla: Right? So it really depends on a lot of different factors. What we find is obviously the readiness of a company to enter into an IP-backed financing process. So first and foremost, the company has to be well-organized. And I would always tell the company, first of all, make sure that you pass let's say the lender's eligibility criteria, because it makes it just easier to to know that they're well prepared. They have the right sort of IP portfolio that's protected. They have commercial revenue streams.
So our eligibility criteria involves three things: So one is we want companies that already have an emerging or established IP portfolio with a registered IP assets and granted patents. So currently, we're looking for mainly companies that are granted patents right now. It doesn't mean that that's all we're going to value for the life of the fund. But most currently, that's the one that takes us much quicker to value. The second thing is, again, having that commercial revenue stream of at least a million dollars. It's very important when you're doing a valuation to be able to attach that revenue stream.
And therefore, if a company's pre-revenue, we were happy to chat with them eventually. But it's they need to know that we are looking for companies that have been able to demonstrate that track record of generating revenue. And then the third criteria is a global ambition and plan to scale. So we're really set up to help create the next generation of global champions in Canada. And therefore, we need to be able to see that there's global application for a company's innovation, and that they have the capabilities to really scale this in a global way.
And then as we go through the actual process, whether it be qualifying the opportunities, due diligence, it's very important for the company to have their financial statements in place, have a working financial model, that's able to show their projections for their income statements, balance sheet, and cash flow. It's like a full sort of financial model, as opposed to just assumptions that are hard coded into an Excel spreadsheet that, unfortunately, that doesn't work for us. Because again, we're our intent is to really cut larger checks. So we're looking to invest somewhere between three to ten million dollars per company. So there is a degree of financial readiness and financial sophistication that we do tend to look for.
And then on the IP, having a real good list of all your IP assets and making it always complete and available. Because we will ask, we will ask a lot of questions with respect to the IP portfolio. We will have, we have questionnaires that the companies have to fill out upfront. So this process is, I would say, very akin to more of a venture capital process. It can take months to conduct. We go and talk to the company's board of directors. We'll talk to the company's customers, some of their key suppliers, their management team. So it does take longer. It's definitely not like a one-month process. I can assure you that. I would say at best that probably a three-month process, and it can take longer.
Christina Sjahli: You mentioned financial statements. I'm assuming you're looking for a accrual basis instead of cash basis, right?
Lally Rementilla: Yes, we would prefer accrual-based financial statements. And if a company, especially, I'd say companies that are subscription-based, where they sort of get annual contract billings paid for upfront, if a company can, I guess, show us both a cash-based and accrual-based, that's good. But definitely at least the accrual-based because then, we can sort of reconcile and really understand what their cash flow needs are and what obviously their income statement provides. Because then, that's where the cashflow piece or the financial model helps. Because if the income statement is accrual-based, then really the cash impact on what we're doing and what they're trying to do will not show up there. It's really going to show up in their cash flow analysis or cash flow statement.
Christina Sjahli: Lally, this has been enlightening. I learned so much from you. And is there anything else that you have not shared with my audience that you want to add to this conversation?
Lally Rementilla: Sure. Well, I mean, first of all, thank you very much, Christina. This has been really great. If there's one thing I have to say is that I'm really just so happy that BDC Capital trusted my team in bringing to the market this very unique, one-of-a-kind opportunity to help Canadian companies across the country. And I believe that we're really a trailblazer in this space, and we're bring