Season 2 Episode 8
30th August 2022
Investing in IP
Julian shared with us his experience and understanding of investing in the IP analytics field, discussing what excites investors about the sector, current trends and the opportunities companies have to access funding.
He chats to the hosts of the Cipher Vision podcast, who are:
On what gets advisors excited
What we love as an advisor is sectors which are very, very active. So sectors which are generating huge amounts of inbound interest in investment, both from venture capital and from private equity, because that tends to generate deal volumes.
What I particularly love is sectors where there is a challenge within the sector, caused by historical unstructured data. And where that data can effectively then be now using today’s AI and machine learning, in order to provide value for customers.
I focus on sectors which are global sectors and where the problems are global problems, because that creates a far more significant market opportunity for us from a banking perspective.
For instance, the anti-counterfeiting market. Clearly counterfeits have existed for millennia, but counterfeits have really successfully taken off with the advent of E-commerce and marketplaces, and that really then creates a whole new industry in the anti-counterfeiting space.
We advised a business called Encode Probe on raising capital back in 2018 and what they were able to do was very clever. They were able to go inside marketplaces, like Snapchat, and Facebook and Amazon, and identify counterfeit goods using image recognition technology. And they were then able to map and trace the bad operators effectively, by being able to connect websites with email addresses and with mobile phones.
Now, that’s a business that couldn’t have existed 10 years ago. It started to exist with humans doing work, doing various Google searches and trawling manually through marketplaces and then they’ve invented AI software to automate those processes. So that’s probably a great example of a business that we love.
How different stages of business growth impact funding
Things get started, ten thousand dollars here, ten thousand dollars there, building up to angel investors who will then be investing hundreds of thousands of dollars.
Then companies tend to go through venture capital rounds and venture capitalists will come in and invest millions of dollars. And that then moves forward as companies then mature, become more cashflow generative. They then start to attract interest in private equity.
Private equity would then be investing everything from tens to hundreds to billions of dollars. And then clearly businesses can eventually be looking at the public markets and IPOs.
What timescales look like for acquiring venture capital funding or PE funding
The answer is it varies wildly from business to business and sector to sector.
Typically speaking, what we do see is that B2C businesses, which are very heavily marketing driven, either they can be a bit like fireworks in that they either succeed very, very quickly and they fly, or they fizzle out.
B2B businesses tend to be more of a longer grind, because you’ve got typically speaking larger amounts of money at play. They’re typically selling at a high price point and the sales cycles are hence longer, because corporations take time before they actually invest tens of thousands or hundreds of thousands of dollars in a product.
So B2B businesses do tend to take longer to get going. But once they get going, because of the subscription driven nature of the business model, they tend to be very, very robust.
Is the IP analytics space niche?
The IP software and services space as a whole is actually not niche at all, it’s a ten billion plus marketplace. It’s a very, very big market. And corporations are spending a huge amount of money on filing and maintaining patents, and protecting the IP that they have. They have then invested the R&D budgets behind them even bigger than what they invest in the IP side as well.
So, it’s not a niche marketplace at all, it’s actually a very, very large key marketplace.
It’s only logical that we would actually find a huge interest in strategic patent intelligence, because what it is doing is unlocking our whole area of expertise at the press of a button that previously would have taken a team of people a couple of weeks, and a significant amount of money to produce a report that would have been of any use to a corporation.
On driving IP efficiency
I also don’t think it’s just about efficiency. I think it’s also about the ability to do things that simply were impossible before.
I mean, if we look at the creation of COVID vaccines and the way that people have used tools in order to look at drug repurposing, for instance, and pharma and Pharmacovigilance, all of those tools are pulling on huge sources of unstructured data, in order to be able to do things that simply weren’t possible before. So, it’s not just about saving money, it’s also about really creating new value.
Is IP ahead of the technology curve or behind?
I think parts of the IP world have been heavily behind the curve, and the legal sector in general has been generally behind the curves.
I think the corporations are pushing the legal sector, because they are the ones who actually are seeing the immediate benefits of being able to deploy technology. Whereas law firms are perhaps a little bit constrained by the desire to be able to print the invoice for the early bill, but I think that is changing.
And I think law firms are now starting to understand the value that technology brings to them as well.
The growing IP market and advice for securing funding
First of all, you’ve got to identify a problem that you’re solving. You’ve got to identify a product that people are going to not only want to buy but need to buy. And when they’ve bought it, they’ve got to keep on buying it. I think that’s absolutely critical.
What is the problem that you are solving with the technology that you are building? That is the first point, I think once you’ve then identified that, it’s about getting out into the marketplace and selling it and getting that growth driving the business forward.
Founders continually strive with having frankly enough capital behind them to deploy, to be able to grow the business as fast as they wish to grow it, and investors are always looking for the evidence that makes it worthwhile to make those investments.
I think what businesses need to be doing is providing evidence to investors to enable them to make investments.
What does the future hold?
I think it’s really, really exciting. We’re in the very, very early stages to the foothills of really understanding how we can get into and use unstructured data.
This really wasn’t something that anyone could do 10 years ago, even five years ago. And this is a huge industrial revolution that’s taking place. And I don’t know what the developments will be in the next 10/15/20 years, but all I can tell you is they will be very, very exciting, and they will be transformative.
On the topic of increasing interest in intangibles from investors
They’ve always been interested in intangibles, I don’t think that changes, I just think their ability to understand them is actually increasing.
If you’re looking at a business, which is principally driven off intangible value, your question is then what is that intangible value? Is it the brand? Is it the trademark? Is it the know how of the business? And that has always been key to value.
Julian’s key takeaway
My key takeaway for you would be that this is a really exciting time. And we’re in a really exciting place where the opportunities for growth are legion.
It’s about the ability to use unstructured data to create new insights across not just patent departments, but also reaching up into R&D and reaching across into financial services. The growth that can be generated out of those areas is enormous, both for companies like Cipher, but also frankly for the operators within those industries.
Nigel’s key takeaway
As CEO of Cipher, which uses machine learning to deliver automation and efficiency for patent owners, it’s easy to think of yourself as special, as too niche to be exciting for VC/ MP investors. The good news comes from three directions.
First, there are advisors such as Julian and his team at Houlahan Lokey that really understand the sector.
Secondly, that automation to improve access to complex and unstructured datasets is mainstream and a well recognised business model and very attractive to investors, especially when it harnesses advances in new approaches enabled by AI and machine learning.
Thirdly, there have been a significant number of transactions in recent times in the intellectual property sector, the vast majority of which have performed very well, which in turn encourages other investors to take a closer look.