In our previous interviews we spoke about taxation of intangible assets, about new developments and trends in this area, pitfalls and abuses. Today I would like to talk to you about intangible assets themselves or rather about how they appear and what it all starts from.
This is a very interesting question: how an idea or an innovation turns into a product, a patent, a brand, a trademark, intellectual property or, broadly speaking, into an intangible asset.
In most cases the way from an idea to an intangible asset lies through start-ups, spins-off, or through independent work of individual researchers who patent or otherwise protect their inventions.
This latter case comes about less often, since it requires a lot of investment not only into the research process but also into the protection of the invention.
What is the difference between a start-up and a spin-off?
A start-up is a recently set up company (perhaps, not even a legal person yet) which is in the development stage and builds its business either on the basis of new innovative ideas, or on the basis of technologies that have just emerged or are being developed. Here we talk about young companies that need funds to come onto the market and bring their prototype to the stage of a finished product. A start-up can be found in any sphere of the market, not only an IT sphere, with which they are often associated. The most modern meaning and notion of a start-up is this or that venture project. In Russia, the results of the development stage or “raw products” are mistakenly called a start-up. It is correct to call a start-up a firm that develops and produces this product (or provides services).
What is then a spin-off?
A spin-off is one of development models of a start-up and, primarily, of a high tech start-up. It presupposes launching new projects by their spinning off the existing business that is quite solid.
It is important to note that the resource base for setting up a project is the ground of this or that university or maternal company, which provides not only premises for free rent, but also appropriate equipment and appliances, and materials necessary to develop a prototype or to conduct research or development works.
A spin-off company does not aim to set up a corporation or a fully-fledged business. The task of a spin-off project is to become separate and independent in all meanings: in terms of management, finance, and resources. And further on, this project, after becoming separate, may either become a start-up, which happens quite often, or be integrated either into the corporate private sector or the state sector by means of a simple market purchase, or on a contract basis finally become a structural element of a bigger, but related system of activities.
The use of this or that type of an innovative company or a model depends, in my opinion, on the sphere of activities. Start-ups are easier and more profitable to set up, for example, in IT, whereas in biotechnologies, being a high tech field, spin-off seems more adequate.
What happens to start-ups after their establishment? Who helps these guys with their innovative ideas but without funding to develop and come onto the market with a finished product and start generating profits?
It is much easier for spin-off companies to gain funding for their development, since they are a branch-off of an existing company or are receiving grants and subsidies from the state, by working in universities. As to start-ups, they have several options to develop and get funding.
To go through an incubator and/or an accelerator.
These are 2 business models, the main difference of which is the duration of support. Incubator supports start-ups at all the stages of their development: from the idea generation stage to the stage of mature business. Accelerators are for fast and effective targeted support, which can ensure the development of the project in the shortest time possible – from the prototype stage or MVP (minimal viable product) to a product with developed business processes.
Another difference also lies in the fact that one of the main functions of incubators is to provide startuppers with a work place and an office for rent or sublease, and also to maintain the technical state of that place. But it does not take any share of the project.
Accelerators usually host teams who are already legal persons (or who will become legal persons once they enter the acceleration programme) and, at least, have a prototype. Main interest for startuppers in accelerators is expert support and investment.
As far as I understand, start-ups are innovative companies that have invented a brand new thing and are trying to launch this novelty on the market. However, without any guarantee for success. Who will then risk and invest money in them?
Investing in such “black horses” turns out a most profitable thing… It is either business angels or venture investors who invest in start-ups.
The main difference between them follows from the fundamental definitions of these investor types: angels are wealthy people, as a rule, with business and/or management experience, who invest their own money. Venture investors are professional investors who represent venture firms and who invest money of a pool of institutional and private investors joined into a fund.
Business angels invest in companies that are, as a rule, at an earlier stage of their development. The amount of angels’ investment is from ten to several hundred thousand dollars, bigger investment is often a result of pooling together investment of several angels.
The investing amount of venture investors starts from several hundred thousand dollars and more often millions. The reason for such amounts is that funds of tens and hundreds million dollars are invested, as a rule, in 10-20 companies to keep the balance between diversification and manageability of investment, and the investment process for a venture investor does not change significantly when investing $500,000 or $5,000,000 and that is why small investment is less justified in terms of economy.
Business angels participate more often in the life of their portfolio companies than venture investors. For a businessman, who has recently set up his business, an experienced business angel can be an advisor on a range of issues, thus providing invaluable support to business.
Venture investors invest in better prepared teams, when there is less need for intensive support of business, and their interaction aims to minimize risks and accelerate the company development.
But on the whole, we should not oppose these groups of investors. They work with companies, that are, as a rule, at different stages of development, - practically not overlapping in terms of the size of investment and that is why they do not compete with each other. Thus, business people rarely face this dilemma of who to go to for funding. Venture investors often invest in companies, previously funded by business angels, since this interaction better prepares a company for getting venture capital.
Our company, IP Global Solutions, specializes in the management of intangible assets, and helps start-ups both to go through accelerators and find their investors, keeping in mind tax planning and optimization in the management of intangible assets at the start-up stage especially.