Licent´s Jack Ross

Jack Ross is the President and founder of Licent Capital, LLC, a specialty finance company for intellectual property, headquartered in Jericho, N.Y. Previously, Mr. Ross spent fourteen years in investment banking. Mr. Ross was a pioneer in the development of the securitization market in the 1980s. He was a founding member and manager of Merrill Lynch´s industry leading Asset Backed Finance Group. He began his investment banking career as a member of Drexel Burnham Lambert´s Financial Institutions Group. Mr. Ross received an MBA from The Wharton School and a BS from the University of Buffalo. Prior to business school, Mr. Ross was a CPA at Laventhol & Horwath.

A New Kind of Financing for IP:
Licent´s Jack Ross

yet2.com: Tell us a little bit about Licent Capital and how the company was started.

JR: My personal background was working on Wall Street, where I spent 15 years. For the last 11 years, I worked for Merrill Lynch as head of the Asset-Backed Finance Group, which is their securitization practice. Securitization is the creation of securities primarily from loans such as auto loans, credit card loans, trade receivables and other types of loans that have a cash flow associated with them.

I left Merrill about two years ago when I decided to start up Licent Capital with my partner Sydney Karabel. Sydney and I looked at the field of technology and saw an opportunity to finance transacted intellectual property through securitization; we believed that this could be done for licensed technology which was supplying a steady cash flow to the licensor. And so, we´ve set up a lending structure by which we can take an asset, in this case a patent being licensed to a third party, and utilize the future cash flows from the license payments or royalties to secure current financing for the licensor.

yet2.com: What initially attracted you to the intellectual property space? What is it that makes this space particularly hot right now?

JR: The first thing that happened to really draw our attention was actually the David Bowie transaction from 1997, whereby the musician utilized future cash flow on his copyrights of his music to get up-front proceeds. That was really the first time this technology was applied to IP, and was really the first indication that IP could be used in such a way. That drew our attention, and when we did our due diligence on IP, we found that the amount of licensing activity in patents was growing tremendously. It has been estimated that over $100 billion in annual licensing royalties were paid in 1999, and this amount is expected to grow to over $200 billion by the end of this decade. Those figures are certainly eye-opening.

yet2.com: What sorts of organizations do you typically work with? Is there a specific type of licensing deal for which IP royalty financing is more appropriate?

JR: Well, we´re not a development stage lender; we work primarily with people who have a license in place where the technology is in fact used in a product currently marketed. Usually we require at least a year of royalty cash flows coming from the sales of products in the market, or minimums to be paid in the future.

In terms of the types of clients that we work with, it really runs the gamut. We work with a lot of corporations, mostly medium to small in size, research institutes, and universities, as well as individual inventors.

On the corporate side, where we thought our business model would be really much more focused on the small and medium-sized companies, we are starting to see some good interest from large companies or divisions of large companies as well. We have gotten some recent inquiries from larger companies, which has been a bit surprising, considering that we did not expect large companies to make use of IP royalty financing since they have numerous alternative sources in the broader marketplace. But what we´re seeing is that oftentimes, larger companies have not funded smaller divisions or start-up type environments that are in the business of licensing out technology. We´ve started to get inquiries from these divisions of larger companies that need immediate financing for some of the things they are trying to do to try to get their business off the ground.

As far as industries go, we don´t have any restrictions, either. Currently we have ongoing transactions in pharmaceuticals, medical devices, electronics, chemicals, and mechanical devices. We could potentially provide financing for almost anything that can be patented. We are also set up to do copyrights and trademarks, and use them as security, but the main current focus of the business is on patent licensing.

yet2.com: You mentioned three types of clients you work with: corporations, research institutes and universities, and independent inventors. Do these three types of organizations have different incentives leading them to undertake IP royalty financing?

JR: The corporations typically look into IP royalty financing as a way to obtain alternative sources of capital. We allow these companies to use the IP assets that their business is based on to generate capital. The alternative for corporations is equity financing, but that means giving up the upside in the business, and companies often don´t want to do that unless they are getting a tremendous valuation in the marketplace. Given some of the current market conditions, our alternative is certainly more attractive than equity financing, based on the valuations as they exist in today´s market. IP royalty financing allows companies to take the proceeds from licensing and immediately put them into more research, marketing, or other activities to build out their organization.

Research institutes can also use proceeds to raise capital to build new facilities and hire new researchers. One interesting point is that many of these organizations view our transactions as risk transfer, since this is a non-recourse instrument, meaning that if the royalties of the intellectual property fail to pay off the financing, we will not and cannot look at any other assets of the borrower to be repaid from. For example, if the royalties from a financed university license dry up for whatever reason, we cannot look to any other of the university´s assets for repayment. Research organizations are generally quite conservative and want be able to plan for the future. They don´t want such draconian events to alter their future cash flows. With IP royalty financing, they can be assured of future cash flows and able to reapply those as they see fit.

Individual inventors also benefit from risk transfer. Oftentimes their life´s work resides in their patents and they depend on the cash flows generated from those. Non-recourse financing can be a great benefit to these individuals by helping to insure cash flow. There is also a tax benefit -- if individuals finance with us using our methodology, they are getting a loan and don´t have to have to pay a gain on the proceeds. This is unlike the immediate taxes that would result from the sale of their patent or the royalty stream. Since our instrument is a financing, they don´t have to pay any tax on the gain, and the interest expense of the borrowing is tax-deductible in many circumstances as well, so these individuals are able to get a nice tax shelter this way.

yet2.com: You mention that IP royalty financing is appropriate in most industries. That being said, is there a particular industry where this type of financing option is more popular?

JR: Yes. The popularity of IP royalty financing seems directly related to where the majority of the licensing activity takes place. Areas where we´ve had a lot of success have been the pharmaceutical and biotech industries as well as the electronics arena. On the other hand, software is another area where there´s a lot of licensing activity, but does not fit very well in our business plan. Most times licenses in the software arena are short term and they really require the licensor to maintain the asset on an ongoing basis. We´re looking for situations where the technology has been created and transferred on a long-term basis.

yet2.com: Are there other companies that offer similar services?

JR: Not yet. What we´re doing at Licent Capital is really leading-edge finance. I hope, ultimately, that there will be competitors because that will mean that we´re successful. But to this point, we have not run into any other organization that focuses in this area. We have spoken at a number of conferences such as LES, AUTM, and several patent law organizations everyone reflects back to us that this is a new concept and one that they think will be successful.

yet2.com: Since this is essentially a new concept that you´re selling, how have you gone about introducing it to the marketplace?

JR: Our marketing is from two directions: It´s top-down, product awareness marketing, and it´s also talking directly to companies that have intellectual property. The challenge in the top-down marketing is that no one is helping us, meaning there are no industry competitors out there who are also educating potential customers about this product. We can´t walk in and say "You´ve heard of XYZ company -- well, we do it better or we do it cheaper." We really have to educate people from the ground up on the concept of IP financing. We´ve structured our marketing to educate, and have relied on the various means that you can to reach an industry, like conferences, seminars, the web, and meeting with the industry experts from law firms, accounting firms and consulting firms in the hope of passing the word this way. That´s the challenge -- all the marketing on our type of product has to be done by us. We´re still a small company and so it takes time to get the word out.

Second is finding and marketing to clients individually. Finding the clients is not easy. Many of the companies that we´d like to pursue are privately held, small companies, and getting to them is often difficult. IP Royalty financing is not a product you sell over the telephone in a five-minute conversation. This requires meetings, follow-up and a lot of financial education on what we´re doing. And frankly, many of our clients are not that sophisticated financially to be able to process what we´re saying, so it takes time. We´re a new company talking about a new concept. That just adds up to time.

It´s taken time to market our message to the industry, but we´re not swayed by the fact that it has taken longer than maybe I, with my Wall Street temperament, would have thought in the beginning. I´m certainly comfortable with the feedback we´ve gotten from the industry -- that we´re on to something here and that we have something that will ultimately be very attractive. It´s just a question of us finding our way.