Intellectual Property Rights-based Debt Financing to Startups: Need for a Changing Role of Indian Banks
Knowledge-based capital is increasingly becoming an important source of economic growth worldwide. As startups and innovation-driven enterprises are scaling up in the domestic economy, their requirement of access to capital and market to monetize their intellectual property (IP) for business growth and expansion has been growing. Given the unique position of the Indian economy as the third-largest startup hub globally (NASSCOM, 2020), and increased recognition of IP assets as growth engines, it is time for India to utilize its potential to accelerate inclusive growth.
Globally startups are considered nation-builders due to their contribution to the economy through multiple channels—employment, foreign capital, advanced technology, competitive products, technological innovations, wealth creation and equitable distribution. The contribution of intangible assets to a nation’s economic prosperity is presented in the OECD (2013) study, which argues that young firms with a large number of intangible assets have generated nearly 47% of all new jobs in OECD economies during 2001–2011.
Startups require capital for business setup, expanding operations, penetrating research and development spending. In addition, startups often need short to mid-term capital to supplement it during various funding stages. With limited tangible assets in their possession, startups find it difficult to succeed through the stringent credit appraisal process of commercial banks. They are forced to borrow at exorbitant rates from non-traditional lenders (Panda & Joy, 2019). The use of intellectual property rights (IPR) as collateral is an emerging business opportunity that may help capital-starved startups to fund their life and growth capital.
Today, India has a key position in knowledge capital development. Its knowledge economy continues to witness steady growth in recent years, aided by growing IPR awareness at the grassroots level and with innovations getting encouraged at schools, colleges, and universities. Being the third-largest startup hub and with increasing IP capital recognitions, India needs to utilize this unique position to be considered a knowledge and innovation-driven economy. The present study tries to identify the growth potential of the Indian economy based on these relatively unexplored growth agents, that is, IPR dominated startups. The structure of the study is as follows. The next section presents the emergence of startups and problems associated with their funding cycle. Subsequent sections cover the development of knowledge capital in India and reviews selective literature on IPR-based debt financing. The section that follows presents the institutional setup in India for IPR-based debt financing and suggests certain debt financing options that can possibly be explored by Indian banks. The last section outlines the constraints (including market imperfections) of IPR-based debt financing to startups in India, followed by a conclusion.
Debt financing to startups at present is mainly funded by VCs. IPR-based debt financing is an untapped source of financing for startups in India. As an untouched area till date, it offers tremendous scope for Indian banks to expand their balance sheet. As IPR-based debt financing requires a number of essential infrastructures, including creation, maintenance and proper valuation of IPRs, India needs to strengthen its IP valuation and protection mechanism. The role of the policy support for the smooth functioning of IP-based debt financing has become more urgent post-COVID-19 pandemic as the Indian startup sector has been severely affected by the pandemic.