I once chatted with a group of technology specialists and one of them asked an important question: “I know what intellectual property is, but what’s an intellectual asset?”
It seemed to me that this is the most important concept in the modern world of tech, for (presently invisible) assets are the missing link in creating a flourishing tech industry in Canada, or anywhere else for that matter.
I remarked that very few people know about assets, and even fewer know about the pathway to creating formal asset strength in non-traditional asset classes.
While the pathway is complex, it all starts very conventionally. Getting to intellectual (or intangible) assets means moving beyond the world of pure ideas, which are not assets, to the generation of something of commercial value. Intellectual property, while a broadly-used term these days is only the legal vessel, the institution form within which intangible value is formally contained.
In other words, applications with real value like software, are formally enclosed within IP or intellectual property institutions like copyright, patents, brands and trade secrets.
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The resulting intellectual capital, even if commercially valuable, is, however, not yet bankable. And it takes a brain surgeon to turn that capital into an intellectual asset capable of being leveraged or provide security for financing.
One of the gentlemen said to me, “well we don’t have any assets, we’re just a group of bright people who provide services.” I probed further, what are those services. “Well we set up complex data management systems. Where is the asset strength in that?”
Well, I said, you might be surprised, and I then told him the Microsoft story.
In 1980, IBM approached a tiny company called Microsoft to produce an O/S (operating system) for their (soon-to-be-released) new Personal Computer.
Until Microsoft came along, software development had been a pure service industry. Software developers would – essentially – work for hire. They’d write their code, produce one-off solutions to computer problems, get paid and go home none the wiser, or richer.
What Microsoft did all those decades ago was dump the ‘software-as-service’ model and change the rules of the game. It wrapped the O/S system software it produced (called PC-DOS) in a legal agreement and then licensed its use to IBM instead of selling it outright. In doing so, it maintained ownership of the underlying software, which could then be improved and adapted – as we all know, it eventually became Microsoft Windows. In addition it also obtained the rights to re-brand their O/S software as MS-DOS and license it to other customers as well.
To make a long story short, they converted a software development service contract, which was probably worth about a few hundred grand, into an asset worth hundreds of billions of dollars; Windows – despite its recent fall from grace – remains the world’s most valuable intangible asset.
So, I hold him, to build an asset in your service business you need to move beyond your human capital, the source of your ideas, and then focus on the asset qualities of the applications you generate that have commercial value.
But, he pointed out, that still doesn’t solve the financing problem.
He’s right.
Conventional finance, commercial banks and most conventional financiers don’t recognize intangible assets, can’t finance our most interesting technology ventures and are diverting our investment dollars from local markets to the Wall Street casino – where it disappears never to return.
It is time for a change. It is time for conventional banking institutions to enter the 21st century.
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.
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