Can the accounting of intangible assets help to tell the story and future of a digital tech company?

Spring 2017, software platform company disrupting a traditional high yield industry through the combination of user generated content, B2B - C2C tech platform and a shared-economy worldwide scalable business model in the mist of B-round with the promise of IPO in 8 to 12 months.

Nearly no revenues, yet with customer contracts recently signed pending to be deployed. A company to consider as an investment after proper DD, interview with management and key investors. Great investment memo describing the ProblemSolutionTeam, BizModel, Market, etc.. yet virtually blank balance sheet.

After several weeks one of the prospected investors drops the case as its attention is gripped by another investment opportunity with a shorter time to transaction and less “complex”.

Lessons learned:

  1. Digital and tech companies should rely more on intangible assets accounting to tell their story and describe their future due to their relative lack of physical assets: The long-term value of a digital company might exist in the uniqueness of its technical solution, its first mover advantage leading to a recognisable trademark, a business model, or in the number of users that they have acquired. On the opposite site, tangible assets traditionally incorporated in a valuation might be foes: the value of the account receivable can be volatile in the case of transaction based business models, inventory might not exist or dependant on interaction among users, etc….
  2. Intangible assets are more than patents, trademarks and goodwill: “...scientific or technical knowledge, design and implementation of new processes or systems, licences, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights”. (http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias38_en.pdf)
  3. Digital assets = intangible assets: There is a difficulty for digital companies to link certain investments e.g. user acquisition, or user value (e.g. the estimated average Lifetime Value of an Amazon Prime Member is over 3,000USD @ 15% Contribution Margin), SW development, etc... with the future economic value generated by the investment, intangible assets should describe what have been done with the money and which are the digital resources that the company owns or controls with the expectation that it will provide future benefit, defining the grounds for future investment plans and understanding for which assets generate return on investment, and which don’t.
  4. Detailed (and no, detailed does not mean to book everything under goodwill or R&D expense capitalisation) reporting of intangible assets facilitates the valuation of your digital company: it doesn’t make you better or worse, it gives a clearer picture of your digital enterprise, and enable benchmarking, trust build up and transparency.

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