Article Title

Lending Innovations

Document Type

Article

Abstract

This article is the first to identify the disruption in tech lending by outlier commercial banks and to theorize the ways in which IP Venture Banking is fueling innovation both nationwide and globally. This disruptive model is a new beginning for both banks and startups on the path of borrowing and lending for innovation.

Part I identifies the four outlier banks-from among the six thousand total banks-that dare to venture into the innovation-intensive sectors for lending purposes and dominate the business model of lending for innovation. Based on extensive efforts to extract data from bank lending activities, Part I reveals the results and sorts through the empirical data.

Part II illuminates the complex geographical map of innovation served by IP Venture Banking in the United States by examining the industries that the outlier banks serve and the loci where the outlier banks operate. Part II details both the activities and influence outlier banks have spread to serve innovation centers worldwide.

Part III explores key characteristics of outlier banks in IP Venture Banking and the unique relationships that outlier banks have with their VC clients.

Part IV explains how warrants work, illustrating with concrete sample loan and warrant agreements that outlier banks have filed with the Securities Exchange Commission. Part IV also analyzes the costs and benefits with regard to warrants from the divergent perspectives of the startup borrowers and the outlier banks.

In anticipation of the downside of IP Venture Banking, Part V focuses on how outlier banks turn to secured transactions law for protection, accepting collateral in the form of intellectual property assets, such as patents, as a last resort in the event the startup heads for liquidation.

Contrary to what experts have professed about the importance of valuation of intellectual property in lending, Part VI asserts that IP Venture Banking renders valuation of intellectual property irrelevant. Due to both uncertainty and costs, outlier banks do not require valuation of intellectual property assets when determining whether to lend to a startup. Further, the outlier banks' reliance on the VCs for their intensive due diligence of the startup reduces both risks and costs.

The article concludes that banks have a crucial role in facilitating innovation by disrupting their own business model and embracing IP Venture Banking. Otherwise, banks will soon become relics of the past as they continue to adhere to old business models.

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