Video: 10 Minute IT Jams -The top 5 intangible asset risks

Intangible assets are now the backbone of modern businesses. But as their value skyrockets, so do the risks for companies who fail to understand, secure, and defend these invisible assets.

That is the stark warning from Paul Adams, chief executive of EverEdge, an international consultancy specialising in intangible assets such as data, software code, brands and regulatory approvals. Adams spoke to Tim and It Jams this week, mapping out the top five risks to what he calls a company's "most important assets" - the ones you cannot drop on your foot.

"EverEdge is an intangible asset specialist. We like to say we work with all the assets inside of the business that you can't drop on your foot," Adams explained. "Those are things like data, confidential information, brands, trade secrets, relationships, regulatory approvals, and product designs. Those kind of things."

Based in New Zealand but advising clients across the globe, EverEdge has worked with more than 2,000 companies during its 14-year history, ranging from startups to Fortune 100 giants. Adams said that in today's economy, intangibles are now "over 90%" of corporate value, compared to just 17% as recently as 1975.

"That's where virtually all of your company's growth is likely to be coming from," Adams noted. "Most businesses actually have a lot of intangible value – even manufacturing firms, who would say they don't. Tech companies, of course, are completely intangible in character."

But while businesses often focus on their tangible property – buildings, vehicles, machinery – they can be dangerously naïve or neglectful with their growing pile of intangibles. Adams outlined five fundamental risks that catch companies unawares, sometimes with catastrophic consequences.

The first, Adams said, is that "most companies leak like a sieve". Key intangible assets often leave by the front or back door, via customers, suppliers or employees. The result can be "competitive edge erosion, margin pressure and material value loss… you end up like a hamster on the innovation wheel, trying to innovate and stay ahead of your competitors when you're constantly losing value", he warned.

Adams recounted one incident from his consulting career: a company outsourced software development to an external supplier, only to see its entire codebase copied and shipped to a new competitor offshore. "What they'd done is given them our most valuable asset – our entire codebase… it represented tens of thousands of person years of engineering effort. That supplier grabbed majority market share and cost us over $150 million."

The second risk is ownership – or rather, the lack of it. "Eight of the ten companies we see cannot even prove they own their intangible assets," Adams said. Since intangible assets are hard to inventory and not listed on balance sheets, confusion and disputes are common, particularly after restructures or joint ventures.

One fintech start-up, raising $36 million at a $120 million valuation, crashed after it was unable to prove ownership of its core software code. "There were three founders, then one left, then various friends and family got involved. None of it was properly contracted or recorded," Adams said. "When investors asked them to prove they owned the code, they couldn't. The company failed."

The third major threat arises from open source software. Adams explained, "80% of all software code is now open source code. That's fine except for three issues: who owns the code; toxic licence terms; and it's a very common way of getting malicious code inside of an organisation."

He described how a private equity firm placed over $100 million into an industrial company whose true core asset was its software – but licensing issues and cyber liabilities with open source components were left unchecked. "The investment was not small… the company's core asset, the software, was actually compromised."

Risk number four concerns brands and trademarks. "Half the companies we see don't own their brand or have major brand infringement risks," Adams said. One fast-growing company spent $1.5 million a month on marketing but never secured its brand name in the United States, where a competitor already owned the word mark. "They spent over $36 million building a brand they fundamentally didn't own."

The final major risk is litigation – specifically, IP infringement lawsuits. Freedom to operate can evaporate as successful companies inevitably attract legal challenges. "There's been a huge growth in IP litigation in the US and EU in the last decade. Basically the more successful you become, the more likely you are to get sued," Adams said.

He related the cautionary tale of an award-winning hardware company that, after signing a deal with a large US customer, indemnified that customer for any and all IP infringement. Without understanding their real risk exposure, they found themselves forced to sell to a competitor for a third of their value, generating a $100 million loss for investors.

"These are the five key intangible asset risks we see every day with companies. If you can avoid those five, you've avoided most of your problems around intangible assets," Adams concluded.

The lesson is simple, he said: "Every asset has risks associated with it. And intangible assets are where most of the value – and risk – now exist for companies."