The IFI Interview: Lucas von Reuss, CEO and Co-Founder of Quant IP

Which is more important—quality or quantity? Conventional wisdom would favor quality, but at Quant IP, a Munich-based company dedicated to measuring innovation, one does not exist without the other; while quantity may not be everything within a patent portfolio, it has a lot to say about a company’s technology quality.

For our second edition of The IFI Interview, we chatted with Quant IP’s CEO Lucas von Reuss, whose patent technology company is built around the quality/quantity idea. At first glance, von Reuss does not seem like a typical patent executive. After all, he spent the first 12 years of his career as a financial journalist before turning to patents. But some of the finest innovations come from a pair of fresh eyes on a subject we think we know a lot about and showcasing it in a new way. Since 2018, von Reuss and his team have been getting to the bottom of how to bring patent data to financial markets in a way that helps professionals do a better job of allocating capital—a subject that von Reuss happens to know a lot about.

One way Quant IP does this is through their custom-tailored Competitive Technology Report.

Each report is packed with valuable proprietary research and rankings, using both real-time and predictive analytics—the latter being key to the financial industry, which relies on forward-looking information in order to make investments. Von Reuss gave us a peek at Quant IP’s Meta Platforms (formerly Facebook) analysis, which was eye-popping. One portion of the report traces the types of technology Meta patented over time. In 2019, a distinct shift occurred, indicating that the company was stockpiling the building blocks for the virtual and augmented reality of the future—the metaverse, as that future is called. “When they rebranded in 2021, it was just the last step of something they had been preparing for quite a while,” says von Reuss. “This is not just a marketing fad.”

So why do financial practitioners even need this kind of data? Can’t they simply read the financial statements? Financial statements tell only one part of the story. Analysis from Quant IP tells another—very crucial—part. Read on for von Reuss’ views on the significance of intangible asset growth, why patent information helps banks make better lending decisions, how technology analysis could have raised a red flag before the fall of payments firm Wirecard, and why Quant IP uses IFI as their data backbone. This interview has been edited for clarity and length.

IFI CLAIMS: How are financial professionals starting to use patent data in their decision making?

Von Reuss: The big picture is that intangible assets make up an ever-increasing part of the value creation process of companies. Everybody agrees on that. If that’s true, the companies that tend to lose the most if that value creation process is broken are banks. If you lend to a business because for the past ten years, you had a nice, sustainable business that you are willing to finance, and that model breaks and your loan turns sour, that is an important thing. So I’m always astonished by the fact that on the one hand, these banks lend to companies where the value creation depends 80 or 90 percent on IP, but they don’t make the effort to get a better view of the landscape of the composition of that IP as the true value creation of the company. They tend to still focus on the same output or results of that value creation—the financial results of the past years—which is a lagging indicator actually. I guess it has to do with access to the information in a format that you can actually work with and use. I hope that’s true because that’s what we are working on.

The number of companies relying on IP to secure their value creation is growing every year, and so it’s a no-brainer that in ten years, the kind of analysis that we do right now for banks will be standard. A decade from now, if you give out a significant loan to a technology-exposed company, you will be asked if you checked the patent portfolio. And if you say no, you’ll be asked why. It will be part of the due diligence.

Patents that you create yourself from your own innovation process don’t show up on your balance sheet. So that black hole of value creation gets ever bigger with time, as long as accounting standards don’t change. Everybody knows there is something there, but nobody tries to make sense of the black hole that is growing.

IFI CLAIMS: So it isn’t easy for banks to lend money based on the fact that companies are inventing exciting and innovative things.

Von Reuss: Bank credit to corporations is mainly based on financial history. In order to assess the creditworthiness of a company, banks rely on models that work with past financial performance of companies. And most of the most innovative companies are too young to produce this kind of financial history needed to fit into the models that banks use.

If you can show a certain trajectory of cash flow and revenue growth, you’re bankable. And if you can’t show that, you’re not bankable. It’s as simple as that. And there is conformity on that. If you are lending to larger companies where the rating of creditworthiness is not assigned by banks themselves but by credit rating agencies, those ratings basically use all the same data and all the same rules. If you look at the ratings between Moody’s, S&P, and Fitch, they are highly correlated. So everybody uses the same input and everybody comes to the same conclusion. And this is all based on financial data.

IFI CLAIMS: So what does a young, innovative company do?

Von Reuss: Very young companies will probably never be bankable. From an investment perspective, if you’re looking at the one who is deciding to give the company money to work with, either it’s a person who is giving the loan or it’s someone who is giving money for a stake in the company. Because there is a high probability of failure for very young companies, that risk/reward structure is not suited for credit or loans, but only for equity investors. But as companies grow older and build a reliable financial history, they become bankable. The goal with Quant IP’s offering for banks is to make that transition from nonbankable to bankable one or two years earlier than is possible right now with the current rules we have in the banking industry. So we are expanding the pool of companies that banks can lend to because we make up for some of the lack of financial history with more knowledge about the competitive advantage of a company from a technology perspective.

IFI CLAIMS: Are there other use cases for these analytics?

Von Reuss: Another use case is larger established companies that are finding themselves in a technology transition period. And that, of course, is the really big pool of companies that banks are already lending to. If you look at European and Japanese financial markets, most of the loans that banks originate are going through sectors like chemicals, machinery, cars, car suppliers. Those companies have been around for decades. But now with digitalization and other forces, their markets changed rapidly. The most obvious one is cars and the transition toward electric vehicles. In ten years, between ten and 30 percent of car suppliers will be out of business because they will not be able to make that transition. They were able to supply the internal combustion engine with key parts that are important, but it is hard to make that component in an electric vehicle. Every bank wants to know which companies are able to make the transition and find a new business model in the world of electric vehicles. So the other significant part of use cases comes from older, established companies in industries that are going through a rapid technology transition. I think that here especially, how to evaluate the capabilities of the company to actually make that transition is hard to do without alternative sources of information. Patent information gives you a good lead because it’s a forward-looking metric. If the company tells you that it’s invested significantly in building a sustainable battery business and is moving away from internal combustion engines, but you see no patent activity in that area and they’re still filing for patents in the internal combustion engine arena, then the bank can spot the problem.

IFI CLAIMS: How exactly does Quant IP’s patent analytics help banks understand those risks better?

Von Reuss: What we can spot are weak competitive positions in a company in terms of technology and red flags for deteriorating technological developments. It’s one thing to spot oddities. But banks are lending to these companies with five to ten-year loans and will have a continuous loan origination business with them. Banks are very interested in monitoring and understanding how that competitiveness is evolving over time. Is it increasing? Is it decreasing? We quantify the technology competitiveness through the years by having a high-quality map of patent information on the corporate tree level. Combining it with such proprietary analytics as our quality scores, and then being able to benchmark a company versus its peers, we can then give a bank a clear picture of the competitiveness of a company from a perspective that is very hard for a bank to grasp with traditional risk metrics.

IFI CLAIMS: What feedback have you been getting from your bank customers?

Von Reuss: That they have a tool to validate information they receive from business owners and CEOs because that’s who they mostly rely on for information about a strategy shift. It’s very hard to validate that if you’re a banker and have no specific industry knowledge and no insight into the company as to what is exactly happening. And that objective patent information gives you that tool to actually validate the kind of conversations you have with management.

It also gives our bank customers a better picture of how competitive a market actually is. If you talk to young companies, they will tell you there is no competition. Actually you don’t know because most of those fields are so new and evolving and dynamic that it’s very hard for a bank to assess whether this is true. If you are using patent information to look for similar companies with similar technologies, you get a good picture. If you instantly find 1,000 similar companies or if you find only 50 similar companies, that tells you a lot about competition dynamics.

For smaller companies, it’s interesting to have a tool at hand that gives you a personal risk indicator for the value creators in the company. Quant IP can give banks information about which are the most important inventors for a company, and then the bank can check with the company and ask if they are still on board and if they are incentivized to stick with the company. If a team is responsible for 75% of all inventions of the last five years, this team is very important. When banks can identify the key persons, they feel safer if there are sustainable relationships with the company and they aren’t just employees who can leave at any moment.

Banks also need to see if a company has a sound innovation process. We derive that from the structure of the patent portfolio. Let’s say you have two companies. Both have produced 20 inventions over the course of five years. One company has produced ten, then in three years, they produce nothing, and then produce another ten. And the other company has produced consistently the same amount every year. You can assume the second company has a sound innovation process and that there is directed product-relevant innovation going on. The first company seems to produce innovations for whatever purposes, but not for building a sound patent portfolio in the long run.

IFI CLAIMS: The collapse of Wirecard, as you know, was a huge story in Germany where you are based, and made plenty of news internationally. Could any of your analytics have identified any red flags there?

Von Reuss: The short answer is yes, definitely. And the long answer is, there are different levels of red flags, and Wirecard is a good example of all of them. I want to be very careful not to argue that a look at patents would have shown that Wirecard was a fraud case. That’s definitely not true. The level of fraud committed is extensive and cannot be explained by looking at patent information. With all the questions around acquisitions they made and financial metrics they used, one key question that was also raised was, What is Wirecard doing technology-wise? Or, How can they explain why they grow faster than everybody else? They referred to a better technology most of the time to explain that. And most of the analysts and investors were lazy enough to give up with that explanation.

It seems to be a very complex thing Wirecard did, so people assumed there would be a good technology behind it. Otherwise nobody would grow that fast. If you have an outstanding technology, a lot of companies would love to have that and would try to secure that with the help of patents, but Wirecard did not do that. In the last five years before going bankrupt, Wirecard filed for one patent application. But they didn’t get the grant of the application. One invention or patent application is not a sound technology strategy. You could argue that maybe they have a good technology but it’s hard to patent it in that area. But if you see other competitors doing something similar are willing and able to patent their technologies and innovations, then you have a problem because it stops making sense at all—if you boast about your technology and all your competitors file like crazy and you don’t file at all, or the one invention you file is not successful, then there is something odd happening here.

And if someone had asked us, Can the technology explain the success story of Wirecard up to its downfall? We would have said, No, at no point in the company’s history could technology explain the success of Wirecard up to the point where the questions arose about the fraud cases. If you have zero patents and everybody from Paypal to Klarna has a patent strategy, and one company turns out to be a big fraud case, it’s pretty clear.

IFI CLAIMS: Why does Quant IP use IFI patent data?

Von Reuss: First of all, coverage. We wanted to have truly global coverage right from the start as a company in order to service clients with information about companies of all sizes and geographies. Secondly, we were looking for high quality in terms of structure of the data. We didn’t want to have to restructure the data once it arrived in our service. The work that IFI does in terms of collecting from different data structures and then putting that in a uniform structure makes it super easy for us to work with. We also saw that the level of service was high and that every question that we had was answered quickly. That was important to us because as soon as we get a question from our clients, we need to answer quickly. And if we find that we don’t have the answers but have to refer to our data provider, then speed is of utmost importance. Those are the three key areas for us. That’s why we chose IFI.