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It is more than just lack of private equity finance that stands between UK research excellence and commercial success
Commercialisation of research is hard. This is the common contention of politicians, professionals and the dreaded experts. It is to varying degrees true, though to convince ourselves that other countries have magically cracked it is to miss the mark; there is no secret alchemy going on elsewhere. The UK performs pretty well against most metrics when it comes to getting its ideas to market. But this doesn’t mean there aren’t inefficiencies in the system—including in funding spinouts and helping them grow into those rare, spectacular billion-dollar successes. Small, judicious interventions could do a lot to mitigate those challenges.
But lots of small changes are hard to mobilise. This is the contention of Mike Rees, former deputy CEO of Standard Chartered, in his independent advice to Research England on university-investor relations.
He spoke persuasively about this at the National Centre for Universities and Business’s Annual Lecture last week, drawing on the experiences of academics, tech transfer professionals, government and the investor community. What he found wasn’t as bleak as some imagine, depending on where they sit (and access to funds has a place dimension)—but challenges do exist.
These challenges have implications for universities, the investor community and policymakers if as many innovative spinouts as possible are to get their best chance to flourish. And the political parties will need to pay them attention to accomplish some of the vaunted policy goals around R&D they are proposing.
Rees demonstrated gaps in connecting universities, their ideas and propositions to private investors, as well as gaps in building the escalator of funding through public interventions. Newer parts of the system are taking time to settle down.
The Connecting Capability Fund and collectives such as SETsquared are enjoying success in pooling capacity, and ultimately getting teams into a position to pitch. And iCURE fills that early-stage role of helping academics have critical developmental conversations. But not everyone has a SETsquared or a Midlands Innovation Commercialisation of Research Accelerator—and building them to full flow and efficiency takes time.
Capital constraints
And capital constraints exist: the Woodford debacle has reduced the range of funds for illiquid assets such as spinout companies. Diversity in the market is also contracting as individual funds retrench into sectors and relationships they find reassuringly familiar. Equity investors used to finding opportunities in the Golden Triangle are continuing to do so, but often won’t look further afield. The top five investors have supported nearly 40 per cent of the deals made over the past two years.
As Rees contends, this situation can’t sustain the present demand for capital—let alone the levels that supporting increased R&D investment suggests. And tech transfer offices also need more support in scoping opportunities to engage investors.
So is there a lot to fix? Actually, the Rees message is more nuanced. There is a diversity to UK spinouts—the universities they are emerging from, the numbers in which they proliferate and the disciplines on which they focus. UK IP income compares favourably with that of the global players and is improving. And capital hasn’t dried up; over the past five years, there has been a 20 per cent increase in the number of funding deals done by spinouts and a 40 per cent increase in the aggregate amount raised.
So there isn’t a single huge barrier to planting these new seeds—at least not in terms of getting capital into spinouts. Rather, Rees suggests “getting a lot of small things right and having an impact in the aggregate”.
In an election cycle with abstract commitments to R&D spending being thrown around, this isn’t a big ticket item for a manifesto. Talk about turning the UK into a science powerhouse, speeding past South Korea and smashing with ease through 2.4 per cent (or 3 per cent) of GDP spent on research, and thoughts turn to the big, shiny immediacy of ambitious capital projects, voguish delivery instruments, and more abstract targets.
But as Rees points out, firms like ARM, Deepmind and Dark Trace are deep science companies spun out of universities addressing major societal and productivity challenges. They are evolving from quality capability in UK universities to accomplish their own increasingly big, shiny things.
That’s partly why this matters. But getting early stage capital into spinouts doesn’t just increase the survival chances of firms that go on to global superstardom. It can lift a host of firms and ideas to viability, then success. It can build in the finance readiness and fitness to help them prepare to access the next stage of growth capital. And in turn, employ cohorts of skilled, ambitious people in emergent sectors and disciplines. This is all good news for universities.
So what needs to be done, and critically, by whom?
Plugging the gaps
The government’s 2017 Patient Capital Review on how to support innovative firms to access finance needed to scale up, proposed some innovative deployments of available investable funds as early stage capital. This should be further explored by government, especially where gaps can be plugged in the market. That can build diversity and resilience in the system. And seed funding for knowledge intensive spinouts should be more readily available; Innovate programmes lead the way but a consistent expansion of provision is critical. And corporate venture capital can also play a key role in curating and nurturing ideas and opportunities to maturity, with all the support that suggests.
Similarly, more leadership—across and between universities—and clarity of vision in government, can all set a clearer sense of direction. But we also need to learn more about the availability of capital across the country. Ideas taking root away from major funds need to be given the opportunity to grow to the best of their potential. This will help everyone understand their options: which universities need to raise their own funds to leap over capital gaps? Which need to build profile with the right investor communities? And where can government pull policy levers to make it all easier?
These are questions governments of any stripe will need to return to in the coming months. Otherwise opportunities to harvest the innovation of a host of new ideas could be missed—all for want of planting a few seeds in the right places.
Andrew Basu-McGowan is innovation policy and place lead at the National Centre for Universities and Business