With the relentless barrage of bad news surrounding Brexit, it is perhaps not surprising to hear that the amount of equity finance invested in startups in the UK dropped in 2016.
A recent report from equity specialists Beauhurst showed that equity finance into startups declined by 12% in 2016 compared to 2015[i].
There is however, growing enthusiasm for investment into high-technology spinouts emerging from the UK’s leading universities.
Leading universities and research institutes have been spinning out high-technology companies based around technologies developed by their academics for decades now. Until recently however, the pace of spinouts formed from UK university research has been slow, mainly because academic research is often too early-stage to be directly commercialised, necessitating expensive further investment.
This is particularly the case in the Life Sciences sector, where developing a novel chemical entity into a marketed drug can take upwards of 10 years, and can easily cost over a billion dollars. Additionally, there is always a high chance of failure associated with commercialising any ground-breaking, but nascent technology.
Together these factors have meant it has historically been very difficult for universities to attract sufficient investment from venture capitalists and angel investors to capitalise on many of the promising discoveries, despite their blockbuster potential.
Despite these difficulties, the stellar success of select university spinouts has led some investors to shift their strategy so that they may better reap the massive potential benefits spinouts represent. For example, IP Group[ii] has invested in spinout companies from a range of UK universities since the early 2000s, and is now expanding into the US. Other investors such as renowned investor Neil Woodford, the Wellcome Trust’s investment arm Syncona, and US-based ARCH Venture Partners (itself tracing its roots back to Chicago University) have also invested in a range of university spinouts.
In the last few years, a new trend has emerged: the University Venture Fund (UVF). Set up specifically to develop technologies arising from university research and often linked to specific universities, UVFs exist to provide spinouts with the exact type of financial support they need to thrive.
The largest of these funds is Oxford Sciences Innovation (OSI)[iii], formed in 2015 with an initial investment of £350m, which expanded to £580m last year[iv]. OSI focuses solely on investing in early stage spinouts emerging from Oxford University.
The profound impact it has had on the number of spinouts emanating from Oxford has been transformative for our innovation ecosystem. Since OSI’s launch, Oxford University has more than doubled the number of spinouts it formed in 2016, increasing year-on-year from 10 to 21, with a five-fold increase in seed investment activity in the same period, rising from £9.5m in 2015 to £52.6m[v].
Over £30m of this came from OSI, illustrating the powerful stimulatory effect that the fund has had. This large influx of capital means that research, which would otherwise have languished in laboratories, is now benefiting from focused and substantial investments.
Other universities have attracted similar independent funds. University College London formed the UCL Technology fund in 2016 with £50m[vi]. Cambridge University formed Cambridge Innovation Capital (CIC) back in 2013 with £50m of capital.
The latter fund has since expanded to £75m with the addition of new investors, and has already invested £33m since its formation[vii]. The fund typically invests £2-5m, often immediately after a seed investment stage, though sometimes earlier. The fund is having a beacon effect, with an article in the FT claiming that the £33m invested by CIC has helped attract another £70m in co-investment from other investors iv, and the same has been seen in Oxford, because of OSI, where we have seen a quadrupling of investment from external sources in a single year.
One key aspect of these funds is that they take a long-term view and will back spinouts from seed to IPO, acknowledging that it may take many years for portfolio companies to grow in value sufficiently for them to seek an exit or IPO. Due to this, UVFs and funds like them have earned the moniker “Patient Capital” a concept described in more detail in an interesting article by Tony Hickson[viii], Head of Technology Transfer at Imperial Innovations.
Another factor behind the upsurge in funding available for commercialising university research, particularly in the biomedical space, is the need for global pharmaceutical companies to source new innovation to fill their drug pipelines. As mentioned, the development of biomedical technology is particularly expensive, with bridging the famous ‘valley of death’ – the gap between University research and a commercial product such as marketed drug – continuing to cause headaches for would be academic entrepreneurs.
Two funds have launched recently to address this: Apollo Therapeutics, a £40m fund formed by three large pharma companies (AstraZeneca, J&J, and GSK) and three leading Universities (Cambridge, UCL and Imperial College)[ix], and LAB282, a £13m drug discovery partnership between Oxford, OSI, and Evotec. While these funds do not invest in spinouts per se, they are helping to quickly develop potential projects into fully fledged technologies with a direct route to market, thanks to their industry partners.
UVFs are helping to rapidly develop university ideas into real world technologies, they are creating jobs and economic impact, and they are helping the UK maximise the benefits its world-leading research base can create. But crucially, through the accelerated evolution of university ideas, they are helping to change lives for the better, and drive forward human progress.
We are heading into an uncertain future. Yet, despite Brexit, these developments indicate that the historic trend of Britain doing great research, but failing to benefit from it, is finally ending. The creation of large investment funds linked to particular universities, along with investors willing to take a long-term view hopefully heralds a golden new age in our competitiveness in our increasingly technology-driven world.
