MOST universities start as teaching institutions, delivering graduates to society. After a number of years, the focus is shifted to a more research-oriented approach and, apart from graduates, research papers became an important output of the institution.
At the turn of the last century, innovation became an important strategy globally and patents were added to the list of institutional outputs. This makes universities more attractive to entrepreneurs. The next step is for universities to become the central players in a knowledge region, as is evident from developments around leading global universities in Leuven, Oxford, Cambridge, Boston and Finland and Silicon Valley, for example. Here, the boundaries between universities and broader society have become increasingly blurred, especially in relation to the creation of specific technology industries where the university plays an important role in the establishment of an entrepreneurial ecosystem.
Using Leuven as an example, it appears that the first step in the establishment of such a knowledge region is for a critical mass of spinout companies in a specific industry to emanate from universities in the region. This rapid startup creation attracts entrepreneurs from outside the university who set up shop among the new university spinouts. Venture capitalists and angel investors soon join the activity. Strong networks develop between the stakeholders in such a region, and soon large multinational companies set up a presence in the region to acquire new innovations and buy young technology companies.
While SA has a small but growing venture capital (VC) sector, the national innovation system still displays several structural deficiencies. One of the most significant of these, often overlooked, is the lack of early, competent and coherent support for new ventures in the research-supported high technology sector. In the four years ended in 2012, according to the South African Venture Capital Association’s 2012 VC Survey, only 4% of VC funding was allocated to seed funding of this nature. Over the past 10 years, this sector has attracted less than 2% of private VC investment in SA, despite world-class opportunity production and a consistent funding requirement for more than R500m from entrepreneurs, large universities and research councils, such as the Council for Scientific and Industrial Research and the Medical Research Council of SA.
Influenced also by the VC sector’s post-dotcom contraction, the government perceived a market failure and implemented public seed funding instruments around 2004. In 2008, the state embarked on the implementation of a “second generation” innovation policy, encapsulated in the Intellectual Property Rights from Publicly Financed Research and Development Act. Recipients of state research funding are now required by law to discover, report, protect and commercialise intellectual property, and every research institution in the country must have a technology transfer office to manage the expensive and often onerous legal requirements introduced by the act.
For more than a decade, state institutions such as the Innovation Fund and its successor, the Technology Innovation Agency, have kept entrepreneurs hopeful, but the government was essentially the only significant early stage investor. This often produced outcomes that were less than satisfactory, and the absence of private capital in seed stage technology investment in SA remains a fundamental deviation from international best practice. While research institutions have rapidly advanced their professionalism, the absence of skilled seed capital to move technical opportunities from the lab to the VC door remains a key weakness in the ecosystem.
Individual universities in SA lack the critical mass to maintain the deal flow to ensure the success of a seed fund vehicle such as the one envisaged (by way of illustration, the Oxford University research budget is approximately equal to the entire budget of all South African universities combined). There is thus a need for collaboration, which is the motivation behind the establishment of a proposed University Technology Fund.
To grow a new technology towards successful commercialisation, funding is required for activities during the different phases of technology development. Typically, university technology transfer offices do not have the funds to develop technologies to VC funding-readiness (or to the stage where an informed decision to mothball the technology can be made). This results in a large number of top technologies emanating from universities being forgotten in the fast-growing patent cemetery of the public sector innovation channel.
The Technology Innovation Agency Seed Fund plays an important role across the development and funding gap stages, but it is not nearly sufficient to fulfil the needs in this regard. The unfunded mandate causes the behaviour of technology transfer offices to become skewed away from optimal: they tend to start companies too early and then seek funding for them from sources with a mismatched risk profile (before they have been sufficiently derisked). As a result, investors are either unwilling to invest, or they compensate for the high risk by taking disproportionally large equity portions, which in turn disincentivises the entrepreneurs.
Ideally, the university offices need to be able to support the nurturing of intellectual property (IP) for a longer period. This implies that the development phase must stretch right across the funding gap. The ideal funding model should enable the offices to provide incremental or “drip funding” to a new technology as it is developed (preferably within a dedicated incubator). This will prevent premature company formation and ensure technologies are market-ready before leaving the safe university environment. The proposed model for the University Technology Fund will address many of these problems.
A number of local universities are working towards establishing the fund and aim to involve leading investors who can add value to the initiative. Ultimately, it will create a single funnel of the top innovations emanating from leading local universities towards a single fund with preferential rights to these technologies. This concept is not new — a growing number of universities abroad have either their own, or regional, technology funds to support development work. Examples include the various University Challenge Seed Funds at Oxford, Cambridge, Imperial College and University College of London (established via a UK Government initiative involving partnership with industry and philanthropic funders), the Strathclyde Innovation Fund and the UK’s IP Group Fund, as well as the Gemma Frisius Fund at the Catholic University of Leuven.
The proposed SA fund aims initially to combine the strengths of some of the top local universities to raise a single “umbrella” fund-of-funds, feeding into independent university funds. The fund will thus provide the platform for investors to invest in the technology output of, eventually, all universities. Secondly, the intention is not for the fund to become the sole source of funding for each university. Each university will be able to increase its participation in its dedicated institutional fund by raising further investment, for example via its own funds or from alumni who wish to support a particular university. Ultimately, the University Technology Fund will anchor universities as the engine rooms of innovation and the knowledge industry, and create national wealth and jobs in accordance with international developments in the higher education sector. It has the potential to change the entire entrepreneurship landscape of SA and be the innovation spring on the African continent.