Spinout valley of death
This time last year, most of the conversations I had with spinout folk in the UK were about greedy universities; specifically, institutions taking too big an equity stake in their spinouts and putting off investors.
That doesn’t seem to come up as much anymore. The message I’m hearing at the moment is we’re on the way to fixing that (are we, actually? Or do we still have a long way to go?), and there are bigger fish to fry. Now, the biggest hurdle many people tell me is a valley of death created by a lack of proof-of-concept (PoC) funding — the money needed to test and demonstrate an idea and prove it can be taken to market (read: get it ready for venture capital funding).
“It’s about that gap from what pops out at the end of a research grant and what is needed to be in a position to commercialise the IP,” Steven Schooling, managing director of UCL Business (University College London’s tech transfer office), told me recently.
The new Labour government has made some moves in this area. In chancellor Rachel Reeves’s first Budget on Wednesday, she announced the Treasury would provide at least £40m in proof-of-concept funding over the next five years. That was a relief for many in the sector — before the Budget some told me they were worried the £20m pledged for that by the last government might be cut.
But is it enough? Some thought the £20m, which was to be spread over three years, fell short of what was needed; £40m over five isn’t that much more.
“£40m is just the start and clearly more can be done,” says Moray Wright, the CEO of Parkwalk Advisors, a prominent spinout investor.
“Encouragingly, the chancellor also pulled levers to help crowd in private sector capital, including extending the Enterprise Investment Scheme (EIS) back in September.
“I’d caution that capital alone won’t transform our universities into unicorn nurseries. We need researchers to become scientific entrepreneurs and to build commercial teams in the UK.”
Schooling adds: “It’s good to see the government has listened to calls from the tech transfer sector and understood the importance of supporting early-stage technologies from our universities to get them investment-ready.
“However, while this is an uplift from the £20m pledged [but not distributed] by the previous government, it remains significantly lower than that invested by our international competitors in the EU and the US.”
Who actually needs support?
The question of how to allocate the money needs to be answered.
The numbers differ between the golden triangle of Oxford, Cambridge and London and the rest of the UK. The top four universities by number of spinouts are University of Oxford, University of Cambridge, Imperial College London and UCL, according to data from Beauhurst and the Royal Academy of Engineering. Although other places in the country are building up their spinout populations, those four institutions have seemingly well-oiled spinout machines.
UCL has put aside £7.5m in its budget over three years for PoC and seed funding, which has come from returns from UCLB’s previous investments into successful spinout companies — since 2015 the institution has also agreed to allocate 5-10% of the UCL Technology Fund for PoC and other seed investments. Less than 5% of the funding Cambridge gets is put toward proof of concept, O'Brien said.
“PoC funding is most needed where local ecosystems are suboptimal, distance to major investment hubs is significant, commercialisation resources are limited and institutions have no existing proof of concept mechanisms,” Ana Avaliani, director of enterprise at the Royal Academy of Engineering, told me in an email.
That said, “a case can undoubtedly be made for more proof of concept funding for Oxford/Cambridge/London, as these [places] need to maintain the global competitiveness they have achieved. So perhaps the focus in that instance should be on addressing specific gaps, such as deploying PoC for frontier tech commercialisation and supporting cross-disciplinary innovation,” Avaliani added.
Clustering university investment committees
It’s also not just about having more money. O’Brien thinks pressure needs to be put on the structures universities have in place to manage it. “This should not be money that is just spent by the universities to appease academics who are screaming loudest for a bit more,” he said.
“It needs to be managed with an investment committee (IC) mindset […] that’s the difference between it being a grant and an investment. We need it to be an investment.”
Cambridge has set up an IC of 12 people, including two faculty members who are serial entrepreneurs, people from industry, VCs and angel investors. The idea came from visits to Harvard and after talks with people at KU Leuven in Belgium, which O’Brien said have set up similar things.
The tech transfer office (TTO) manages the money but every investment goes through the IC. An investment case is taken to them for each project, and it’s all milestone-driven. “If you don’t hit the milestone you don’t get the rest of the money,” O’Brien said.
It’s easier for TTOs to run in that way if they’re well established, but harder if they don’t have tonnes of experience commercialising research. O’Brien told me that instead of smaller universities struggling to make good investment decisions because they don’t have the scale, he thinks we should have five or six clusters of regional universities working together around the country.
“The money is pre-approved and the ICs have the authority to make the decisions. In theory you could go from a great idea to a funded project within a quarter,” O’Brien said. “The governance around this needs as much attention as the funding side of it. I would not be supporting PoC funding that gets drifted out to institutions that don’t have the scale to deal with it properly.”
Resources are already being grouped across the UK, in the form of a growing number of regional investment vehicles focused on spinouts.
Northern Gritstone, in the north of England, has a tight focus on companies coming out of the universities of Leeds, Manchester and Sheffield. Investors based in London also tell me that knowing Northern Gritstone has capital to deploy has made them look more closely at the north of England for dealflow. Elsewhere Midlands Mindforge — a partnership of eight universities in the Midlands — is aiming to raise up to £250m for spinout investments. More recently, five universities in northeast England committed £12.5m to a £22.5m fund to invest in spinouts from the partner universities.
Readers, I want to hear from you. What do you think about the £40m put forward by the government for proof of concept funding? Is the gap in PoC money the big hurdle at the moment, or are there other things on your mind? And would a clustering model around the UK for PoC work?
— Tom Nugent, newsletter editor
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