This submission is written by Future Planet Capital in partnership with Global University Venturing. Having raised $300m for British innovation from the world’s largest investors, Future Planet Capital is a key contributor to the innovation ecosystem. Global University Venturing writes as the world’s leading source of accurate and authoritative research on the detail and diversity of innovation funding models. Indeed, they are regarded as unrivalled experts and regularly hold global conferences attended by the world’s foremost investors.
The international investors perspective and British innovation
The government highlights the lack of patient capital available to young and innovative companies. Acknowledging this truth, at Future Planet Capital, we have in the past two years received commitments of $300m from sovereign wealth funds and institutional investors in Asia. We offer the opinion that if Britain is going to give our innovation the investment it deserves, we must think globally. Britain has innovation in spades, and there is, in fact, a large appetite for investment at home and abroad.
Connectivity is the key issue that the Future Planet Fund was designed to solve. The world’s first global top university fund, Future Planet connects the world’s largest institutional investors, sovereign wealth and pension funds, to centres of innovation.
Flying the flag
Connecting with innovation can be difficult for large investors, as Nick Greenwood, Future Planet’s Cornerstone Investor and Fund Manager of the Royal Berkshire Pension Fund, highlights in his submission to this review. Indeed, the world of start-ups is convoluted and ever-changing. On the contrary, sovereign wealth and pension funds tend not to operate at a tempo compatible with the accelerating entrepreneurial world, nor is it worth their while to invest small amounts that barely move their investment needle, but are susceptible to a high percentage of career limiting failures.
Increasing the accessibility of the sector to these investors is the most intuitive path for the government to take. The appetite for innovation investment is certainly there, just last year the Public Investment Fund of Saudi Arabia invested $3.6bn in Uber and, in collaboration with Japan’s SoftBank, created a $100bn technology venture capital fund.
We urge the government to follow two approaches to address this dissonance. The first is in the creation of marketable, intermediary investment vehicles such as the British Innovation Fund, from which capital can be deployed as and when it is needed. Second, and most important, is marketing. We need to connect Britain not just to patient capital but also international capital. Britain must shy away from insularity. We are home to the best universities and primary research in the world. Investing in the accompanying ecosystem is a clear long-term option for international investors seeking portfolio diversity and access to world-class innovation, not least in a world of low public market returns.
Transferring technology
Capital – or a lack thereof – is not the only issue. As the Treasury has suggested, the UK has struggled to replicate the array of billion-dollar unicorns produced by the US. Scaling innovation from seed to success requires not only capital but grit, efficiency and ambition. At Future Planet we are seeing far greater size and valuation achieved in California and China – Britain needs to raise its game.
The UK consistently ranks top in the world for innovation and yet, when it comes to IP applications and exports, we do not make the top 10. We are unable to propel and protect the technology that would allow our companies to up-scale from the outset. Look no further than the Cambridge-born Solexa. Acquired by Illumina in 2007, their technology now forms the basis of a $30bn company. Again, DeepMind, the brainchild of Demis Hassabis and Mustafa Suleyman at UCL, is the world’s pre-eminent artificial intelligence company, yet were acquired by Google after four years.
We are an integral part of the global value chain, but fail to capture our share of that value. Our technology is instrumental to the world’s largest companies, shaping our very existence, yet Britain is left behind.
As leaders in the world of university venturing, we see part of the issue as a product of the UK’s method for technology transfer. Britain’s model for supplying public funding to universities rewards a high output of primary research. While this drives us to the top of university ranking tables, it fails to encourage the commercialisation of IP. The government has an important role in setting structures which allow academics and faculties to personally profit from commercialisation.
This leads on to the second area for improvement – university equity models. As the consultation considers, the 50% stakes typically taken by British universities in their spinouts may deter and demotivate entrepreneurship. However, as referenced in GUV’s research, lower equity may be untenable, especially for smaller institutions.
Oxford Sciences Innovation (OSI) has one of the best models in the UK. Its agreement with Oxford entitles it to 50% of the university’s stake in return for a 5% equity stake in OSI, allowing founders to exploit the $600m in investments attracted from the likes of Google and Tencent, and maintaining the university’s interest.
An incremental but fundamental improvement to this model would be for universities to take smaller but perpetual non-diluting stakes. In the US, the figure is typically below 10%, incentivising entrepreneurship, while maintaining a sizeable exit stake for universities – Stanford maintained over 10% in Google up to their IPO in 2004.
Believing in Britain
Britain has the talent, the technology and the money to compete with our US counterparts. All that is missing is the execution. Consider just some of our accomplishments. In 1977, Frederick Sanger sequenced the first complete genome, 12 years later Sir Timothy Berners-Lee invented the world wide web. Before them, Brits invented the jet engine, the fridge and antibiotics.
British innovation continues to shape our very existence. We are world leaders in genetics, machine learning and big data. If handled correctly, we are on the cusp of a British technological renaissance. The industrial revolution in Britain led the world and opened up huge prosperity for itself and the rest of society. Now the internet, DNA and big data offer the potential for a knowledge revolution, capable of producing even greater wealth and prosperity for the UK and the world.
The work you are doing in the Patient Capital Review is incredibly important for Britain as a whole. The government’s most effective contribution will not be money but providing the voice that communicates and the infrastructure that protects the plethora of innovation we have to offer. We urge the Treasury to be bold in its approach, and look to the future – it is surely bright for Britain.
The Global University Venturing perspective
Your review of the UK’s need for more patient capital has been well received with its greater focus on helping companies scale up to at least 250 employees through access to more long-term finance. To many experienced investors and entrepreneurs, the review is broadly spot on.
However, while the consultation is focusing on this provision of capital and the needs of scaling up, it is important to consider how these entrepreneurs start and the infrastructure they can use more broadly to turn their ideas into global champions. In this context, the role of universities as source and provider of longer-term support is important.
As the House of Commons select committee inquiry into IP management and technology transfer said: “It is, therefore, surprising that the terms of reference for the government’s forthcoming Patient Capital Review do not mention universities, nor is there any indication that they will have a place on the industry panel that will support the review.
“The government’s Patient Capital Review must engage with the university sector and learn from those universities that have developed patient capital schemes.”
The review counted 45 spinout deals in 2011 and an average of 85 a year from 2014 to 2016, with a total of £370m ($490m) invested in 2011 to £340m a year in 2014, 2015 and 2016. The activity is mostly concentrated in London and the southeast, the east of England and the southwest – with other regions across the UK struggling to attract capital.
The figures quoted from the unnamed source, however, do not line up with data collected by trade paper Global University Venturing, which shows that, between 2013 and 2016, spinouts from University of Oxford alone raised almost $2.25bn between them, closely followed by University of Cambridge at just over $2bn.
Spinouts are also just the tip of the iceberg in terms of university engagement with entrepreneurialism. Licensing and proof-of-concept (PoC) are hugely important areas for helping turning the best minds’ ideas into useful innovations and inventions that be commercialised.
David Allen, former head of the first PoC in the US at the University of Colorado more than 20 years ago, proposed the creation of a national network of PoC centres across the US based on the highly successful University of Colorado model. US President Barack Obama followed up and this system and its results could be studied and the UK consider how to leverage tech commercialisation expertise established locally in regional universities and then linking this into a national network, perhaps under the Praxis-Unico trade body, focused on created success stories and new unicorns emerging from across the country.
More broadly, a focus on spinouts can miss the role students, post-graduates and faculty can play in working for entrepreneurial businesses and passing on their research and ideas and seeing the theory work in practice to shape their later academic studies. Encouraging these links beyond just a focus on counting spinouts and scaling them up through patient capital can be helpful for national productivity but also helpful for one of the UK’s largest export industries – the universities themselves.
As Imperial College London professor David Gann wrote last month about artificial intelligence: “Through their own brilliant discoveries, universities have sown the seeds of their own disruption.”
Universities have as much to gain from understanding the ideas and work that their student and faculty develop as they have in seeing these ideas becoming commercially successful or developed into a scaled-up enterprise.
In this a context, giving the universities encouragement that this is regarded in their funding as strategically important remains helpful. But they also need flexibility to find and iterate on their approach with spinouts and startups, such as Imperial’s founder’s choice to retain 95% equity or more equal balance, seems to allow institutions from within the so-called golden triangle of Oxford, Cambridge and London to the regions in the UK beyond to find what works and is helpful to them.
Even well-provided universities, such as Oxford, in its submission think it should have the flexibility to have much higher than 5% equity because it is public money that has gone to the academics to give them the time and facilities.
However, universities increasingly recognise they could perhaps, in the words of Tom Hockaday, founder of Technology Transfer Innovation, afford to be as generous as they can be to those developing the ideas at their institutions.
Providing the patient capital will then enable those entrepreneurs with the talent and vision to scale up to do so.
Signed:
Douglas Hansen-Luke, executive chairman, Future Planet Capital
Christine Gulbranson, SVP Innovation, University of California, and Global University Venturing Leadership Society advisory chairman
Kendrick White, Leadership Society member, formerly UNN Technology Commercialisation Centre
Gregg Bayes-Brown, Leadership Society member, Oxford University Innovation
James Mawson, Global University Venturing Leadership Society founder
Other society members in a private capacity