The term “patient capital” has been bouncing around with increasing frequency in the past couple of years – most recently with the flotation of venture capital firm Draper Esprit last month – but what is it and why has it gained such traction in the UK?
Patient capital means different things to different people, but in this article it refers to evergreen or open-ended funds that do not have a fixed investment period and focus on early-stage high-tech ideas emerging from academia – also known as university venture funds (UVFs). “Patient” does not imply slowness, though. These funds still drive investments with pace and ambition, but they are prepared to stay with their investments for longer.
Investors in academic startups take on high market and technical risk in exchange for very large potential rewards – but they also have to accept waiting a long time before these rewards manifest. In our own experience, and that of others, it may take eight to 17 years for a university invention to reach trade sale or initial public offering. The fact that providers of patient capital do not have to provide returns within a set window means they can take a longer-term view with their investments – an essential requirement for developing scientific academic startups.
Before patient capital funds started to appear, science-based technology startups tended to seek funding from venture capital and seed funds. VC funds are usually closed-ended, with a fixed investment window, for example 10 years. This means they often prefer to wait until a technology is more substantially validated before investing – typically series A at the earliest. Seed funds are prepared to invest much earlier than VC, but may lack the capital to follow their investment and avoid dilution. This means that they often will not invest in certain areas in which startups require a great deal of capital or have long cycle times – such as biotechnology, pharmaceuticals, aerospace and automotive.
Neither of these models worked particularly well for university technology startups, and this resulted in the so-called valley of death – universities found it hard to attract sufficient funding to validate their technology, meaning they could not progress towards commercialisation. This discouraged the formation of spinouts, as a funding route was not always clear.
The UK has also not yet matured to the point that super-angels (ultra-high-net-worth individual investors) or university endowment fund-backed UVFs have emerged to fill the early-stage funding gap. Perhaps because the UK has not yet developed the culture of philanthropic donations from alumni on the scale seen in the US in the way US-based Stanford backed StartX.
Patient capital is the result of the innovation of UK universities and their technology transfer offices finding a means to fill this gap. It seems to have come to prominence in the UK because of a number of factors, but primarily:
• The UK is home to a number of world-leading universities which generate many exciting technology innovations.
• The valley of death problem was recognised early, perhaps due to the sub-critical size of the UK VC community compared with the US, meaning investors needed to wait for propositions to be derisked before engaging.
• There are enlightened institutional investors who recognise the strength of UK universities and their intellectual property being an undervalued asset class.
Patient capital is a UK solution to supporting and funding the country’s many academic startups. There are now many active patient capital investors, including Imperial Innovations, IP Group, Mercia, Oxford Sciences Innovation, Cambridge Innovation Capital and others, with impressive combined resources and a clear focus on university-associated science and technology startups. These are complemented by other forms of evergreen fund such as corporate, charitable and impact venture funds that may be sector focused but share the same long-term approach to investing.
Should the venture capital community be worried? I would say no. VCs are a vital part of the UK high-tech funding ecosystem and will continue to invest alongside patient capital, sometimes leading syndicates and sometimes participating alongside rounds led by patient capital UVFs. The key is to ensure that VCs forge close relationships with patient capital UVFs and corporate venturers to ensure they get in early enough to see the best opportunities. At the Global Corporate Venturing Symposium in London in May, one prominent investor described series A rounds – the point in which VCs generally engage – as now being the “third” institutional round. It will be interesting to watch this tension – between riskier early engagement and maximum return from engaging later – play out over time. u
This article, first published online by Imperial Innovations, has been republished with the author’s permission