University venture funds must reach beyond the golden triangle

If a researcher at Stanford University wants to create a spinout, all he or she needs to do is print the licence, scrunch it into a ball and chuck it out of the window to the rabid pack of entrepreneurs and venture capitalists waiting below.

In the UK, we do not have the same luxury.

If a UK university wants to develop an innovative ecosystem it has some heavy lifting to do. It has to build the infrastructure, construct well-resourced technology transfer and incubator initiatives, attract talent and established companies, work to build an entrepreneurial culture in its region and either find ways of luring investment or create its own fund to stimulate company growth.

Viewed in that light, University of Oxford’s production of 21 spinouts last year, compared with 10 in 2015, is no mean achievement. It is also no fluke. There are many reasons why Oxford’s innovative output is on the rise, but the major catalyst has been Oxford Sciences Innovation, a company launched in 2015 to manage a £590m ($795m) university venture fund aimed solely at the university’s spinouts.

These funds exist to solve a problem for universities. Many spinouts are based around technologies that require more time and resources to develop than a traditional startup born in the private sector. Consequently, regular venture capital, which expects to make a return in three to five years, may not be the right investment partner for a company looking at eight to 10 years to get to market.

Investors that take such a long-term strategy are known as patient capitalists. University venture funds have the same approach, but focus their investments on opportunities coming out of universities and typically have some university cash behind them.

Such funds began in the 1980s, at University of Chicago’s tech transfer office. Chicago’s venture fund parted ways from the institution in 1992, going on to become Arch Venture Partners, one of the largest science-focused funds in the US. While a small handful of US universities have followed Chicago’s experiment, most institutions there still largely opt to work with traditional venture capitalists rather than create their own funds.

The idea of university venture funds only really began to flourish when it reached British shores around the turn of the millennium. In 2000, the stockbroker Beeson Gregory signed a deal with University of Oxford giving the company equity in chemistry spinouts in return for investment in a new laboratory. The investor, now known as commercialisation firm IP Group, has grown internationally and is a backer of a number of university funds.

University venture funds in their current form were born in 2006, when Imperial College London took the bold step of floating its technology transfer office, Imperial Innovations, on Aim, London’s alternative investment market. The move helped the company, which this year rebranded as Touchstone Innovations, raise more than £300m to invest in tech firms emerging from Imperial. Touchstone has since broadened to become a venture fund for universities in the golden triangle of London and the southeast.

Manchester University launched its UMIP Premier Fund with £32m in 2008, followed by Cambridge Innovation Capital in 2013. The latter now has £125m under management; its supporters include Cambridge University and one its most successful spinouts, the chip manufacturer Arm.

This is all great for the golden triangle, but not so much for the many universities that, thanks to London-based investors’ reluctance to travel, lack the funding to turn their great ideas into companies. The next stage in the evolution of university venture funds in the UK has to be aiding smaller regional universities.

If these universities are looking to create their own funds, however, they will have to create their own ecosystems. This can be achieved only through collaboration.

There are already some examples. Epidarex Capital, a life sciences investor based in Edinburgh, is backed by three Scottish universities and King’s College London, as well as a number of corporates. In the south, the SetSquared partnership of Bristol, Bath, Surrey, Southampton and Exeter universities has created a collaborative incubator that has nurtured more than 1,000 companies, and they have collectively raised over £1bn. The partnership has become a beacon for the region’s angel and venture capital investors.

More than anything, it is critical for universities and government to realise that the only place Silicon Valley can exist is Silicon Valley. Each ecosystem has its own strengths and weaknesses requiring different methods of support, including university venture funds. However, without analysing these strengths and ensuring solid foundations for an ecosystem with a good research base and a pipeline of spinouts, there will be little for such a fund to invest in.

A version of this article first appeared in Research Fortnight. It has been republished with permission from the author.