Editorial: A patient investment idea worth keeping

“This one is for keeping,” is not a phrase often heard among heads of venture investment firms.

The remark by Russ Cummings, CEO of Imperial Innovations, a UK-listed university spinout investment company with a £549.5m ($678m) market capitalisation, indicates a sea change in thinking by private capital market investors.

Cummings, who spoke on a panel at the 121 Tech Investment London conference last week, was talking about companies in his portfolio, such as Featurespace, a data and computer science spinout from Cambridge University.

Victor Christou, CEO of Cambridge Innovation Capital (CIC), agreed on the panel that part of the problem of traditional 10-year venture capital funds was they were often forced to sell out of portfolio companies too early, which reduces value.

CIC was set up as a public limited company but in August this year decided against floating on a stock market in favour of raising £75m privately from investors including sovereign wealth fund Oman Investment Fund, tech company ARM (before its agreed purchase by Softbank), hedge fund Winton Ventures and mutual fund manager Woodford Investment Management.

When asked by Global University Venturing during the panel, Christou said: “Given volatility in public markets it was no surprise [CIC raised money privately rather than floating.] Balance sheet investors do not have to sell to prove returns or return money to LPs [limited partners, the investors in VC funds].”

This model points more to the style of investing developed by listed conglomerates such as Berkshire Hathaway and successful corporate venturerslike South Africa-based media group Naspers, which owns around 33% of China-based peer Tencent, having acquired the stake for $34m at the start of the last decade and retaining it since. Tencent’s latest market cap is about $245bn.

However, investors do require a return. Public investors look for a rising share price to show the value delivered by the underlying portfolio company, and potentially dividends or share buybacks.

Cummings said: “It is up to us to demonstrate the quality [in our portfolio] as well as have equity analysts and cash realisations.”

The London Stock Exchange (LSE) last week also hosted its first university intellectual property (IP) commercialisation investor forum, with insurer and fund manager Legal & General (L&G) expected to find ways to start investing more in academic spinouts.

In a prepared statement, Nigel Wilson, CEO of L&G, which has £746bn under management, said: “Spinning out research and development from our universities and turning this innovation into the companies of the future, is paramount if the UK is to improve productivity and deliver economic growth.

“Legal & General is investing £15bn in our great towns and cities. We are partnering with universities on research and development, and lending to SMEs [small- and medium-sized enterprises]. The UK is a world leader in startups, we need to invest to make them successful scale-ups.”

Since 2014, 13 university spinouts have joined LSE’s markets raising £2.5bn and today they have an aggregate market value of £4.3bn.

IP Group (formerly IP2IPO) was the first IP commercialisation company to join LSE, floating on AIM in 2003, before Imperial Innovations and other forms of so-called patient capital.

In a guest comment in news provider Guardian ahead of the LSE event, Chris Silva, CEO of Allied Minds, a US-focused peer to IP Group, said: “I have lost count of the times I’ve been asked why a US-centric company like Allied Minds has staked its future to listing on the London Stock Exchange, rather than Nasdaq or the NYSE.

“Why do I, as CEO of a Boston-based company which looks to commercialise the most exciting discoveries spinning out of leading American universities and government institutions shuttle across the Atlantic to tell our story to British and other European investors?

“What do we get out of being a FTSE250 company when we could trade on Nasdaq, the market so many regard as the natural venue for the biggest beasts of disruptive technology?

“For Allied Minds, the answer is that we chose London because it is largely UK investors who understand our model.

“Indeed the case for our London listing in June 2014 was overwhelming because our biggest shareholders, such as Woodford Investment Management and Invesco Perpetual, were already UK based…we are not the only US-based IP commercialisation company listed on the LSE. We have been joined by PureTech Health. More will follow.” 

Global University Venturing (GUV) will next year be publishing a report prepared by Gregg Bayes-Brown, its former editor who is now an officer at Oxford University Innovation* (formerly Isis Innovation) the tech transfer unit for Oxford University, based on research he showed at this year’s Symposium.

The report is expected to form part of a discussion at our London Symposium on May 23-24, 2017, in partnership with fund manager HLD Partners and China’s Tsinghua University.

Simon Cook, the Canadian CEO who took his UK-based VC firm, Draper Esprit, public in the summer on London and Dublin Stock Exchanges in a £102m initial public offering (IPO), said by email: “Patient capital (listed VCs, mutual funds, etc) have quietly become the largest investors, and LPs are a small part of the capital base now. 

“Some of this is due to tech IPOs going much later stage, leaving pre-IPO rounds as a growth area for funds and many are investing not through LPs. Many investors do not want to commit 10+ years in illiquid structures but need to access growth.”

However, Cummings said on his panel that despite the £3bn of capital raised by these patient capital investors over the past two to three years, this was still only about half to a third of what was required to fund early-stage entrepreneurs in the UK(see here for Imperial’s guest comment on patient capital in Global Corporate Venturing).

Ultimately, for that gap to close the value delivered by the entrepreneurs has to be found by investors of whatever flavour.

Anne Glover, CEO of VC firm Amadeus Capital Partners and the third member of the panel, said the UK was behind the US in number of venture-backed tech exits, with 135 in the past few years but most achieved at less than $250m in value.

Christou pointed to the crucial differentiator in delivering these returns in future: brainpower.

He said: “The great democratisation of technology has been the fall in the price of computers. So, not capital but brainpower-driven activities [will be important in the future] because a good education system trains people to apply knowledge to specialist areas.

“Artificial intelligence and machine learning will soon be strange not to be used in all businesses, so then brainpower is key, which requires high-level education at universities.”

Glover added: “You could see universities writ large as centres for business activity not just education,” and Cummings added that it was a “golden era for UK science, with its funding ringfenced by the government
for many years”.

However, when questioned by GUV about whether such universities’ venturing units were lacking ambition in their own ambitions to invest beyond the UK – Imperial Innovations set up an India operation in 2007 – Cummings said it was “hard enough to do here [in the UK].

“It is not just about capital and process but having access to managerial talent. You have to be close to a country to know co-investors and the corporate buyers.”

This points to a potentially interesting dilemma. While entrepreneurs are increasingly looking for investors that can bring more than just fungible capital, in particular those that can help them expand internationally, many venture investors are increasingly inward-looking at their local region.

This is a crucial appeal behind CapitalG (formerly known as Google Capital), Naspers and other corporate venture capitalists (CVCs) investing in India, China and elsewhere to help businesses expand beyond borders.

Even in a world where Donald Trump, with his skepticism for existing trade deals, is US President-elect, it looks as if CVCs might be some of the relatively few motivated investors in a globalised innovation capital ecosystem, and hence a target for governments, entrepreneurs and co-investors wanting to attract them to a region.

A workshop at the Global Corporate Venturing and Innovation Summit in California in January 2017 will include Nigeria’s Office for ICT Innovation and Entrepreneurship (OIIE), Russian Venture Company, Brazil’s BNDES and Apex-Brasil agencies, Business Development Bank of Canada, UK’s British Business Bank and Department for International Trade, United Nations Office for Project Services, Dutch Ministry of Economic Affairs and Nederlands Investerings Agentschap, Germany’s Bavarian US Offices for Economic Development, the European Venture Fund Investors Network (EVFIN) and European Fund for Strategic Investments (EFSI), and the US’s state and department investment leaders.     

*Editor note: The original article incorrectly had Gregg Bayes-Brown moving to Oxford Science Innovation, which is the university’s patient capital firm, rather than to Oxford University Innovation.