GUV Summit Keynote

The idea of collaboration was formalised early on at last year’s Global University Venturing Summit by a keynote speech from Shelley Harrison, a senior adviser at Collar Capital and executive-in-residence at New York University. Harrison works as part of a team looking to answer the call by former mayor Michael Bloomberg of how New York City can position itself as a world capital of science and technology while helping the economy. Harrison’s answer? For NYC to reinvent itself. His keynote set the tone for discussion about last year’s theme of innovation through disruption.

But this year, as well as inviting Shelley back as a star speaker, he’ll be on next, we have taken on his core point that reinvention is possible through partnership. It is the theme that will run through the next two days’ discussions, awards and networking expertly brought to life by editor Gregg Bayes Brown.

Gregg will talk tomorrow and analyse Global University Venturing’s trends for 2014, draw on its recent data and examine his exclusive rankings for what makes an innovative university and whether we are looking at the right things?

This will provide the insights for how this industry is developing and what best practices people will take away. I, however, will tell a story. And, like all good stories, it promises a happy ending for the good guys.

Once upon a time, nearly 15 years ago, a professor wanted a new laboratory. He had done good research for the university and he had been made head of its chemistry department. His research had even piqued the interest of commercial folks who valued his spin-out at about £450m in its heyday. Alas, the university didn’t have £60m to invest in a new lab for him. Undeterred, he chatted to third parties to see if they would give him the money. One, a chess whizz, had a nifty idea for how a collaboration might work: perhaps he could pay for part of the lab in return for part of the rights the university would take in any spin-outs over the next few years years.

Both agreed. And so, after a handful of calls in an afternoon, investment bank Beeson Gregory found £20m to give to Graham Richards for a new chemistry research lab (CRL) at the University of Oxford. In return, what is now known as IP Group took the rights for 50% of the university’s stake in spin-outs or licensing revenues for the 15 years to next November.

A happy marriage indeed. The university has earned more than £100m ($150m) from these spin-outs, while IP Group has reaped even more – the advantages in following-on an investment to maintain stakes in companies.

One of these follow-on opportunities was Oxford Nanopore, which is now valued at about £600m, or nearly $1bn, in this summer’s latest round.

The brilliant scientist behind Oxford Nanopore was Dr Hagan Bayley, professor of chemical biology in the department of chemistry at University of Oxford.

When chatting by email with him on Friday about this topic, Dr Bayley said: “For me, the [new laboratory] building was a very important factor. While I was being recruited, it was a hard-hat site, but obviously impressive.

“Over the [past] 10 years, it has proven to be an excellent place to work; it is both a delightful space and at the same time could hardly be bettered as a facility for experimental science. Remember, it is just as important to retain top people as well as attract them, and I think the CRL has worked in this way too.”

Money, therefore and as ever, is a commodity that allows other things to happen.

But the story is unfinished. To look at the next chapters being written we need to ask why things happened the way they did.

And as “why?” is always the hardest question to ask, we’ll start there. Why did the university not have £60m for a new lab – it didn’t pay a penny, Graham said?

To most entrepreneurs and financiers the use of OPM (other people’s money) is, of course, smart business indeed. Use your name to attract the money and keep the right to earn profits from any fruits from the investment; it is the way venture capitalists (VC) work or smart conglomerates, such as Richard Branson’s Virgin Group.

But it is rarely argued that academia has been a smart business.

A glance at Oxford’s 1993/94 annual report shows quite a discussion on the plant collection, including a doubling of the bamboo collection, and moaning about research funding caps.

Then, a LONG way down, the penultimate point, is a page indicating a few million loss on £240m income, plus having £247m in long-term investments to provide income and as assets.

Now, however, the university’s most recent financial statement is easy to find, well laid out and pretty detailed – just like any other reasonably large corporate entity turning over about £1bn per year and making a slight profit over expenditure.

But while the numbers are bigger – the university has doubled in turnover broadly every decade since the early 1990s at a compound annual growth rate of about 7.4% versus its 2.3% over its 900 year history – the sources of this revenue hasn’t changed too much. These sources include government funding, tuition fees, corporate R&D/licensing, some donations and publishing. Future growth, however, might be more tricky. Government funds, as it seems it has ever been, is under threat, there’s a cap on tuition fees and corporate R&D and licensing money is always tricky to negotiate – as George Buckley, ex-CEO of US industrials group 3M, will attest to this evening ahead of our awards.

But then there is investment income. Oxford’s £686m endowment provided nearly 3% of operating expenditure in 2012/13, even after the various colleges set up an aggregated one in 2008 to reap the advantages of scale and a professional team. Continued growth could offer far larger sums to the university budget.

This could be important. As Hagan Bayley by email and Tom Hockaday, managing director at Isis Innovation, the tech transfer office set up at Oxford in 1997 (who you will hear from later), on a call effectively said, money is important as it enables the infrastructure to attract, retain the best people and bring out from them their best work, which then creates a virtuous circle of bringing in more money to allow the institution to do more.

While Oxford has obviously grown and reaped the rewards for its excellent research and teaching, others have done so, too.

Over in the US during the past 20 years, Harvard and Stanford have been down similar paths to Oxford. Their early-1990s worries about budget deficits, led to tweaks to business models and soaring revenue growth.

But the source of that revenue mix has been slightly different. Harvard’s endowment now provides a third of its operating budget, while Stanford’s gave 21% of its $4.1bn turnover last year up from 9% in 1992.

Both endowments have grown dramatically at a 12.3% and 11.4% CAGR, respectively, since the early-1990s.

Harvard Management Company sat on $36.4bn while Stanford Management Company ran $21.4bn, according to their latest figures, up from $6bn in 1994 and $2bn in 1992, respectively. Their returns have come through heavy allocation to alternative investments, including private equity and venture capital.

Harvard University’s endowment management company fiscal 2014 returns showed a 15.4% gain that beat internal benchmarks and included a 32.8% return from venture capital.

Stanford University’s merged pool, which includes its
$21.4bn endowment, returned 17% in the past year, with US public and private equity markets, particularly venture capital, significant contributors, it said.

And this is where our story gets a little mistier as we hypothesise about the future and the role venturing could play for a far wider range of institutions beyond the experts at Oxford and others attending this Summit.

One of the great statistics you will hear tomorrow is from Simon Gibson, CEO at Wesley Clover, the investment vehicle created from the $10.8bn sale of Newbridge Networks to Nortel and the inspiration behind the de facto university Alacrity Foundation, is a line from investment bank Goldman Sachs about how the group of seven largest countries in the mid-20th century made up about 70% of global gross domestic product. By 2050, however, the G7 will make up just more than a third, with emerging economies the remaining 65%.

Naturally, as these economies grow – China alone is forecast by Goldman Sachs to be a $70 trillion economy by 2050 – their funding for universities will increase, even if Larry Summers is right in his analysis last November of the strength of regression to the mean in growth rates. Globalisation, therefore, will put pressure on the incumbents from the G7 to match peers from emerging economies rather than just offer a greater number of overseas students and companies wanting to study or work at them. They could also find further ways to collaborate even as technology developments brings its double-edged sword of potential opportunity and disruptive threat – it is notable that VCs by mid-August had already invested nearly $1bn in ed-tech startups and will likely pass 2012’s record for the full year, according to Thomson Reuters data.

This brings our story back to the heart of this summit and our three publications. I and most of my colleagues used to work within Dow Jones; I was editor of the private equity and venture capital section, with my team providing copy for the Wall Street Journal, Dow Jones Newswires and our various trade papers and other media outlets, such as BSkyB. We only covered the independent VC and buyout firms. But the innovation economy is larger than that and how the universities, governments and corporations collaborate and feed into and from the entrepreneurial ecosystem and other investors is increasingly important. (NB we are planning to launch a fourth title next year on Global Impact Venturing so any insights or help with that would be appreciated.)

But as globalisation and technological change increase the numbers of potential competitors it also offers more chances to form the partnerships that can provide a competitive edge and not just survival but further growth. All these organisations in this ecosystem are looking at what they can do best and any unique advantages they can bring as well as who can bring other assets to create a larger whole.

For universities, their core asset is the people passing through them as teachers and researchers as well as students. Finding ways to take stakes in their alumni and professors’ careers, either through donations or equity in their businesses, is a way to extend their business model not just to reaching more students or charging more to do so or for access to their research but to create an asset portfolio of assets generating outsized returns.

The model has yet to be fully developed of course. While a large endowment is a help, most universities struggle to reach critical mass for one. The vast majority of TTOs are loss-making while a similar proportion of VC firms fail to earn their profit fees (or carried interest).

But the direction of travel is clear.

Started in Canada and now also in Wales, Alacrity runs a seed fund and follow-on facility so its entrepreneurial graduates can take their ideas to market. Stanford has also started doing the same setting up last year an “unlimited budget” from its balance sheet to back startups from the independent StartX incubator on top of commitments to third-party VC funds through its endowment, while the Harvard-approved Experiment Fund, run by VC firm NEA from its School of Engineering and Applied Sciences campus, has this month disclosed in a regulatory filing that it has raised $73m for its second fund.

Naturally, Oxford has been at these direct investments a bit longer than these other examples. While it missed out on follow-on its initial holding in Hagan’s Oxford Nanopore, Isis spun its follow-on funding team, Oxford Spin-Out Equity Management, out back in 2008 and has larger stakes still in other winners from the chemistry lab, including Oxford Catalyst, as well as from other departments.

Compared to a 900-year history, even the near-80 years since the first VC firm, American Research and Development, was spawned from Harvard’s dean, Georges Doriot, is a blip in time, let alone the score of years universities have apparently taken an interest in backing their student and faculty’s actual work.

But while globalisation remains with relatively few controls on people and capital, this area offers universities a strategic edge broadly under their control. Even if they don’t know when or where the next Oxford Nanopores-type of success, let alone a Facebook out of Harvard, will come from, it is a pretty good bet it will come from someone’s studies and creative leap of imagination; just like any good story.

Thank you.