Patient Capital and University Venture Funds in the UK

The term ‘patient capital’ has been bouncing around with increasing frequency in the past couple of years – but what is it and why has it gained such traction in the UK?

Patient capital means different things to different people. In the context of this blog 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 or UVFs). The term 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 start-ups 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 8 to 17 years for a university invention to reach trade sale or IPO.

The fact that providers of patient capital don’t have to provide returns within a set window means that they can take a more long-term view with their investments – an essential requirement for developing scientific academic start-ups.

Before patient capital funds started to appear, science-based technology start-ups tended to seek funding from venture capital (VC) and seed funds. VC funds are usually closed-end, with a fixed investment window e.g. 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 won’t invest in certain areas in which start-ups require a great deal of capital or have long cycle times – such as biotechnology, pharmaceuticals, aerospace, automotive and so on.

Neither of these models worked particularly well for university technology start-ups, 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 spin-outs as a clear funding route forward 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 (such as StartX from Stanford) have emerged to fill the early stage funding gap (pre-Series A), perhaps because the UK has not yet developed the culture of philanthropic donations from alumni to the scale seen in the USA.

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:

1. The UK is home to a number of world-leading universities which generate many exciting technology innovations;

2. The ‘valley of death’ problem was recognised early, perhaps due to the subcritical size of the UK Venture Capital community (in comparison to the US) meaning that investors needed to wait for propositions to be de-risked before engaging’ and

3. Enlightened institutional investors who recognised the strength of UK universities and their IP being an undervalued asset class

Patient Capital is a UK solution to supporting and funding the country’s many academic start-ups. 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 start-ups. These are complemented by other forms of evergreen funds such as Corporate or Charitable Venture Funds that may be sector focused, but share the same long-term approach to investing with the Patient Capital UVF funds.

So should the venture capital community be worried?

I would say no. Venture Capital Funds (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 Venture Capital funds (CVCs) to ensure they can get in ‘early enough’ to see the best opportunities. At the recent Global Corporate Venturing conference in London [last] week, 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.

To help with a recent government commissioned review of tech transfer in the UK we have produced an overview of the rise of Patient Capital in the UK which can be downloaded below – if you have found this post interesting and want to learn more then please consider taking a look.

– This article first appeared on the blog of Imperial Innovations, where you can download the full paper as a PDF. The article has been republished here with permission.