University venturing in the wake of the WeWork saga

When faced with a setback, one must generally either address the root cause or else risk the prospect of a repeat. Procrastination can have dire consequences, and while reform is never easy, it is crucial to the development of every individual and organisation.

It is a principle that holds especially well for the world of venture capital. Here, staking bets is always a matter of applying discipline alongside the seasoned intuition of investors.
Indeed, many will have been given pause for thought by co-working space operator WeWork’s spectacular fall from grace.

WeWork’s wanton profligacy has cynics circling the industry, admonishing the likes of post-flotation ridehailing service Uber, which also leaks capital on heavily subsidised services for its customers.

Both are portfolio businesses of telecoms and internet conglomerate SoftBank’s Vision Fund, which reported an eyewatering operating loss of $8.9bn on the duo in October, according to deals database PitchBook.

Further concern was raised with reports the behemoth second Vision Fund had closed just $2bn of its initial $100bn target, indicating investors’ confidence may be waning.

Amidst the fallout, it would be unsurprising to see investors shift strategy. If so, there are certainly worse options than looking toward the world’s leading universities. Academia is renowned for technologies based on deep scientific research, leveraging government funding to generate IP validated through the rigorous framework of tech transfer.

And, as equity markets begin to tighten, there are signs of resilience for universities, although, admittedly, there have also been a handful of disasters.

In the UK, commercialisation firms Frontier IP and IP Group remain set on international expansion, pushing their university-centred models into pastures new in Portugal and Australasia respectively.

The former almost trebled its pre-tax profit during the 2018-19 period, taking its overall portfolio to 17 companies, including three founded in alliance with Portuguese universities.

Danger is evident elsewhere. Commercialisation firm Allied Minds is under siege from an activist investor, having lost not one but two chief executives in the space of just a few months.

The spinout-focused Woodford Patient Capital Trust only escaped by a thread the disaster enveloping its founder Neil Woodford, having erased more than 13% from its net asset value year-on-year as of October 2019.

Now under the helm of asset management firm Schroders, the vehicle must restore investor confidence and recover from breaching its borrowing limit late last year.

As a whole, the mixed picture is instructive. For spinouts to thrive against the evolving equity backdrop, universities must stress their ability to match science with commercial acumen, in many cases working closely alongside venture capitalist partners.

Applying scrutiny

With the passage of the Bayh-Dole Act in 1980, US universities gained presumptive ownership of government-funded research projects for the first time.

Where previously federal government retained first refusal on taxpayer-funded projects, academic schools were now expected to find commercial use for their inventions. Grants now came with a twin objective: of serving the public while also securing sustainable revenues for the parent institution.

As the model propagated beyond the US, clear benefits arose for venture capitalists – most obviously in healthcare, where the vast bulk of academic research dollars is concentrated.

Disease targets identified by faculty already aligned with the interests of investors in the pharmaceutical sector. With greater commercial impetus, these projects would become only more enticing to backers.

Four decades on, and the majority of academic spinouts and licences still come from the life sciences.

At Johns Hopkins University, for instance, the figure is roughly 80%, according to Liz Burger, senior director for strategic initiatives at Johns Hopkins Technology Ventures (JHTV), the institution’s tech transfer office.

Burger said: “Universities are under pressure to diversify their revenue streams. Johns Hopkins is known for its volume of federal research funding, and yet, like our peers, we are interested in capturing value from our technologies – and watching them evolve into meaningful products and services.”

With cash rewards on offer, tech transfer offices have worked to limit the risk profile of their assets, further increasing the pull for venture investors.

On the other hand, the number of spinouts has exponentially expanded – hitting 1,000 per year by 2015, from some 200 or so in the mid-1990s, according to the Milken Institute. Yet, not every project can be a blockbuster.

The onus is therefore on TTOs to apply sophisticated evaluation to new inventions, pitting them against real market scenarios.

At JHTV, Burger outlined a meticulous process. For one, faculty researchers are offered solid coaching, through programs that include a branch of the US government-funded National Science Foundation I-Corps accelerator.

Johns Hopkins investigators wishing to secure grant money must delineate clear commerciality, along with viable projections of financial and regulatory barriers.

“For us at JHTV, discipline starts with collecting reports of invention that help our team to understand first the differentiation of the science and second the commercial potential of the eventual product,” Burger said.

“The scientific merit is rarely a question at Johns Hopkins, but layering on an assessment of the commercial value proposition is more challenging. We spend a lot of time helping to tease that out as we plan the licensing strategy.”

Burger added that grant funding had allowed the TTO to concentrate more on technology development, increasing the value captured from licensing agreements as concepts are matured further toward proof-of-concept.

“We are fortunate to have raised translational funding from private sources and to have a set of State of Maryland programs that fund translational work,” she said. “The value of our inventions can increase significantly if licensed after additional proof-of-concept, prototyping studies.

“The funds are applied to very targeted development work and can help projects change course where needed or prove out in a way that increases the licensing position.”

Professionalism

Regardless of the strategic approach, tech transfer’s impact is now invariably a quantifiable matter, measured in terms of disclosures, licence agreements, patents and cash returns.

Throw in increasing professionalism in terms of TTO personnel – appointed on both academic and commercial credentials – and universities hold a strong hand in formulating investment proposals.

Through academia, VCs have access to some of the world’s greatest research, these days often spreading beyond the life sciences into any investment space that merits deep technological expertise.

Ilian Iliev, managing director of investment firm EMV Capital, which focuses on advanced business-to-business technologies, said university assets often offer greater distinctiveness and depth than other potential investments.

Although EMV Capital does not have a specific focus on spinouts, university ecosystems have nonetheless become integral to its deal flow.

The firm sealed four VC investments in academic-founded businesses during 2019 in the US and UK, including a follow-on investment in Imperial College London-founded underfloor insulation robotics spinout Q-Bot.

EMV Capital also committed capital to University of Edinburgh’s microelectromechanical communications equipment business Sofant Technologies, as well as University of California, Los Angeles spinouts Vortex Biosciences and Wanda Health, focused on liquid biopsy and predictive healthcare respectively.

Each of the spinouts could be in line for further funding sometime this year, Iliev said, adding: “For us it is important in order to ensure the businesses we invest in have genuinely something different in the market, and also that they are protectable with significant barriers to entry for competitors should the businesses be competitive.”

The rise of artificial intelligence has created even greater potential for universities, Iliev argued, opening up research from departments that were historically rare sources of tech transfer material.

Iliev cited the role of linguistic experts in training up natural language processing models as one example. Another is philosophy’s part in building ethical frameworks for the technology.

“It seems in the era of AI and machine learning that a lot of the more esoteric and isolated university departments from years gone by are now becoming relevant.

“These departments have now turned out to be a repository of extremely valuable knowledge and expertise that can be used by AI businesses as they build digitisation tools in various sectors.”

Challenges

Working with university IP brings its share of challenges for investors, so it is essential that university TTOs strike the right balance, obtaining a return-on-investment on one hand while also building up its entrepreneurial ecosystem.

Iliev argued institutions must resist the urge to overplay the value of their expanding IP pipelines, and instead prioritise the longer-term prestige of the innovation ecosystem.

“Many times, where we have been turned off from a university spinout proposal, it has been because the founders or the TTO had inflated expectations of the current value of the IP, and an underappreciation of the investment, time and resources it takes to commercialise a business.

“Not every company is a Facebook and not every compound is Viagra. It may be a difficult question, but it needs to be asked – what is more important, a slightly higher percentage of royalties, or having one more successful spinout that creates jobs and motivates researchers in the university’s ecosystem? What we see as the successful tech transfer ecosystems are the ones that take a more laissez-faire approach – they end up with a strong ecosystem of entrepreneurs, students and investors that like to stick around.”

Universities must be comfortable with investors, too. Adam Stoten, chief operating officer at Oxford University Innovation (OUI), the tech transfer office of University of Oxford, said a potential partner’s attitude to university IP could transform the trajectory of negotiations.

“It may be something as simple as whether the investor or licensor uses a lawyer with experience of university contracts,” Stoten remarked. “If they only have legal expertise in contracts between private sector organisations, then it is almost certainly going to be harder versus a lawyer used to contracts between universities and businesses.”

“Universities are large charitable bodies with the primary mission of research and teaching. When entering a licensing contract, for example, we must retain rights for academics to publish on the IP that we are licensing out. Publication is the lifeblood of the university.

“There are tried and tested approaches to delaying publication in order to protect any arising IP, but if a company comes in and just wants a blanket prohibition on publication, well that is not going to be possible.

“Negotiations tend to be harder where the investor or corporate is dealing with a university for the first time. They will simply not be used to the kind of things universities have to insist upon.”

When it comes to investor engagement, there is no sure-fire recipe for success. Many levers exist, but university venture funds (UVFs) may be one of the more attractive options for institutions with significant dealflow.

Armed with £600m ($789m), University of Oxford’s Oxford Sciences Innovation (OSI) has in many respects laid down a marker. Stoten argued the vehicle had complemented the university’s core commercialisation strategy, especially in helping to close the gap on well-connected peers in the US.

Stoten said: “There is a great alignment between ourselves and OSI to develop Oxford in terms of our policies and practices in a manner that increases the pull for investors around the world.”

“We have to accept there is a fairly limited pool of early-stage risk capital in the UK, and I think to really achieve our vision of a world-leading innovation ecosystem, we need to be attracting top-tier, well-resourced experts from the likes of Silicon Valley, Boston and continental Europe.”

“Off the back of OSI’s war chest – many other investors have taken that as a signal of the calibre of research going on in Oxford, and that has made it easier to bring in other investors.”
Mirroring the success of OSI is no small task for even the most prestigious of universities, so it seems reasonable for smaller ecosystems to pursue an alternative. One option available is the notion of regionalised UVFs linking the ecosystems of multiple institutions.

The idea has certainly taken a foothold in the UK, which has been constrained by a lack of investment infrastructure outside the so-called Golden Triangle, the hotbed containing academic researchers from Oxford, Cambridge and London.

Along England’s north-eastern frontier, some 300 miles from London, the regionalised Northern Accelerator is embarking upon a $125m fundraise dedicated to spinouts from the universities of Durham, Newcastle, Northumbria and Sunderland.

Since the initiative was established in 2016, it claims to have increased spinout generation from its affiliates by about five-fold, to hit 10 during the 2018-19 academic year.

Stoten said: “It would be great to see these [kinds of funds] making more rapid progress. Without a doubt the critical mass of the UK’s research and commercialisation output lies within the Golden Triangle, but I think if we can leverage our international standing to bring in more investors to the wider UK ecosystem, then that will be a great outcome.”

Joined up thinking

The regionalisation of university venture flows hints at the potential in joining up the tech transfer activities of multiple institutions.
As more universities enter the tech transfer arena – from Japan and eastern Europe to name just two territories – there is surely scope for further collaboration to lure investors.

Some countries, with France perhaps among the most notable, already possess highly integrated tech transfer networks, however institutions remain relatively isolated elsewhere in part due to competitive pressures.

Given the tremors emanating from scandals facing Woodford, WeWork and others, it could be beneficial to put rivalries to one side, in order to explore cooperation in more areas of mutual academic interest.