Select Committee on Science and Technology Appendices to the Minutes of Evidence


APPENDIX 73

Memorandum submitted by the University of Warwick Science Park

INTRODUCTION

  The University of Warwick Science Park is mainly concerned with assisting the start up and development of technology based SMEs. This includes assistance with technology transfer with the University of Warwick and a range of measures designed to improve the growth prospects of our client SMEs. The comments that follow are based on 15 years of experience in working in this field. We are less concerned with the relationships of larger companies and the way that they interact with the University.

TECHNOLOGY BASED SMES

  Much of the character of the new technology based firms (NTBFs) have been researched by Westhead and Storey in the HMSO document "An Assessment of Firms located on and off Science Parks in the United Kingdom". We generally concur with the results of this extensive survey and it provides a good background to the remarks which follow.

  There is a misconception amongst many that NTBFs conduct high levels of R&D. This is generally not true. A few do, but these are the minority. For most NTBFs in the early stages of development up to say £0.5 million turnover, their regular commitment to R&D may be a few per cent of turnover. This may mean R&D budgets of £25-100,000 pa. Most of this they will expect to carry out in-house in order to maintain control over development time scales. Thus, the amount of resource available for funding extra mural R&D at a University or Government Research Laboratory tends to be modest in terms of the type of budgets that Universities are interested in.

  NTBFs at Warwick and throughout the UK may be classed into two types:

    —  Product led businesses (both hardware and standard software products)

    —  Knowledge or service led businesses (including bespoke software development).

  The latter category outnumbers the former by about 3:1.

  It is the product led businesses which have the greatest need for R&D to ensure that their products compete in today's fast changing markets. By contrast, the knowledge led businesses rely more on simply "keeping abreast" of latest thinking and technology, understanding what suppliers are providing in the market place and helping customers to make the most appropriate choice of technology for their circumstances. They rarely push their customers towards "state of the art" technical solutions, which can frequently cause teething problems. Rather they steer clients towards new but proven technology. This group takes a professional interest in research results relevant to their field, but they rely on the product companies to translate research into useful products, systems or services. Thus while this latter group of companies are important to the diffusion of technology their role in the processes of innovation tends to be far less.

  Concentrating on the product based NTBF we find that their decisions about new product or process development may arise in one of three main ways:

    (1)  Innovation led market pull ideas stemming usually from the entrepreneur/company founder. These ideas arise from identifying how two or more previously unconnected matters can lead to solving a problem for industrial customers or otherwise better meeting a market need.

    (2)  "Me too" market pull technologies, where an entrepreneur has experience of a particular industry, perceives that there are high margins being made and believes that he can serve the same market from a lower overhead operational base and hence return a good profit after charging a lower price. He believes the price margin will win market share. In addition the product he brings to the market usually has several features which differentiates it from competition in the market place. These entrepreneurs often fail to perceive the full complexity and cost of gaining a significant market share.

    (3)  "Technology push", in which a technologically minded entrepreneur perceives a possible novel use (or uses) for a technical idea he has been working on. He sets up a company to exploit this idea and finds that he has to "create" the market. Although this last category is often perceived as the typical model for UK NTBFs, they are in fact a minority. However, it is quite a common model for academic entrepreneurs.

  Once established with their first product developed as a result of one of the above mechanisms, NTBFs need to continue to innovate by developing successive generations of their technology to keep up with rapid changes in the market place. Many product based NTBFs fail to maintain the necessary level of investment in R&D largely because they do not generate profits sufficiently quickly or in sufficient quantity. The fate for these businesses is either to be taken over (which is a common occurrence) or a lingering failure.

  While most NTBFs come into existence with a radically new product (apart from the "me too" type) relatively few NTBFs consider developing other radically different products or services. Rather as mentioned above they are more likely to:

    —  Develop successive generations with steadily improving performance and customer value;

    —  Develop or licence or otherwise acquire complementary products.

  Given this background it is clear that the typical NTBF is not going to have a heavy interaction with Universities or Government Research laboratories. Equally clearly the greatest potential for mutual collaboration to improve the flow of innovation into NTBFs lies with the product orientated business. However, even here where the need (and willingness) to cooperate is greatest there are problems.

  By far the greatest of these problems is the disparity between time scales and perceptions of government labs and universities and the research and development needs of the "product" NTBF. The researcher from the 5 star University department is driven by the RAE (research assessment exercise) to deliver a minimum of two papers per year in certain high rated scientific journals. While his/her research time scales are often long (measured in years) the need to generate papers is inexorable which means that even "interesting" short term diversions to help an NTBF with a problem often have to be shunned, particularly as the NTBF will usually not want any results of their collaboration to be published. Furthermore, the NTBF often has tight deadlines for its R&D. The market is moving all the time and factors such as cash-flow militate against a leisurely approach to new product development. Therefore the NTBF is more likely to be thinking in terms of weeks or months as opposed to the academic's years.

  If the above analysis were the complete story then clearly there would be no interactions between universities and NTBFs, whereas of course, there are examples of good relations between NTBFs and universities. The problem is that the number of relations involving NTBFs which lead to real innovation and the exploitation of the UK's university intellectual property base is much smaller than it could be. The statistics show that too many of the relationships which do exist are casual and occasional.

  The following are some thoughts as to the types of initiatives that might be considered which could lead to a greater level of productive interaction.

SUGGESTIONS FOR INITIATIVES

Create specialist intermediary organisations

  The UK has excellent research at the level of the University and Government research labs and UK NTBFs are not intrinsically poor at innovating. What is missing is the means of generating good and effective communication between the two sides. In Germany there are three levels of intermediary organisation which assist the process of the translation of research to exploitation. They are:

    —  Max Planck Institute. This is at the "R" end of the R&D spectrum and interfaces better with larger corporate R&D functions;

    —  Fraunhoffer Institute;

    —  Steinbeiss Institutes set up largely to serve the R&D needs of the large number of small and medium sized enterprises, most of which cannot afford to maintain an ongoing R&D function. Steinbeiss operations are subsidised and permit collaborative R&D, technical training and access to knowledge relevant to solving technical problems of the nature typically found in commercial operations targeted at the SME.

  It may not be appropriate for the UK to follow the German model precisely, but it may be appropriate to see if existing university and public sector research organisations could take on this "intermediary " role. This would mean going well beyond the existing industrial liaison office and contract research activities. Perhaps within a region several universities could "club" together to provide this type of service.

Change the Research Assessment Exercise (RAE)

  The dysfunctional behaviour of the academic community towards the commercialisation of research is definitely getting worse as the RAE drives Universities to greater concentration on the outputs which generate a good research score. While University research might well have a bias towards the long term "blue sky" type of activity for entirely logical and justifiable reasons, it seems wrong that this should be at the expense of opportunities to exploit research results for the benefit of the UK economy.

  Therefore we would argue that the RAE measurable outputs might be adjusted to take account of other factors such as:

    —  Patents generated;

    —  Unpublished/unpublishable (because of commercial agreement) but otherwise excellent R&D;

    —  Transferred research results to Industry;

    —  "Spin out" company formation from research.

Create More Spinout Companies

  The UK has a very poor record for spin out companies from its University sector and the results from Government research labs is almost certainly even worse. Traditionally spin outs are seen as companies formed by academics based on their research. Research has shown that few of these companies are particularly successful, but where such a company employs full time professional management this picture tends to change and the companies are more successful.

  The advantage of encouraging spinout activity is that the motivation of the individuals concerned tends to be high and this is absolutely essential for the successful exploitation of complex scientific and technological ideas. However, spinout activity does not have to involve the key academics. Experience in several parts of Europe have shown that qualified research assistants, postgraduate students, technical staff and even undergraduates can be successful in this spin out process. In the UK context we know that relatively few PhD students and Research Assistants are likely to find long term careers in the University sector, so why not encourage some of them to exploit the work they have been doing in the laboratory. True, many do not have the desire or the commercial skills, but again there are excellent models (eg UNISPIN, Graduate Enterprise) for overcoming these barriers. Unfortunately, so far, it is not in the self interest of Universities to operate programmes like this.

  The advantage of spin out companies is that they tend to have intrinsically good relations between faculty and company technical staff which leads to long term constructive relations with each party having a good idea of the others' strengths and weaknesses.

Improve Access to the Knowledge Base

  The quantum of skill and knowledge that many NTBFs require to develop a new product or solve a technical problem does not usually involve much "leading edge" research. Conversely it often does involve a sound grasp of current knowledge in one or two narrow areas. Again this implies that it is not the long term involvement of the leading academic that is required and it is why programmes such as the "Teaching Company" and "STEP" programme are so popular amongst SMEs in general and NTBFs in particular.

  Therefore we would argue that in the interests of ensuring the good take up of knowledge from the University/Government Lab Sector during the processes of innovation there should be more or expanded schemes of the STEP and Teaching Company nature. It is well known and experienced by ourselves that both of the above programmes suffer from budget limitations as opposed to lack of company demand. Therefore expansion of the schemes will almost certainly be taken up by SMEs.

  In addition to the existing two programmes we also perceive a need, articulated by SMEs themselves, for a programme which provides "teaching company associates" for periods of 6-12 months as well as the more usual two year programmes which are operated currently. This would then provide the continuum from the 2-3 month STEP project undertaken by undergraduates to the full two year teaching company associate programme.

Improve Access to Finance

  Access to finance for NTBFs is a subject of its own which has been covered by the Bank of England and Tech Stars reports published last year. We gave evidence to the Tech Stars report and were delighted with the balanced approach of this report which highlighted the significance of developing the management team as well as finance the developing growth NTBFs. Therefore, the comments below on improving access to finance should be taken to include measures to ensure that the recipients of such finance have the necessary breadth of experience and skills to develop their business, and if not then they need help in acquiring these skills before finance is injected.

  The key measures in relation to improving the exploitation of University research we see would be:

    —  Developing the SMART programme. It is an excellent scheme but needs to be extended and made more flexible in the amount of grant given both as a percentage and total funding available to a single project. We are aware that many companies awarded SMART grants do not succeed commercially. We are not surprised since no attempt is made to help these often small and immature companies to develop their management skills as well as developing the product or service. This is the main shortcoming of the scheme in our view, and a shortcoming that is amendable to correction.

    —  The creation of venture capital "seed funds" for speculative developments requiring finance below £250,000. There are very few such funds in the UK and many of those are "drying up" as a result of relative disinterest by the institutional investment sector who see the management time as disproportionate to the amount of finance managed in each fund. We see the development of the Merseyside Special Investment Fund (MSIF) as an interesting regional development in this field. Although the MSIF is more than seed capital it demonstrates one effective way of bringing small scale finance closer to the SME sector through regional economic development interests.

    —  BTG used to operate "royalty" loans to encourage risky R&D that could lead to interesting new intellectual property. Loans were repaid by way of royalty payments on the exploitation of the arising IPR. In effect they were success loans.

    —  The recent budget announcement of the creation of a University Venture Capital fund we see as largely irrelevant to NTBFs. Generally we see this fund being used for bringing some longer term research to the stage where it can be taken up by larger companies. Hopefully, it might also be adapted to encourage University spin outs.

27 April 1998


 
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