Written evidence submitted by The British
Private Equity and Venture Capital
Association (BVCA) (TIC 54)|
About the BVCA: The British
Private Equity & Venture Capital Association (BVCA) is the
industry body and public policy advocate for the private equity
and venture capital industry in the UK.
The BVCA Membership comprises over 230 private equity,
midmarket and venture capital firms with an accumulated total
of approximately £32 billion funds under management; as well
as over 220 professional advisory firms, including legal, accounting,
regulatory and tax advisers, corporate financiers, due diligence
professionals, environmental advisers, transaction services providers,
and placement agents. Additional members include international
investors and funds-of-funds, secondary purchasers, university
teams and academics and fellow national private equity and venture
capital associations globally.
As a result of the BVCA's activity and reputation-building
efforts, private equity and venture capital today have a public
face. Venture capital is behind some of the most cutting-edge
innovations coming out of the UK that many of us take for granted:
the medical diagnostic services we use in hospitals, the chips
in our mobile phones, the manufactured components of our cars,
and the bioethanol fuels that may run them in the future.
Likewise, private equity is behind a range of recognisable High
Street brands, such as Boots, Phones4U, Birds Eye, National Grid
1. The UK has a strong track record when it comes
to scientific research and investment in innovation. Indeed as
the Hauser Review notes, we are currently 2nd in the G8 only to
the US for excellence in research
and we have three universities (Cambridge, Imperial and Oxford)
that regularly appear in the world's top 10.
The UK is regularly ranked near the top for innovation in the
EU (though the latest report presents our current position as
one of stagnation).
However the BVCA's own analysis suggests that despite this strong
base in research and innovation, the market for commercial investment
in high growth companies is not as burgeoning as it could be.
2. In the UK, the state of the capital markets
is usually found at fault when it comes to early stage venture.
A BVCA/NESTA report (2009) found that this was both a demand and
a supply problem. They dubbed this "thin markets" where
limited numbers of investors and entrepreneurial growth firms
within the economy cannot get together at low cost. This analysis
is less applicable to say the US which is characterised by deep
In comparisons with other countries, investment in
early stage companies in number of investments and quantum of
investment does not reflect our relative strength in r&d.
3. As can be seen from the above, whilst neither
the UK nor Israel could hope to compete with the US in absolute
terms, neither do we compete in relative terms in early stage
and have recently fallen behind the US.
4. In terms of the size of investments made (and
the quantum), the UK and France are very close together as is
Germany. But the US invests much more per investment as does Israel.
This suggests investment in UK and EU early stage is spread much
analysis in the benchmarking report highlight three determinant
factors in explaining levels of activity; higher levels of entrepreneurial
activity, R&D expenditures as a percentage of GDP and visible
success stories on the stock market affect early stage and total
venture capital activity. The analysis suggests that the supply
side is attracted by success stories, while opportunities for
entrepreneurs arise from technological exploration (reflected
in the R&D measure). In-depth analysis shows that entrepreneurial
activity in the UK is the most important of the three factors.
We would expect that if entrepreneurial activity (in terms of
creating high growth oriented ventures) was increased it would
have a significantly higher impact on VC activity in the UK.
Therefore one of the first areas of attention for policy makers
is to increase entrepreneurial activity.
6. This is backed up by a 2010 survey conducted
by Deloitte which says that in terms of what is important in fostering
VC activity, 60% cite an improving entrepreneurial climate as
key and 59% cite a strong R&D climate, supported by Govt.
Only 35% cited tax and regulation as the most important element.
7. The BVCA welcomed the commitment in the Comprehensive
Spending Review to protect the science budget but as the analysis
above suggests, we must do more at the next stage when it comes
to fostering entrepreneurial activity and turning research into
commercial opportunities. Thus the £200m to be invested in
Technology and Innovation Centres has merit as this will cut to
the heart of the problem.
8. The Hauser Report
described work done in other countries to add capacity through
TIC-like institutions in the so called 'intermediate sector'.
In France Carnot Institutes set up in 2006 foster links between
a renowned research base and industry. In Germany Fraunhofer Institutes
perform a variety of functions listed by Hauser as
out applied research in the innovation chain between university
generated initial discovery and industrial development to realise
its commercial potential;
SMEs to innovate though provision of knowledge, equipment and
technical and commercialisation services to large and small companies;
a highly skilled workforce.
9. The Fraunhofer Model, is comprehensive in
scope and geographical coverage with over 80 institutions (of
which 58 are fully fledged Fraunhofer Institutes) with total funding
of 1.6 billion annually. It is clear that with initial
investment of £200m we are not looking to create that scale
here in the UK and nor should we. As Hauser notes
the role and rationale of TICs is therefore context
dependent, which also includes the presence and nature of other
academic or business centres of excellence; the balance of business
sectors; and the importance attached by the public and private
sector to innovation within a particular nation. This is an important
point to bear in mind when considering the transferability of
a 'model' from one country to another.
10. Fraunhofers also tend to focus upon "Technology
Readiness Levels" (called TRLs ) 4 to 7 (industry/applied
contracts and government projects ), whereas UK universities are
traditionally strongest in TRLs 1 to 3 ( blue sky and early stage
translational research ). However, in the best research intensive
universities, there is a strong overlap, both in people, equipment
and funding bodies between the TRL 1-3 stage and the TRL 4-5 stage.
11. This is a major strength in the UK and leads
to better and more creative outcomes. We should not then see Fraunhofers
as filling a completely empty gap, as there is already good work
being done in that space by the best universities. These are precisely
the universities which also tend to have critical mass/active
technology transfer offices with dynamic and productive VC links,
such as at The University of Manchester, Cambridge and UCL.
12. The Fraunhofers, as a specific initiative,
have more recently championed and catalysed a number of Translational
Innovation Clusters, which look to build upon existing areas of
expertise and contacts, in regions and fields of critical importance
to the relevant national economies in which they are based. So
promoting clusters in which venture capital and universities can
"sit" together as part of an enterprise landscape and
add value together is worthwhile. This aspect of the Fraunhofer
model would be welcome - especially if centred in those areas
which could pick-up and build upon existing activity - particular
consideration should be given to existing sectoral expertise as
can be seen from the examples below.
13. So we need to be particularly mindful of
overlap when it comes to implementation because it is clear from
the list of Fraunhofer functions above, that the UK already has
existing capacity in many of those areas and any new provision
through TICs must dovetail effectively with it. University of
Manchester Intellectual Property is engaged in activity that would
certainly fall into Hauser's 'intermediate sector', for example
managing IP created at the University and then following evaluation,
helping to commercialise it via sale, licence or spin-out. They
have helped raise hundreds of millions for spinouts and are now
licensing at a rate of 20 per annum
14. Case Study - UMIP and NanoCo:
with VC partners, UMIP raise some £175M into spin-out companies
in the last 5-6 years. This represents 85 transactions during
a very difficult economic climate and of which about half were
in the very early venture space ( seed capital ). From selling
shares in some of those spin-outs ( and from other sources ) they
have been able to initiate about 100 proof-of-principle programmes
in new tech transfer intellectual property projects, which will
give rise to many new start companies/spin-outs and licences over
the next 5-6 years. An example of a Manchester University spin-out
staring life as a proof-of-principle project is NanoCo. Although
originally set-up in 2001, it received its first seed capital
injection in late 2004. It makes and commercialises fluorescent
nano-crystalline particles (quantum dots) of semi-conductor materials
that have unique chemical, electronic and optical properties,
due to their small size. The dots are so small that 80,000 of
them can fit across the width of a single human hair, and have
applications in biological marking, flatscreen TVs, security and
clean-tech. Having received two rounds of institutional venture
capital following the 2004 university and VC seed round, NanoCo
now has partnerships with major industrial firms and is today
valued on the stock-market at £200M.
15. Case Study - UCL and pharmaceuticals:
GSK: UCLB have announced partnerships with GSK on
a three year strategic collaboration to investigate new compounds
to treat potentially sight-threatening disorders.
Pfizer: They have also announce a collaborative project
with Pfizer Regenerative Medicine to research a better understanding
of stem cell-based therapies for certain ophthalmic conditions.
AstraZeneca: UCL and Astra Zeneca have entered into
a collaboration to develop regenerative medicines for diabetic
16. BVCA research suggests that there is work
to be done in turning a world class research base into a burgeoning
market for high growth companies that can attract venture finance
and become the global titans of tomorrow. Whilst closing this
gap has many facets, one such facet is further provision in the
intermediate sector through institutions like Fraunhofers and
our own TICs. However, the wholesale application of such a network
of institutions is not financially viable (with £200 million)
nor is it practically necessary because of extensive existing
provision. Before deciding on how to deploy this capital, an
audit of existing provision is essential so that a clear understanding
of coverage and best practice is gleaned and where appropriate,
this can be replicated where provision is currently lacking. This
may involve investing in new standalone institutions or it may
involve adding to existing capacity. Government should not be
wedded to either approach but should simply deploy the money where
it will be of most use. An extensive consultation with the university,
venture and business angel sectors should be the starting point.
The British Private Equity and Venture Capital Association
2 December 2010
6 International Comparative Performance of the UK research
base, September 2009 http://www.dius.gov.uk/assets/biscore/
Times Higher Education Supplement rankings,
see http://www.timeshighereducation.co.uk/world-university-rankings/2010-2011/top-200.html Back
European Innovation Scoreboard 2009 Back
From Funding Gaps to Thin Markets: UK Government Support for Early
Stage Venture Capital, BVCA, 2009 Back
Benchmarking UK Venture Capital to the US and Israel: What lessons can be learned?
BVCA, 2009 Back
2010 Global Report on Trends in Venture Capital, Deloitte 2010 Back
The Current and Future Role of Technology and Innovation Centres
in the UK, BIS 2010 Back