Bridging the Valley

 

Written evidence submitted by Cambridge Enterprise Ltd (Valley 12)

1. Background

Cambridge Enterprise (CE) [1] is a wholly owned subsidiary of the University of Cambridge and its mission is to help University of Cambridge inventors, innovators and entrepreneurs make their ideas and concepts more commercially successful for the benefit of society, the UK economy, the inventors and the University.

The order in which those benefits are listed is deliberately aligned with priorities of the University and strongly influences the way in which CE conducts its business activities.

2. Terms of reference

The Committee has invited written submissions to a series of questions and our responses are described below in the context and perspective of issues arising from fulfilling CE’s mission.

3. What are the difficulties of funding the commercialisation of research, and how can they be overcome?

Successful commercialisation of university research whether through consultancy, patenting and licensing or forming spin off companies requires, in summary:

· Generous funding of research to generate world changing technologies

· A policy framework from a university and its research sponsors that supports and rewards invention and commercialisation alongside research and teaching,

· Professional personnel with adequate funding for investing in patents and proof of concept work, who can help capture research results capable of commercialisation and ensuring they are successful commercialised

Such activities can only be successful where the demand for technologies is robust. A major difficulty is that the demand by UK companies for innovative technologies arising from universities is both weak and diminishing as a result of the decline of the manufacturing and commercial research based sectors. The US is a major customer for UK inventions but the demand side is uncertain both there, in the rest of the EU and elsewhere, although the so-called BRIC countries are showing increased enthusiasm and interest.

The process and procedures for effective technology transfer are well established but there is a major lack of appreciation and understanding of the time interval between speculating about a commercial possibility, and turning a gleam in an inventor’s eye, or a sparkle of diamond in a pile of sand, into a successful commercial product. While the contributions universities can make to economic development by induced investment in technology development and associated increase in employment are very significant and have been well documented, the returns to a university such as Cambridge is relatively modest compared to its research income. The need for well qualified people and financial support to achieve such success is clear in principle, but the timescales required, coupled with poorly articulated and unreal expectations make raising adequate long term funding for knowledge and technology transfer difficult in practice.

In addition, once inventions have been identified, and preliminary markets speculated upon, there is a need for additional proof of concept or translational funds to add value to the very embryonic technologies and inventions that arise from university research. These are needed:

· to explore and assess potential markets more thoroughly

· to prioritise commercial opportunities

· to protect IP portfolios

· to demonstrate proofs of principle

· To reduce commercial risk for licensees and create more credible propositions for early stage investors.

There is a shortage of seed stage funds needed to support transfer of technology from the laboratory, to form a company and to recruit a commercial team. The successful University Challenge Funds showed the way and a scale up of that initiative would be very welcome. HEIF funds are invaluable but subject to multiple uses and the scale of funding needed for spin offs is significantly more than is currently available from that source. To make the highest impact, seed funds need to be adequate, readily available, be easily applied and their management and stakeholders to have realistic views on their potential returns.

Investment funds do not always provide continuity of funding, due to the fund lifecycle. SEIS/EIS funds, while providing great incentives for angel investors, are not always easily aggregated into easily accessible funds of sufficient scale, a general problem when using angel funding to fill the VC gap. Later stage investors tend to discourage further angel funding and introduce preference stacks and deeply discounted rounds that remove most if not all the returns from early stage investors especially from companies that, although ultimately commercially successful, may have required multiple significant funding rounds.

Licensing deals, or a mix of licensing and equity based deals, is one way of preserving value for inventors and universities but recognition of the special status of publically funded IP by preserving the value of a small percentage of the equity would be a novel but major incentive to universities and their inventors to create more companies. Potential serial inventors who have seen later stage investors benefit massively from their efforts but with a modest personal return to themselves, can be much disincentivised against repeating the experience as a result.

4. Are there specific science and engineering sectors where it is particularly difficult to commercialise research? Are there common difficulties and common solutions across sectors?

Sectoral issues are very important and have not been given enough attention as the issues are complex and not subject to simple solutions. Progress has been delayed by crude generalisations and attempts to create "one size fits all "models of technology and knowledge transfer and inappropriate criteria being used to measure success.

Research based industries and deep, IP rich, capital intensive industries such as the pharmaceutical and biomedical industries share a common language with the public research base and are more familiar with assessing early stage research results and the value of in-licensing technologies to achieve product innovation i.e. "Open Innovation". While success even in this heavily regulated sector is very hard to achieve, the market for products, the process of product development and the risk-reward balance are well articulated. However, the long term nature of such technology development brings its own challenges, as timescales do not fit within traditional venture fund lifecycles. Development of a range of schemes to increase the variety of long term funding for pre-profit companies is essential.

Industries that are equally capital intensive and IP based, such as consumer electronics and aerospace, present different challenges. They may own large quantities of dominating, background IP but much of their innovation is incremental in nature and inter-company cross-licensing of patents and IP is commonplace. The difficulty in disaggregating the value of the contribution of individual patents to any final products in these sectors makes in-licensing of IP from universities less common but access to such IP as background may present major opportunities for long term collaborative research with industry: Rolls Royce and BP’s long term collaborations with Cambridge being excellent examples.

In industries that are less research or IP intensive, the challenges of commercialisation alter dramatically. The familiar patenting/licensing /equity based spin off model may be less appropriate for copyright or know-based business opportunities. Other models of knowledge dissemination for creating such "soft" start ups (i.e. closer to market know-how/copyright /consultancy based companies) through collaborative research and consultancy arrangements with the university become more appropriate. These are excellent forms of research commercialisation but may bring lower direct returns to the university and their success be less easily assessed by conventional metrics.

5. What, if any, examples are there of UK-based research having to be transferred outside the UK for commercialisation? Why did this occur?

This is the absolutely the norm, not the exception, in the Cambridge cluster. Given the lack of UK and rest of Europe demand from companies and investors, local technology companies are "born global" and frequently are purchased by overseas, largely US based investors or companies as they grow. While not a spin off as such, Autonomy’s purchase by HP was a recent headlining example although as yet, and like a number of the following examples, the work force has been maintained locally. The UK has very few such top tier companies such as HP that could have carried out such a transaction and so indigenous companies are effectively forced overseas to realise value.

Examples from the University include Solexa, purchased by Illumina; Entropic, purchased by Microsoft; CDT, a majority purchased by US investment funds and then sold to Sumitomo; Paradigm purchased by Takeda and Psynova purchased by Rules Based Medicine. Q-Flo (carbon nanofibres) obtained funding from Israel and Diagnostics for the Real World was funded by $6m of SBIR funds to set up in California.

These are all examples of successful knowledge transfer in the broadest sense but, if retaining and developing such companies in the UK are objectives, they would be assisted by a consistent national strategy to develop companies beyond the early stage. Moving overseas because of manufacturing incentives (e.g. Plastic Logic expansion in Germany and Russia) can only be overcome if the UK government wishes to encourage manufacturing and offers incentives similar to those offered elsewhere.

As well this experience with spin-offs, CE’s three currently most lucrative licences are all to overseas (US) based companies namely Genzyme, Autodesk, and Accelrys.

6. What evidence is there that Government and Technology Strategy Board initiatives to date have improved the commercialisation of research?

HEIF and its precursors have proved invaluable in providing resources for increased commercialisation and, given the timescales involved, continuation of this or equivalent hypothecated funding, is essential for the foreseeable future. The Cambridge-MIT initiative spun off Praxis-UNICO, the important and influential training organisation that supports knowledge exchange, innovation and commercialisation of public sector and charity research for both social and economic impact.

TSB and RDA awards have greatly helped CE’s young companies in their technology and market development and R&D tax credits for those companies that move into profit, have proved valuable. Whilst these initiatives do not provide funds to establish new companies as such, the supplementary funds provided, for specific activities, are a much valued contribution to early stage development costs and provide valuable leverage. CE has examples where the award of a TSB grant has helped provide the cornerstone for a further round of angel investment.

Innovation vouchers and the recently reinvigorated and popular SMART awards have been effective in promoting collaborations between universities and smaller companies and stimulating research activities. To generalise, schemes that give support for collaborations between academia and industry over multi-year periods (where the academics can obtain a deep understanding of understanding of industry’s problems and challenges (and vice versa)) are invaluable.

7. What impact will the Government’s innovation, research and growth strategies have on bridging the valley of death?

Size is important: modest investments, even if well targeted, will lead to modest impacts and maintenance of at least the current level of support for fundamental research is essential to ensure the generation of technologies of the future.

Given the very well documented efficiency and effectiveness of the UK’s research base and the role universities play as engines for economic growth, support for universities and the public research bases at a scale comparable to our competitors is both essential and justified. Introduction of "impact" as a significant metric into the Research Excellence Framework has raised the profile of commercialisation activities very significantly. It is worth noting that while this increase in profile is welcome, a concomitant increase in multiple lines of accountability required by the University’s many sponsors and stakeholders need to be managed very carefully to avoid creating significant additional management burdens and opportunity costs.

To achieve long term success and significant impact, it must be recognized that research funding needs to be accompanied by adequate resources to ensure that effective knowledge transfer can occur and commercialization leads to increased economic and societal impact. This should be regarded as an essential cost of doing research not an optional extra. While such supply side measures have been identified and addressed to an extent, addressing UK demand side issues is essential if the full benefits of such measures to the UK economy are to be realised.

HEIF or its equivalent, coupled with proof of principle and, early stage seed funding are highly cost effective ways of valley spanning. CE’s track record is such that for every £1 it invests in a spin off, the companies are able to raise on average a further £75 reflecting the quality and value of the seeding process. The new SEIS scheme and changes to the EIS scheme should stimulate angel investment in technology based companies but, as mentioned, problems of aggregation, accessibility and scalability are concerns. Inevitably angels, even more than VCs, will prefer to invest in capital light businesses such as ICT and software companies,

Such support helps early stage companies but these companies may encounter even deeper funding valleys to cross as they grow where substantial developmental investments are needed to take products to market. Even if such funding is achieved it must be recognized that, windfalls apart, the early stage investors, inventors and universities can be massively diluted as a result when a liquidity event occurs. Technology transfer from the university may have proved very successful but the returns to the founders may be relatively small and it is important that expectations are managed appropriately at the outset.

8. Should the UK seek to encourage more private equity investment (including venture capital and angel investment) into science and engineering sectors and if so, how can this be achieved?

As mentioned, sectoral issues are very important here too as deep technology based companies which require vast investment over many years are unsuitable for VC investment, let alone angel funding except, perhaps, at the earliest stages. Angel funding cannot fill a VC sized gap and VCs cannot fill such a later stage gap. The result is under capitalised companies which may lurch from one small round to another and spend too much time fundraising rather than developing products and getting them to market. Company failures are far more commonly associated with cash flow issues than with technology failure. Encouraging later stage private equity investment could be useful but, at present, their focus and opportunities tend to be elsewhere. Measures are needed to incentivise longer term investments rather than investments that require an exit after around 5 years, as the case with the current VC funding model. These could include tax incentives to large scale investors such as pension funds

The SEIS and EIS schemes are valuable to early stage companies but have limitations as many universities outside the "Golden Triangle" of Cambridge, London and Oxford may have much less access to suitable angels, and the logistics of managing a large number of small shareholders can add an unnecessary burden to a small company. A route to pool SEIS funds into larger pots, and open up access across all universities, would increase the effectiveness of the scheme.

9. What other types of investment or support should the Government develop?

Government procurement and SBIR type initiatives are key parts of the jigsaw as the government is such a major player in the UK market and especially in the NHS and the defence sectors. The growth of hi-tech industries in both US and Israel has been built on their public high investment in defence and, as one of the world’s largest employers, the NHS represents a major home market opportunity for the UK medtech sector in particular.

SBRI schemes are very useful in this context and should be developed pro rata to match that of the US but the value of new initiatives such as the TICs are questionable, especially when funding is relatively scarce and investment in such initiatives is relatively modest. They have been encumbered with a trivial name and run the distinct risk of becoming self-serving and creating additional interfaces and barriers between universities and industry, distracting from already successful initiatives in this area.

Building upon and investing significantly in successful initiatives is the way forward.

February 2012


[1] www.enterprise.cam.ac.uk

Prepared 20th April 2012