Bridging the Valley

Written evidence submitted by SETsquared Partnership (V74)

The SETsquared Partnership brings together the enterprise activities at the Universities of Bath, Bristol, Exeter, Southampton and Surrey which lend themselves to co-operation and collaboration. It has three major strands of activity:

· Student enterprise: raising awareness of enterprise amongst under-graduates and post-graduates

· Business incubation for start-up technology businesses

· Engaging with industry to inform the research agenda

The SETsquared Business Acceleration Centres at each university perform the role of business incubators, providing support to high- tech, high-growth potential early-stage companies Its Centres currently support around 250 companies, some of which are spin-outs from the Universities but most are from the wider business community.

They provide serviced office space but more importantly, access to experienced entrepreneurs, sector specialists and routes to funding, legal and IP advice. They ensure ideas either 'fail fast' with a controlled closure, or are accelerated in a highly supportive, commercial environment. 

The investment data for such centres demonstrates that the companies are well prepared and attractive to the investor community.  Across the Partnership £750 million of investment has been raised by companies using the centres with 88% of companies still trading after three years.

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

1.1: The commercialisation of research can take the form of new business creation (start-ups), through technology transfer mechanisms (such as patents and licensing) or by means of researchers taking their expertise into businesses who exploit it.

1.2: Start-up businesses need (and often a lack) access to a funding escalator providing proof- of-concept funding, through seed funding to later stage investment. Proof-of-concept funding to demonstrate early stage technology has commercial value is particularly important. It is often used to fund design, prototyping and technology demonstrators in cross-disciplinary teams which straddle traditional Research Council boundaries.

1.3: Many Universities in England use HEIF funding for Proof of Concept to move projects from the point Research Council funding runs out to the point where external investors might take up the investment. Consideration should be given to expanding this type of investment.

1.4: The Research Councils f ollow on funds have proved valuable to offer next level funding for projects. BBSRC have a two-stage process with funds often being co-invested with University HEIF Proof of Concept funds informed by an industry-led panel. MRC and other RCs have experimented with devolving greater investment decision-making to the Universities which has resulting in quicker decisions being taken closer to the innovation.

1.5: Some Research Councils encourage academics to include an element within grant proposals to fund 'Pathway to Impact ' activity.  It is SETsquared’s opinion that whilst valuable, the way in which MRC funds this objective is particularly targeted and effective.

1.6: There is a recognised need to bring key industry players and investors into the academic arena at an early stage. Stanford regularly holds academic investor forums where academics expose early stage 'on the lab bench' ideas to venture capitalists and entrepreneurs, allowing them to changing their plans before their grant application is written. .  The Research Councils provide some money for sandpit type events but consideration should be given to funding aspects of the US model more widely, perhaps in conjunction with the KTNs.

1.7: The SMART (formerly Grand for R&D) is an important component in the escalator often leading to the next stage of  TSB or EU collaborative research funding.  TSB research has shown that collaborative projects including Universities have a higher success rate than those without. 

1.8: The recent changes to R&D tax credits for large and small companies are welcomed but efforts need to be made to encourage more companies to take advantage of them.

1.9: Tax changes announced in the 2011 Autumn Statement to incentivise individuals to invest in start-up/ small companies are most welcome. Please see comments in response to Question 6.

1.10: Whilst UK universities are successful in securing EU Framework progamme funds, British businesses are less so. Efforts must be made to ensure that the UK is able to take full advantage of the opportunities afforded by Horizon 2020 and future rounds of European Regional Development Funding

1.11: David Willetts, Minister of State for Universities and Science, has identified [1] how US firms benefit from access to Federal and State funds to help them fund their research and develop their businesses to a point where companies are significantly more attractive to VC, angel and other form of funding. The UK should consider adopting aspects of this model.

1.12: Exploiting IP effectively is a challenge. The Universities of Bristol, Glasgow and Kings have developed 'Easy Access IP' where simple quick and free license agreements are made available in return for a commitment to 'stay in touch'. The South East IP web site has just been launched which seeks to aggregate valuable IP generated by the University of Surrey and NPL amongst others. Both initiatives seek to address the perception that dealing with universities on IP issues is expensive and difficult.

1.13: As important as funding, there is a need for entrepreneurial researchers to have access to mentors, professional advisers, management expertise and ultimately to paying customers. Traditional UK university efforts to commercialise research are highly risk-averse with institutions only pushing a small number of almost guaranteed opportunities leaving many promising areas of research to seek alternative routes to commercialisation. The development of a constellation of small, large and entrepreneurial investors and mentors around innovation centres- such as those across the SETsquared Partnership- can help address this.

1.14: Research can be exploited when post-graduates and post-doctorates collaborate with, or are employed by, business. Increasing entrepreneurship and business awareness amongst these groups is an important goal for the UK. Programmes to encourage early career academics to spend time in industry – sponsored by the companies but incentivised by modest amounts of public funds - could help encourage academics regard this as an important part of their career development.

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

2.1: Life-sciences research has been traditionally difficult to commercialise but it has also provided some of the largest commercial returns in UK corporate history. The cost of developing and securing approval for new drugs is so great that, in some cases, companies cannot recover their investment within the duration of the patent.

2.2d: The long timelines between early stage research and commercial exploitation, and the very high risk-return ratios, mean that direct investment into this space is drying up.

2.3: Many large pharmaceutical companies are reducing their in-house research capacity in favour of sourcing external innovation. They are increasingly looking to smaller biotech companies to discover and develop opportunities before capturing them at a later stage.

2.4: The recent Government announcement of the £180m MRC/TSB Catalyst Fund is to be welcomed but is a modest sum in relation to the importance of this sector to the UK and the global competition for such high value added activities.

2.5: Commercialising research in sectors with high levels of regulation such as healthcare, aviation and safety-critical systems is time consuming and expensive. Whilst this is a major barrier to entry, it does mean that technologies approved, for example, on a new model of aircraft could be used in production for 20 years, and generate sales in the after-market for a further 20 to 30 years thereafter.

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

3.1: There are many examples of technologies developed in the UK but fully exploited overseas such as MRI scanners, carbon fibre nanotubes, and much of the technology used in mobile communications.

3.2: UK universities, unlike their US counterparts, do not have a requirement to target their licensing at domestic companies. Whilst data is not recorded, it is believed the majority of license agreements signed by UK Universities are with companies and organisations outside of the UK. This may result in some further R&D in the UK but future profits (and jobs) arising from commercialisation will be generated overseas.

3.3: The UK has progressively lost many large indigenous companies with critical mass in important areas of the global economy. As a result, many successful spin-out / start-up companies are eventually acquired by companies outside of the UK.

3.4: The SETsquared Business Acceleration Centre at the University of Bristol has incubated one such company which is now Belgian-owned (because of sources of capital) and many move its headquarters to the US for reasons of market access.

3.5: Another, at the University of Exeter’s SETsquared Centre, has just raised over £2m of (US) VC funding and has plans to create around 80 jobs in the next 18 months. It is already clear that there will be significant pressure for this company to relocate to the US when it seeks to raise the next round of funding. Whilst this is a threat, there is also an opportunity for the incubators to engage with wealthy and immensely well connected US investors, as well as the best international designers and developers being recruited by the company.

3.6: One of the biggest problems facing the UK economy is its relative inability to develop and retain mid-sized high-growth (‘gazelle’) companies. The recent CBI’s Future Champions report addresses this issue and is a useful reference document which draws some interesting comparisons between the UK and Germany and its powerful ‘mittelstand’ companies.

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

4.1: TSB’s role as an industry-led strategic body investing in the UK’s future wealth generating activities is of vital national importance. Whilst its funding has been protected from public funding cuts its budget is modest relative to the scale of the task facing the UK which invests around 1.8% of GDP in R&D compared to our major competitors who are investing between 2.5% and 4%.

4.2: TSB has been successful in providing financial support (as well as technical and commercial due diligence) to projects such as Next Generation Composite Wing and the Environmentally Friendly Engine projects which focused almost £200m of private and public funds on large projects of profound significance to the UK-based prime contractors and their supply chains. It is hoped this has positioned the UK to secure a significant share of the next generation single- aisle aircraft market which could be worth c. $1 trillion over a 20 year period.

4.3: The iComposites competition was a good example of a focused, well-funded project which brought a number of large, medium and small companies together to address major technical challenges. It attracted significant private sector investment and has forged long term collaboration between companies in different sectors.

4.5: As mentioned, SMART/ Grant for R&D is a valuable product.

4.6: Knowledge Transfer Partnership (KTP) is another excellent means of commercialising university research although recent moves to change eligibility rules is likely to preclude early-stage companies from participating. 

4.7: Knowledge Transfer Networks provide a valuable means of keeping communities of researchers and business informed of important technical and commercial developments.

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

5.1: The Catapult initiative is a positive response to address the expense and technical difficulty of exploiting commercially promising research. The long-term funding for these centres will provide access to advanced, industrial scale equipment and a pool of skills no one company could afford.

5.2: It is realistic to believe that Catapults will provide a focal point for universities and industry to work collaboratively to address Technology Readiness Levels 4-6 (the valley of death). It is hoped that they will also help identify the high-level skills needed to ensure the UK can fully exploit these technologies.

5.3: The ring-fencing of the University research budget in the face of stringent budget cuts was welcomed and recognition of the role HEIs play in UK innovation agenda. Notwithstanding the current economic challenges, consideration should be given to setting a goal to increase the percentage of GDP invested in university research and exploitation.

5.4: HEFCE continues to invest in efforts to transfer the knowledge developed in universities to those individuals or businesses able to exploit it. The SETsquared Partnership has invested some of these funds in five high quality incubators which have helped hundreds of companies to grow and to raise £750 million, to support their Technology Transfer (IP and licensing) activities, and to established a programme to increase the awareness of enterprise issues amongst those studying or undertaking research in Universities .

6. 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?

6.1: Yes it should. The Autumn Statement announcements relating to tax incentives for investors in small companies are positive. The role of informed serial entrepreneur/angel investors is vitally important in the creation of new businesses and tax incentives such as EIS and the new SEIS (sp) are particularly important.

6.2: Consideration should be given to additional tax incentives to further reward those who invest at the earliest stages of a business to fully reflect the risks taken.

6.3: SETsquared strongly believes there is a need for state investment or co-investment in the valley of death.  There are a number of mechanisms that can be applied relatively inexpensively to bridge this gap, some of which were successful in the past.

6.4: The University Challenge Seed fund (1999-2000) provided early stage seed funding to spin-outs provided by DTI and the Universities themselves.  Work by the University of Cambridge showed that the £60m investment in over two hundred businesses leveraged a further seven-fold of investment funding (£434m). 

6.5: Regional Venture Capital Funds and Enterprise Capital Funds have also been valuable as a form of Government funding matched against private capital in an attempt to remove the disadvantage faced by investors when considering early stage vs. later stage vehicles for their investments. 

Declaration of Interest

SETsquared is a Partnership funded by the Universities of Bath, Bristol, Exeter, Southampton and Surrey who are in turn receive funding from amongst others, Higher Education Funding Council for England, the Research Councils and indirectly , from the Technology Strategy Board referenced in this submission .

February 2012

[1] Speech of 4 January 2012

Prepared 20th April 2012