Science and TechnologyWritten evidence submitted by The University of Birmingham

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

1.1 The key barrier to the commercialisation of HEI research outputs is the lack of appropriate resources (ie, skilled practitioners and money) at the right time, to prove the market and optimise development and demonstration of the technology for either licensing or investment.

1.2 The problem is exacerbated by the pressure (driven by both internal and external drivers on academics) to publish research papers. This often means that patent filing decisions have to be taken by an HEI’s technology transfer office or other patent budget holder much earlier than would be preferable. This has several adverse effects: opportunities to file patent applications are often missed; where seemingly good ideas are captured the already thin resources of a technology transfer office are spread across a greater number of projects; and inevitably a great number of patent applications are dropped at expensive national phase entry points due to the lack of commercial justification at the time.

1.3 In recent years Research Councils have tried to address this, and schemes such as the Follow-on-Fund, EPSRC Collaboration Fund, and EPSRC Pathways to Impact have been very helpful, but are only accessible to support a small proportion of the portfolio of opportunities. Applications for such schemes are typically strongest when there is already some external commercial interest, and there is a reasonable understanding of the market. Where the market is new or unknown to the HEI any proposal for such funding to a Research Council is unlikely to be successful, yet, as mentioned in 1.5 below, there is a dearth of early stage investors to fill this gap.

1.4 The Technology Strategy Board SMART awards (previously known as Grants for R&D) can be used to carry out proof of concept/feasibility work. However, universities are currently ineligible to apply for this stream of funding, and thus a pressure is potentially put on universities to establish companies at far too early a stage. The University of Birmingham policy is only to set up a new company in circumstances where there is a viable strategy and business plan and a credible team to run the company. Creating a new company before these criteria have been met involves a significant administrative legacy, and has an adverse impact on the culture it is intended to promote.

1.5 Technology Strategy Board SMART awards also require match funding. This is problematic as most so-called early stage (venture capital) investors have moved far away from very early stages and typically look to invest in companies that are at least starting to generate revenues. Those investors left in this space see very high demands on their funds. Whilst schemes like the Seed Enterprise Investment Scheme can encourage investment in earlier stage companies, this does not go far enough. Such investors inherently want to see the revenue potential validated before they would wish to commit funds, particularly in high technology companies (as opposed to services) that will necessarily need a longer lead-time to market. In the past, regional development agencies (RDAs) had schemes which could help, for example in the West Midlands full support could be achieved by matching ERDF money with those provided by the RDA.

1.6 In order to overcome some of these issues, a number of solutions are proposed:

1.6.1 The University of Birmingham has already established an ever-growing network of experienced entrepreneurs who themselves are attractive to investors; such individuals are required by shareholders to lead the development of new spinout companies, with the academic teams in a support role as required. Often, individuals will carry out either pro-bono or heavily discounted work (occasionally with the expectation of future equity) to help develop the commercial proposition around a concept they believe in. Schemes that can reward and celebrate such in-kind efforts (such as prizes and tax incentives) should be considered.

1.6.2 Research Councils should consider creating some form of fund directly allocated to universities that will enable their technology transfer offices to support proof of concept/market development originating from RCUK-funded projects. More schemes should also exist to encourage or enable universities to have some of their academics’ teaching/research time bought out to assist in commercialisation of research (similar to the BBSRC Enterprise Fellowships). The University of Birmingham has had some success with its creation and development of the Medici Programme which supports individual academics to commercialise their research.

1.6.3 Mechanisms such as additional tax breaks or even grants to investor organisations working with universities which encourage investment in proof of concept “projects” before incorporation of a company should be considered. Such early stage investment is very high risk, and the financial returns on investment at this stage are likely to be very small (if any). Tax breaks and grant support may well encourage more funds to be set up by those with loyalties close to a university, such as alumni groups and regional angel networks. Offering national prizes to recognise individuals or groups that do decide to take such early stage risks should also be considered.

1.6.4 Encouraging new teams into incubation environments before company incorporation would also be beneficial. Incentives to enable this (perhaps through vouchers that can be redeemed within Research Parks, Science Parks and other incubators) should be considered.

1.6.5 An equivalent of the Technology Strategy Board’s SMART funding should be made available to universities, at least for proof of market and concept work. This will enable universities to further develop the many ideas that originate outside of Research Council funded projects and/or which do not qualify for RCUK follow on fund support.

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 Any area that is likely to require significant investment and long lead times to market is problematic, particularly where there may be significant regulation. Early stage funding of companies focused on discovering and developing new therapeutics for example, is barely possible in the UK at present due to the long lead times and large investment required. Seed/early stage investors do not have deep enough pockets to follow their money, and later stage investors do not have the risk appetite.

2.2 One possible solution is to create investment and expertise around a common theme, reducing costs and risks. The University of Birmingham is doing this with Bioscience Ventures Limited, a joint venture established in 2010 between the University of Birmingham and Abingdon Health Limited. This new company brings together technologies, money, and sector specific expertise from both parties to enhance and maximise the value of intellectual property in the field of in vitro diagnostics.

2.3 Clearly the scalability of such vehicles will be defined by investment, and the speed at which funded opportunities start to provide a return. This might be replicable in other areas, where industries have a standard development cycle and infrastructure eg, ICT and possibly therapeutics. However, the latter would need a much greater level of investment and is unlikely to be feasible without significant government support to encourage traditionally later stage investors, or corporate venture arms, to invest large sums at much earlier and riskier stages. The recent announcement of the Biomedical Catalyst Fund may be an enabler of such vehicles.

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 In summer 2010 Alta Innovations (the University of Birmingham’s technology transfer company) reviewed the location of their licensees and found that c 25–30% of their licences were executed with companies outside the UK. The primary reasons would simply have been that either there were no ready licensees in the UK, or that the most competitive deal was offered by non-UK companies.

3.2 A number of companies originally started up on the basis of UK research have been acquired by non-UK companies. Primarily this is due to insufficient levels of investment available in the UK to grow these companies to a suitable size and in a reasonable timeframe that meets the return expectations of its original investors. It is only natural that companies would look further afield than the UK to ensure an optimal return to its shareholders through deals with third party collaborators and trade sale partners.

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

4.1 There is no doubt that the many regional and national government initiatives over the past decade or so have had a significant impact on both the commercial development of research and in attracting organisations to sponsor further R&D within universities. Within the University of Birmingham, for example:

4.1.1 The University of Birmingham is involved in a number of Technology Strategy Board collaborative R&D projects such as the £90 million SAMULET (Strategic Affordable Manufacturing in the UK through Leading Environmental Technologies) programme which includes collaborators such as Rolls Royce, BAE systems, GKN and a number of supply chain SMEs and focuses on productivity and environmental improvements, including efficient advanced manufacturing processes and lower engine fuel consumption.

4.1.2 The University of Birmingham has a number of Knowledge Transfer Partnerships (KTPs) which enable the transfer of know-how and expertise from the University, whilst providing further valuable graduate training and career development. The research undertaken as part of the project also has a ready commercial outlet in the form of the supporting partner. Examples from The University of Birmingham include: molecular profiling of blood vessels to identify therapeutic targets with Astra Zeneca; the development and testing of road sensors with Campbell Scientific; and the development of products to prevent discoloration of prepared vegetables with Drywite Ltd.

4.1.3 The University Challenge Seed Funds, set up in 1999, were an excellent source of funding to further the commercial development of research outputs, and the UK University technology transfer industry has matured significantly since then as a consequence. The University of Birmingham was a founding partner of one such fund, the Mercia Technology Seed Fund. Since its inception, the fund has evolved significantly: it now has £12.8 million under management in two funds (with a third Enterprise Investment Scheme (EIS) fund planned).

4.1.4 The University of Birmingham deployed 20% of its HEIF4 allocation to fund 50 proofs of concept projects and several Enterprise Fellowships (on which commercially-minded academics were released from teaching duties to focus on research commercialisation activities). This led to an improvement in the University’s KPIs for knowledge transfer, including the generation of patents and spinouts.

4.1.5 The Research Councils have also contributed significantly to the commercialisation of research in recent years, and The University of Birmingham has benefitted in a number of ways, for example:

4.1.5.1 The University has received funding from EPSRC for it to enable both Knowledge Transfer Secondments (KTS) and other Pathways to Impact (P2I). Successful examples of this include the secondment of a University employee into a spinout company to help substantiate the market for ultrasonic transducer technology. This has led to significant customer and investor interest in the technology. The University is also assessing the viability of possible new spinout companies using P2I funding, for example in relation to novel antenna technology for upcoming new generations of mobile communications handsets. The P2I funding is being used to engage an experienced entrepreneur (of potential CEO quality) to further test the market and develop a viable business plan.

4.1.5.2 The University has also utilised the Research Councils’ Follow on Fund, eg for the further development and market evaluation of an interferometer that exploits the wave nature of light to offer the most precise and accurate measurement of displacement.

4.1.5.3 The University has received Collaboration Funding from EPSRC to work with a new company to develop novel photo-resists for the semiconductor industry. This collaboration has not only assisted in scaling up the technology but it has enabled the company to lever further third party funding.

4.2 Of particular interest to emerging high tech companies are:

4.2.1 The Small Business Research Initiative has provided both valuable information on the challenges facing government departments and opened up new funding opportunities for early stage companies (see also 5.3).

4.2.2 The Grant for R&D (now SMART award) has for many years been an important contributor to the development of certain high technology opportunities, and has assisted in leveraging further investment.

4.3 However, the SMART award could be significantly improved in a number of ways:

4.3.1 The funding should provide greater flexibility to enable the provision of management support to be properly recognized as an in-kind contribution, and flexibility granted in the use of funds to encourage and reward any under-spend. As previously indicated investors are not attracted to opportunities which are not yet at a concept proven/market validated stage. The spending profile should therefore be modified to enable some upfront payment, with the remaining tranches dependant on the provision of match funding as the project matures.

4.3.2 See also 1.6.5 above and 7.3 below.

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

5.1 The R&D tax credits should certainly increase collaboration with universities, and encourage commercialisation of research. However, it must also be recognized that this is a retrospective benefit, and collaboration cannot happen without upfront investment by a company. The Co-investment Fund and Seed Enterprise Investment Scheme could encourage investment into early stage companies. However, these initiatives are unlikely to go far enough, since they will not encourage investment by third parties before proof of concept. One or more new initiatives focused on encouraging pre-incorporation investment in ideas, particularly those originating within universities, would have a much greater impact.

5.2 It is recognized that SMEs and early stage companies in particular have very little money with which to utilise the expertise of universities, though they often seek this support. The Innovation Voucher programme will help this situation significantly. The scheme could have even greater impact if it could be used to encourage either experienced entrepreneurs or companies to explore the commercialisation of university-originating ideas. In that case, the Innovation Voucher would work the other way, contributing to the cost of the entrepreneur or company.

5.3 The continued investment into SBRI is welcomed (see 4.2.1). It is noted that the US require their government departments to spend a defined % of their budget on supporting small business initiatives. Whilst it is appreciated that there may be constraints in doing this within Europe, any mechanism which encourages UK government departments to explore innovative concepts would be welcome. Procurement centres are also welcomed and should allow opportunity to better understand a market need and an industry.

5.4 Potentially, the new Catapult Centres could provide ready availability of significant expertise and equipment to support the growth and development of new and existing companies commercialising the results of UK research. The key to this is likely to be in how “open access” these facilities will actually be and/or what funding streams will be available to enable such access. There should be mechanisms introduced to encourage the Catapult Centres to work in partnership with universities to pull through and accelerate the commercialisation of research. There is a significant opportunity to broaden universities’ impact on economic growth by enhancing the arrangements for business and researchers to generate market-led innovative offerings through engagement with the Catapult Centres.

5.5 Potentially the Biomedical Catalyst Fund could significantly reinvigorate the UK life sciences industry, by enabling investment at all stages of research and commercial development. We look forward to understanding in more detail how this fund is intended to operate.

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 More private equity investment should be encouraged at the proof of concept stages. See also 1.6.3 and 5.1 above. UK government should also seek to exercise influence over the use of European Funds. For example, we are aware of discussions over COSME which may improve some access to finance, but thought should be given to how it could be used for proof of concept stages.

6.2 There is increasing interest in the crowd-sourcing of support and alternative finance (eg, Crowdcube.com). At present, this seems to be suited to more traditional service companies and community projects. However, it is inevitable that there will be increasing interest in the application of these instruments to high technology companies. The UK should prepare itself for this and start to consider how regulation can encourage such support whilst providing adequate protection for investors and investee companies alike.

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

7.1 Unlike most other start-up companies which are more typically driven by the originator of the concept, the commercialisation of ideas arising from University research typically requires additional experienced people to provide commercial drive if a spinout company is to be established. Funds and incentives which encourage those experienced commercial individuals (CEOs and COOs) to work with universities and to co-create businesses would be highly valuable. The support of innovative mentoring schemes which properly assesses the capabilities requirements of existing teams, rather than simply just sourcing a mentor, would also be welcome.

7.2 Further incentives (such as tax breaks, which might not otherwise fall under the R&D tax credits) could be used to encourage larger companies to trial and adopt the processes and solutions offered by both emerging start-up companies and universities.

7.3 Funding similar to the SMART funding available to businesses through the Technology Strategy Board should be available to universities to support early stage proof of market and proof of concept development of ideas.

February 2012

Prepared 11th March 2013