Science and TechnologyWritten evidence submitted by The Association of Independent Research and Technology Organisations (AIRTO)

This response is from AIRTO (The Association of Independent Research and Technology Organisations). AIRTO’s members comprise representatives from:

Public Sector Research Establishments (PSREs).

Non-profit distributing member and non-member based research and technology organisations (RTOs).

Privately held research and technology companies (including Contract Research Organisations—CROs).

Universities (Enterprise/Technology Transfer Departments).

R&D departments of industrial companies.

Business support (including Access to Finance) and early stage technology-based venture capital companies.

AIRTO’s members generally operate in the private sector but with varying degrees of interaction and financial involvement from the public sector. All are to a significant extent involved in aspects of the translation of ideas, research and technological advances into the commercial arena, for clients in both the private and public sectors.

AIRTO’s response to the questions posed follows:

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

1.1 There are in reality two principal challenges within the end-to-end process of commercialising scientific and technological research that, taken together, constitute the so called “valley of death”.

1.2 The first such area is the industrialisation of the research results themselves ie turning the outputs of work aimed at the generation of new knowledge into fully understood technology that will be capable of surviving and operating in the challenging user environments required by commercialisation. This adaptation to harsh user environments, such as those found on production lines, in transport systems, in the natural environment, in space, on the battlefield and even in the home, just to cite a few examples, is beyond the remit and capability of most university laboratories that often lack the requisite infrastructure. (RTOs on the other hand do often have access to requisite infrastructure and could be better utilised in this regard). Those engaged in commercialisation frequently do not discover what is unknown about the technology until they start the process of industrialisation. Additionally, in many instances, challenging cost targets for the eventual product or service have to be met. This is a risk both to those who are taking on the process and those who are financing it.

1.3 The second area of challenge is the process of defining and implementing a competitive business model and the execution of a viable business plan. The risks here include uncertainty over: eventual take-up in the marketplace, reaction from competitors, ability to assemble a management team and changes in general economic conditions, amongst other things.

1.4 The main difficulty in approaching the ‘valley of death’ is overcoming the perceptions of those financing a commercialisation (be that industry licensees, early stage venture capitalists, lenders or in-house “sponsors”) that the risk of losing their investment is too great. This is frequently compounded by a significant communication barrier between innovators and investors (or those responsible for making investment decisions). The innovators frequently don’t understand the language and fears of investors, particularly those from the private equity and venture capital domain, and the investors don’t have the knowledge or tools to properly evaluate the development risks or market diffusion potential of innovative technology, unless it is pretty obvious.

1.5 Summarising the above, the main uncertainties creating such investor perceptions of risk for any given research-related commercialisation opportunity are generally that:

the market need remains unproven;

the intellectual property is not sufficiently protected or secure;

the appetite for the proposed innovation in the supply chain providing the route to market is unclear;

there is not a credible team to manage the commercialisation;

expensive (and possibly unknown) technology development issues may remain which will have to be tackled and which will require additional time and finance to resolve; and

the very early stage investors may find themselves at significant risk of extreme dilution in later rounds of investment in a new venture. This is particular acute with long timescale developments, which are typical of, for example, the biotech sector.

1.6 These problems are compounded by:

communication difficulties and lack of mutual understanding between innovators and investors;

insufficient availability of financial resources to follow on from research with de-risking “proof of concept” activities;

insufficient availability of management expertise with experience in early stage commercialisation;

insufficient availability of financial resources to support skills development (including human resource skills) amongst aspiring entrepreneurs. This is a significant challenge given the variety of perceptions and attitudes found amongst researchers to commercialisation of their work; and

uncertainties over the size of investment required, the likely magnitude of the eventual return and the timescale required to obtain that return.

1.7 Such difficulties can be overcome by increasing efforts to raise levels of investor confidence prior to moving on to complete reliance on mainstream privately sourced development effort and finance. This can be achieved by:

continuing the support provided through programmes such as the forthcoming Business Coaching for Growth programme from BIS, particularly the investment readiness and investor readiness components;

increasing support for pre-commercial ‘proof of concept’, seed stage equity and loan funding (probably with a combination of public and private sector provision);

making more use of post-research incubation capacity and assistance, especially that which facilitates access to harsh user environments, potentially available through RTOs (as recommended in the recently released BIS Research and Innovation Strategy), including the new Technology and Innovation Catapult Centres; and

reducing excessive dilution risks for very early stage investors by providing liquidity for such very early stage investments, particularly those in longer term developments, possibly through new specialist secondary funds. This will also avoid premature loss of support from public sector financing and avoid excessive dilution of early stage public sector investments, as experienced by previous Early Growth and similar government supported funds.

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 The first attempt to commercialise should usually be to license into an existing supply chain. However, there are multiple reasons why this frequently fails, many of which are the same as those that deter potential backers of start-ups.

2.2 Looking at the problems from the perspective and experience of third party investors in new enterprises, there are some sectors that pose specific difficulties. Examples are:

2.2.1. Sectors with significant regulatory or approval requirements, such as biotech and aerospace respectively, where the timescales needed to prove compliance increase costs and risk and lower the rate of return on investments. This is a well-known issue and deters many investors.

2.2.2. Sectors where there is an effective or near monopoly in the UK market in terms of procurement, such as health with the NHS. This means that there is really only one significant UK potential early adopter client. Any barriers in NHS purchasing plans can be fatal to commercialisation efforts.

2.2.3. Sectors with weak or conservative innovation cultures such as, for example, construction, where past examples of innovation may have had only limited success, generating a risk averse culture.

2.3 In general, however, different sectors exhibit different characteristics and need different solutions.

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 some high profile cases of UK inventions being exploited overseas. For example, despite the work done in the UK, all major carbon fibre production is overseas. More recently, significant overseas investment in plastic electronics is threatening to take exploitation of this technology off-shore. In addition, there are large multinationals exploiting licensed-in technologies, in which case it may be that in some instances their non-UK facilities will be best placed to develop the technology concerned. It should be noted also that such companies may choose to support research outside the UK where there is both equivalent research quality and better support for commercialisation or where regulatory requirements stipulate technology validation in global territories (eg in pharmaceuticals). There are many reasons for multinationals to operate in multiple territories, many of which are to do with spreading of risk and differences in local economic conditions, rather than support for commercialisation per se; their globalisation does however confer freedom to move activities and assets from territory to territory and the extent of local support for the riskier stages of commercialisation may be one such factor.

3.2 A possibly more significant problem is that UK interests frequently cannot hold on to ownership of innovative research and technology being commercialised in spin outs once early investors need to seek a first exit point and the enterprise needs to move on to more substantial growth. Vulnerability to loss of UK ownership is brought about by a combination of a) the tendency to undercapitalise new enterprises, b) the need on the part of many investors to churn their capital and to demonstrate early returns and c) the attitudes of UK financial institutions to risk and, for example, the inability to hedge such risks in unquoted investments.

3.3 Much of the evidence is anecdotal. If it is felt that there is a lack of systematically produced evidence on this question it may be worth commissioning research to quantify the scope and scale of the problem and to estimate the loss of added value to the UK which results. Correcting the problem through some form of intervention may be a complex challenge and would need careful planning.

3.4 We should not lose sight of the opportunities to transfer research and technology from elsewhere in the world into the UK for commercialisation.

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

4.1 This is a complex question; assessing the true impact of past and current initiatives is masked and made difficult by the frequent changes that have been made to these initiatives year after year and by the highly targeted but incomplete nature of their coverage.

4.2 It is important that support be supplied in a consistent fashion for a sufficient period of time to enable a meaningful measurement of impact; this has rarely been the case in recent decades.

4.3 It is important also that initiatives cover the full spectrum of market failures on the journey from research to commercialisation; without that the good work done in one area may falter further down the line. For example, much effort has been put into universities and their enterprise or technology transfer offices, but the resources available to the Technology Strategy Board have been insufficient to take forward to the next stage of development many of the worthwhile opportunities emerging from these sources (and from the preceding investment in the research base).

4.4 Therefore, unless support is applied to the sequence of activity needed for successful commercialisation in a proportionate and consistent manner over a sufficient timescale, there is a risk that it will be wasted.

4.5 In the past, in our opinion, too little attention has been given to post-university support. In the last two years the situation has worsened with the closure of the Regional Development Agencies (RDAs) and therefore the cessation of their support for applied research. The very necessary investment in the new Catapult Centres, while strongly welcomed, does not sufficiently compensate for this diminution of this support for wider applied research and commercialisation activity.

4.6 In the absence of the ability to produce a systematic overall impact assessment, the evidence has to be piecemeal and based on case studies. It is also open to influence by contextual factors not directly related to the support mechanisms in question. AIRTO members can however provide a number of such case studies.

4.7 We would also refer to AIRTO reports on innovation (“Study of the Impact of the Intermediate Research and Technology Sector on the UK Economy”, (2008), Oxford Economics; and “Supporting Industrial Innovation in the UK: A view of Government Grant Assistance Schemes (Past, Present and Future)”, (2010), AIRTO). There are also many other reports, particularly on access to finance initiatives for commercialisation in general, which assess specific schemes, from organisations such as NESTA.

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

5.1 The new BIS Research and Innovation Strategy recognises the need for attention to the full journey through TRLs 4 to 7, from research results to commercial adoption. This is very welcome in the light of the comments under 4 above.

5.2 It also recognises that the Research and Technology Organisations (and similar bodies) are underutilised assets in the drive to correct the market failures described. The new Technology and Innovation Catapult Centres will also begin to help to restore some of the balance of support between fundamental, applied and translational research, which has been lost over the last 40 years.

5.3 Whilst some useful measures outlined in the government strategies are essentially costless for the public purse, the real success will come from the application of additional financial support to offset risk. With the current extreme constraints on public finances, this will probably have to be brought about, at least in the short term, through the provision of incentives for greater private sector investment. This will require some imaginative and possibly novel mechanisms.

5.4 The BIS economics paper that precedes the strategy talks of channelling funds to stimulate commercialisation via the Research Councils (“BIS Economics Paper No 15—Innovation and Research Strategy for Growth”, (2011), BIS). It should be noted that this is not a substitute for the withdrawn RDA funding and is generally available only to academic institutions, leaving PSREs and RTOs still unable to be supported effectively in their efforts to translate research into commercially attractive technologies. Some public funding could be more effective if it is used to support commercial organisations and RTOs in their work with universities, rather than directly funding universities to deliver exploitation activities in isolation.

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 AIRTO suggests that the UK should encourage more private equity investment.

6.2 Attracting private equity investment (and also loans) requires measures to reduce risk (particularly technology risk with which many investors are not comfortable) and to increase confidence. Technology risk can be addressed through collaborative R&D projects funded or part-funded through the TSB, coupled with demonstration projects to confirm “proof of concept”. One way of creating more confidence in the UK’s environment for innovation would be to better communicate the capabilities and capacity of the RTO sector as an expert testing ground for developing new technologies, to the investment community. In addition successfully communicating the comparative strengths of the UK’s framework for protecting IP is an important factor in creating investor confidence.

6.3 European Framework grants provide another similar source of assistance but the UK needs to become better equipped to influence the calls and submit successful applications.

6.4 Most grant schemes require matching funds from the applicant and this can be a problem for pre-revenue start-ups that are too early to attract equity investment. A solution to this problem has yet to be found, but it is a barrier to many technology companies seeking to get going.

6.5 Equity investors generally seek companies with demonstrable revenues from contracts. The ability to demonstrate such revenues increases the likelihood of being able to raise funds. The public sector can assist with placement of contracts through SBRI schemes and via public procurement.

6.6 Further steps to increase confidence that technology-related difficulties can be tackled and overcome include emphasising the availability and capacity to help with practical solutions that exists in the network of RTOs and other independent research and testing establishments, including the new Catapult Centres.

6.7 It is essential however that the various measures to encourage early stage investment are followed through until early investors can exit at a profit, otherwise the potential for early stage investment in technology companies will not have been demonstrated and investors will retreat again if the experience is too financially painful.

6.8 Private equity investments can be leveraged with matching public sector support through Early Growth and Enterprise Capital Funds and similar vehicles.

6.9 Balanced teams are needed to commercialise research successfully and many of the softer, non-technological management skills in particular are in short supply. More support is needed to increase capacity in the desired skill sets. This can be brought about through appropriate training programmes, by supporting skills development programmes which encompass technology familiarity and management and by encouraging technically trained and experienced people into the early stage investment arena.

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

7.1 The US uses its SBIR scheme to support, to great effect, early stage SMEs through the use of procurement contracts, including for research. The UK has trialled an equivalent scheme (SBRI) and AIRTO believes that this mechanism should be used more widely. Some AIRTO members trialled the scheme very successfully with the Engineering and Physical Sciences Research Council in the 1990s, but this was not pursued beyond the pilot stage because of concerns over the resources required to screen applicants more widely. Mechanisms for screening applicants should be reviewed. The UK should also support the introduction of an EU equivalent which is currently proposed for the forthcoming Horizon 2020 programme, which will replace FP7 in 2014.

7.2 Given the extreme difficulty of increasing public spending in the current economic climate, every effort should be made to use public procurement budgets to support innovation via the placement of contracts for new and innovative products and services. Such early adoption by a customer, albeit from the public sector, will help to stimulate confidence and leverage investment from the private sector.

7.3 Also, given the high level of secured assets required by banks to underpin loans, and given that most enterprises engaged in commercialisation require a mix of equity and loan finance, some effort should be made to introduce loan instruments as part of government’s support measures, alongside its measures to support equity finance.

7.4 Finally, to adjust the balance of support for projects and enterprises seeking to cross the valley of death, support for the TSB should be increased wherever possible. However, the terms of the support provided by the TSB do not constitute a level playing field for all types of participating organisation. This is leading some PSREs and RTOs to conclude that they cannot participate in TSB schemes without losing money. This will worsen a situation in which the BIS Research and Innovation Strategy already acknowledges that RTOs are an underutilised resource in the UK for the purposes of increasing the UK’s innovation and commercialisation capacity. If this continues, the concentration of scarce skills for this kind of activity to be found in these organisations will remain underutilised and may eventually wither, to the detriment of the UK’s ability to innovate and commercialise its research.

Declaration of Interests

This submission is made by the Association of Independent Research and Technology Organisations (AIRTO). The organisation represents research organisations and technical consultants, operating in the space between the academic research of universities and the commercial needs of industry. AIRTO members undertake research and development, and knowledge and technology transfer. This submission does not necessarily represent the views of individual member organisations. AIRTO currently comprises organisations, employing more than 20,000 scientists and engineers, with a combined annual turnover in excess of £2 billion (AIRTO Ltd. is a company limited by guarantee registered in England No. 1217006 Register office address: National Physical Laboratory, Hampton Road, Teddington, Middlesex, TW11 0LW. AIRTO is a not-for profit organisation funded by membership subscriptions, and managed under contact by NPL Management Ltd.). The members of AIRTO currently are:

ARUP

MIRA Ltd

BMT Group Limited

The Manufacturing Technology Centre (MTC)

BRE Group

The Motor Insurance Repair Research Centre (MIRRC)

The Building Services Research and Information

National Metals Technology Centre (NAMTEC)

Association (BSRIA) 

National Physical Laboratory (NPL)

Campden BRI

National Nuclear Laboratory (NNL)

CERAM Research Ltd

The Paint Research Association (PRA)

City University London

Pera Group

CIRIA

QinetiQ Group plc.

Clear Angle Technologies

Quotec Ltd.

E-Synergy Ltd.

SATRA Technology Centre

FIRA International Ltd.

The Scottish Whisky Research Institute (SWRI)

Halcrow Group Ltd.

The Smith Institute

Health and Safety Laboratory (HSL)

Smithers Rapra Technology Ltd

HR Wallingford Group Ltd (HRL)

The Steel Construction Institute (SCI)

Institute for Sustainability

Thames Innovation Centre Ltd. (TIC)

ITRI Ltd.

TRADA Technology Ltd. (TTL)

Leatherhead Food Research

TWI Ltd.

LGC

University of Surrey

February 2012

Prepared 11th March 2013