Science and TechnologyWritten evidence submitted by STFC Innovations Limited

Background

1. STFC Innovations Limited (SIL) is a company that undertakes commercialisation, IP management and innovation support for the Science and Technology Facilities Council (STFC). The STFC is one of the seven UK Research Councils. SIL was established in 2002, is wholly-owned by STFC, and operates at the major laboratory locations at the Rutherford Appleton Laboratory in Oxfordshire, Daresbury Laboratory in Cheshire and the UK Astronomy Technology Centre in Edinburgh.

2. SIL’s priority is to “Realise the innovative capacity of STFC’s science and research facilities to support the growth of a high technology UK economy”. The STFC is one of Europe’s largest multidisciplinary research organisations supporting scientists and engineers world-wide in the physical sciences. STFC operates major international research facilities and manages international research projects in support of a broad cross-section of the UK research community, in addition to directing, coordinating and funding research, education and training.

3. SIL currently has a portfolio of 56 patent families of which many are already licensed to spin-out companies. Since being set up, SIL has launched 15 spin-out companies, which together last year employed 88 people in high technology jobs in the UK. Several of these companies have the potential for substantial and rapid economic growth.

Q1. What are the key difficulties of funding the commercialisation of research and how can they be overcome?

4. The main issues in obtaining commercialisation funding are:

(a).The high-risk/uncertain reward of pre-turnover companies.

(b)The difficulty in finding high-quality commercial management teams, given the limited salaries available and uncertain reward.

(c)The “language barrier” that exists between academics and industrialists/financiers.

These issues can be compounded by the challenge in producing high-quality business plans and some natural reticence in the research community to market their ideas and products.

5. These problems are difficult to solve in their entirety. Some possible ways to challenge these problems include:

(a)Using government-sponsored or government-partnered special, early-stage funding vehicles, accepting the high risk/uncertain reward characteristics of such early-stage investments.

(b)Hiring professional CEOs who have proven track records and can run or monitor a number of these investments or at least serve to mentor the available CEOs for these companies. A board of professional directors can also be of substantial assistance.

(c)Ensuring that there is an appropriate interface between academics and industrialists/financiers, in the same way that SIL has executive non-academics that liaise with the researchers and the potential investors. There is also a need to continually work with the research community so that there is no sense that an academic is “selling out” by being involved with commercialisation.

(d)The production of template business plans that can be acceptable to potential investors.

(e)The use of dedicated marketing groups within research councils that can assist in marketing ideas to establish their attractiveness to industry.

6. SIL recognises that there are a wide range of challenges in the funding of the commercialisation of research, which affect the entire innovation spectrum. Such funding issues are a particular issue at the early stages of technology-based opportunities, in large part due to the risk (in technology, market and execution) associated with this phase. SIL has been addressing the funding gap in early stage technology business development in a number of ways:

(a)A variety of funding mechanisms and programmes are offered to encourage and promote innovation from STFC laboratories.”Proof of concept” funding has proved to be particularly important in developing new opportunities. As the appetite of commercial funding sources for early stage technology has reduced over the last few years, it has become important to be able to develop opportunities further than was previously required. This “proof of concept” funding was originally provided directly from BIS, but more recently has come from STFC funding, and is currently around £1.5 million/year. SIL believes, based on experience, that there is an important and increasing requirement to develop opportunities both technically and in terms of market application before commercial investment can be generated.

(b)The Rainbow Seed Fund (RSF) was launched in May 2002 and comprises a partnership of publicly funded research laboratories with £10 million funding provided by the Department of Business, Innovation and Skills. SIL is heavily involved with the RSF, which provides investment to support the early stages of commercialisation of technology and services from its partners, which include STFC, NERC, BBSRC, and the Defence Science and Technology Laboratory (DSTL). RSF makes investments of up to £500,000 in promising spin-out companies and acts as a catalyst for further investment from our sources. The RSF has directly invested £6.5 million in early-stage companies since 2002, and this has attracted over £110 million in co-investment from a range of investors from angels to overseas corporate investors elsewhere. SIL believes that the RSF is an excellent mechanism in early stage funding of new technology companies, having been proven to be effective and efficient, and would support additional funding going into the Fund, so that the activities of the fund can continue and be expanded.

(c)The affordability and availability of suitable business accommodation for early stage technology businesses can be an important factor in their growth. In the journey—typically from one or two people and an idea through to viable commercial company with 10s or 100s of employees there are several different types of accommodation required. Initially this might be the corner of a shared office, then moving into a small incubator office, then into an innovation unit as the company becomes established, perhaps ultimately requiring land for purpose-built accomodation. This “home for life” approach requires a spectrum of types of accommodation, and it is both attractive and efficient if this is available at one location. At the Daresbury and Harwell science and innovation campuses the availability of technical facilities and access to expertise is a significant advantage to the growing business, often enabling the business to use its precious investment capital in more efficient ways.

(d)The “Innovation Technology Access Centre” (ITAC) concept developed at STFC offers fully equipped space for innovation, research and development, with flexible access to offices, laboratory space, clean rooms, workshops, “hot-labs” and high specification scientific equipment. ITAC at Daresbury, opened in 2010, provides laboratory facilities for 20 SMEs across a range of sectors including biomedical and energy. 32 new high tech jobs have been created and £8.5 million in investment has been won by the companies since locating onto the Campus. Technologies being developed within the facility include cleaning products to combat bugs including MRSA, a portable TB test, green technologies that make oil extraction cleaner, and a low-carbon alternative to coal that could fuel existing coalfired power stations. The ITAC model is now also in operation at Harwell Oxford.

(e)The European Space Agency (ESA) Business Incubation Centre is located at Harwell Oxford and is managed by SIL. This is designed to broaden the market for space industry by translating space technologies, applications and services into viable business ideas in the non-space marketplace and to create new business opportunities and jobs for non-space companies. 10 companies have been accepted into the programme in the first year of operation. The scheme provides funding to companies that are accepted into the incubator, together with links into the technical expertise of ESA and STFC. SIL believes that such schemes are valuable and effective, and will seek to develop and implement more such “business incubation centres”.

(f)As institutional venture capital has moved away from early stage technology opportunities, the role of private “angel” investors has become more important. SIL believes this is something to be encouraged by (a) making the tax environment attractive to individual investors in early stage companies, (b) by supporting angel investor networks and (c) by providing public support for co-investment funds.

Q2. Are there specific science and engineering sectors where it is particularly difficult to commercialise research? Are there common difficulties and common solutions across sectors?

7. Yes. Those sectors which have no “obvious” practical application are difficult to commercialise. These sectors are often involved in very long-term experiements, for example particle physics or astronomy. Whilst there is no “obvious” practical application for such research, the spin-off opportunities are potentially tremendous, for example the application of particle accelerator technology in MRI machines. A serious difficulty in extracting commercial spin-off opportunities include the lack of individuals dedicated to figuring out how practical applications can be derived from an indirect application of research technology. In addition it is difficult to get the “attention” of researchers to develop such indirect applications when their core role—and indeed grant funding—is dedicated to primary research. Market sectors with inherently long adoption times for new technologies or products are difficult to address for technology companies using venture funding. An example would be introducing new technology into the aerospace industry. A long route to production revenue is not likely to be attractive to investors, unless the ultimate rewards can be particularly large. In an environment where investors face a wide choice of investment options, those with long and risky returns are difficult to fund.

Q3. What, if any, examples are there of UK-based research having to be transferred outside the UK for commercialisation? Why did this occur?

8. SIL does not have direct experience of UK-based research having to be transferred outside the UK for commercialisation. One of our spin-out companies has recently raised US investment and has since opened a facility in the Kennedy Space Centre in Florida, but that is in addition to their activities in the UK, and we see no reason why the two locations should not develop together, in a complementary manner.

Q4. What evidence is there that Government and Technology Strategy Board initiatives to date have improved the commercialisation of research?

9. SIL believes that there is good evidence to support the positive impact that the Government and TSB initiatives have had in improving the commercialisation of research in the UK. A particular example in which there were many different support mechanisms is the development of the spin-out company, Cobalt Light Systems Ltd. This has been supported through a number of separate initiatives operated by the STFC, Rainbow Seed Fund, National Endownment for Science Technology and the Arts (NESTA), the TSB and the South East England Development Agency (SEEDA). As such Cobalt has been able to take advantage of the support offered by Government through these schemes to develop its business and attract private equity investment. The story of Cobalt includes:

The technology on which Cobalt Light Systems Ltd is based has its roots in the work of a STFC research scientist working for extended period on advanced spectroscopy, including grant-funded research collaborating with universities. It is very difficult to quantify the value of this ground-breaking work, including the many years of research, that led up to the company being established.

When commercial potential became apparent “proof of concept” funding was used to develop possible applications (some of the “proof of concept” funding having been given as an award from BIS), and staff working for SIL worked on developing the opportunity.

At an early stage (before company formation) there were small investments from Rainbow Seed Fund (the fund is based on money from BIS but independently managed) and NESTA (these investments were converted into shareholdings when the company was set up).

When the business was set up investors included the Rainbow Seed Fund and Oxford Technology Management, using their “Enterprise Capital Fund” (independently managed, but in which BIS is the largest investor). The company was set up in a building owned and operated by STFC.

The business started to grow and look at new applications. As part of this it received support from SEEDA for an R&D project (Grant for Research & Development), and was able to claim R&D tax credit (a government scheme). It employed a technical member of staff using the “Knowledge Transfer Partnership” scheme (funded and operated by the TSB). It received a contract to develop security applications arising from the CONTEST strategy, supported by a number of UK government agencies.

To fund further expansion the company raised debt funding using the “Enterprise Finance Guarantee” scheme (which is a bank loan with a 75% guarantee from government).

10. Within the history of Cobalt to date there are at least nine different mechanisms that have involved a degree of public-sector support. The majority of this support has been applied in a “commercial” manner—for example the investments, rental of premises etc. The company now has a talented and experienced team of around 15 people, is producing, selling and shipping systems, and is considering the possibility of substantially increased volumes following successful international trials. The future of the company holds great potential, although the challenges of operating and growing such a technology company should not be underestimated. This great progress to date in growing a new and successful technology business is underpinned by the various support mechanisms that have been applied, and the company is a very good illustration of what can be achieved by applying these support mechanisms in a coherent and appropriate way.

Q5. What impact will the Government’s innovation, research and growth strategies have on bridging the valley of death?

11. It is probably too early to determine what effect relatively recent initiatives such as LEPs and Enterprise Zones will have in this area, although it seems unlikely they would have substantial impact on commercialisation.

Q6. 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?

12. Yes. If the UK wishes to take research commercialisation seriously then it must have vibrant venture capital and angel investor communities. The UK should be prepared to create one or two funds or vehicles whose intention is to make venture investments on the same terms as private venture capital firms and partner with third party investors. It should be funded with a sensible level of committed capital, staffed by professionals from the investment industry and prepared to take the risks (make the losses) that such investing is bound to take. Tax breaks are clearly helpful and so are government-procurement contracts to “boot-strap” the revenues of start-up companies.

13. SIL appreciates that government is already making significant efforts in this respect and that the topic is challenging, but more can and should be done. It is clear that private venture investment is not recognising or anticipating the true potential of attractive investment returns in these sectors and governmental encouragement to date has not reversed this trend. As such, the UK should explore more active options to incentivise private venture investment. This could be achieved via both (i) the tax environment to better support individual investors (building on schemes such as the Enterprise Investment Scheme) and (b) increasing public co-funding of venture investment to reduce the risk for private investors (for example through the Rainbow Seed Fund and the Enterprise Capital Fund approach).

Q7. What other types of investment or support should the Government develop?

14. SIL would like to see the government develop policy in the following areas:

(a)Support Angel investment networks that include early-stage technology companies (such as those operated by Oxford Innovation). Such networks are difficult to operate on a commercial basis, so government support could be used to encourage such networks. The networks can offer an effective mechanism for companies seeking investment to engage individual investors, and it is clear that such individual “angel investors” have an increasingly important role in supporting early-stage technology companies.

(b)We believe there is a role for public procurement as a tool for innovation and growth. This is an area which has received some attention (eg House of Lords Select Committee “Public procurement as a tool to stimulate innovation”). It may be that for a small technology company a contract to develop and deliver a product may well be even more valuable than investment in that company. Such a contract will force the requirements on the company to develop and deliver what is required in a specified timescale.

February 2012

Prepared 11th March 2013