Science and TechnologyWritten evidence submitted by Dr Trevor Francis, Technical Director, Byotrol Technology Ltd

THE PERSPECTIVE OF A SCIENCE-BASED SME

Experience of Financial Funding

Context

Byotrol plc. is a biosciences technology SME with a market cap of ca. £10 million.

The company originally started in 2001 as a spin out from a paint company and initially used family money to fund initial set up.

It has developed a patented anti-microbial technology based upon a combination of commercially available biocides and a polymer that gives a long lasting protection when applied to surfaces (hard surface or skin). The technology has applications that spread from Food and Healthcare and to household and personal consumer products.

The company has an Industrial Division and a Consumer Products Division (50/50 JV). The Industrial Division sells both to distributors and to service providers, while the Consumer Division is licensing the technology to fmcgs and retail manufacturers for use in consumer products.

The plc. company has raised over £15 million from AIM in five separate funding rounds.

1. What are the general challenges of science based SME’s for obtaining funding?

Science based technology is expensive (laboratory, equipment, scientists, IP, materials etc.) so there is always a need to secure significant funds to keep afloat (cf software companies which generally have a much lower requirement for funds).

As a generalisation, most “scientific inventors” are creative people with new thoughts on how to develop their innovations. As a result of not achieving sufficient funds, the risk is that many of these new ideas get lost, or if patented will pass into the public domain.

Once investment has been received, there is a heavy outlay simply to stay still and yet most companies want to grow and invest in additional research streams. So there is never enough to cover what could develop from such science-based start-ups without radically finding new sources of investment.

The process of raising funds itself is very time demanding and stressful.

Many companies have suffered due to going too early to the City without properly managing expectations, resulting in having to meet the expectations of the City for short term sales revenue,

There is often an added pressure in the funding “pitch” to be too optimistic and to make the company prospects seem very attractive, which subsequently leads to harder targets to fulfill.

Frequently SME’s report of being offered more money than they were asking for, which can create a “rich” feeling and not appreciating the need to use the money wisely.

2. Disadvantages of seeking VC or Business Angel money

Quite often, early stage start-ups have nowhere else to go to get seed money.

VC’s are primarily focused on ROI and if a tech company has no assets (not manufacturing) but is knowledge based then providing funding is of less interest.

IP isn’t heavily valued within VC’s, while for the company it is often a sizable cost.

VC’s will generally take a significant share of the business and leave the “entrepreneur” with only a small share of the cake. This creates subsequent problems with the founder having “less ownership” of the business that might otherwise be the case. In fact most founders end up with no more than 5% of the company they founded, leading to desire to exit at some stage.

Getting a realistic funding of the potential of the company is difficult for the entrepreneur and can leave the founder with the feeling of being squeezed in terms of own value.

VC assessors have really no expertise in assessing the technology and when joining a Board of a company have no understanding of what the opportunities might be—so discussions with the founder and management are frequently difficult with differences of opinion on strategy and longer-term activities.

VC’s tend to provide money in stage-gates that means that the company is frequently chasing for the previous payment, and having to manage additional cash flow dips.

3. Perspectives of becoming AIM listed

AIM tends to be only for companies with a market cap of £10 million so isn’t an option for early stage companies, who need alternative sources of seed money, business angels etc.

AIM tends to be more speculative than VC’s and having no track record doesn’t put AIM off.

AIM tends not to get involved in running of the business and leaves the management to get on with leadership decisions.

Potentially works well but requires the CEO/FD to have a good knowledge of the process otherwise setting of sales revenue targets can lead to “ short termism”.

Being a plc. adds gravitas as a company and especially in discussions re licenses and allows the use of “share options’ to incentivize employees.

General process with NOMAD’s provides good financial discipline, but disadvantage of AIM tends to be overall cost with annual fees, NOMAD’s and NED’s and corporate lawyers.

RNS communications can materially affect share price, so need careful management.

4. What else can companies do for increased funding?

Various range of R & D funds are available from TSB and these generally are working well. Innovation vouchers may be useful to embryonic companies for early stage studies, but creating next stage funding through extending the voucher schemes for larger sums of money and prior to getting into TSB calls would be helpful.

Byotrol was able to benefit from regional Development Agency Exceptional award that has been really helpful for R & D development including skills and capabilities.

Our company has just made a European fund application and our perception of these is that the scope allows for bigger awards. This has a disadvantage for UK plc. in that that it encourages cross European working with the risk of technology moving out of the UK.

Making grant applications is time and resource demanding and requires the company to decide strategically that they present a source of “extra money” and worth doing.

R & D tax credits offer another source of financial support but for Byotrol they are just being reviewed due to lack of clarity whether the Regional Exceptional award represented “state aid”.

5. How can the Funding process be improved?

(1) Build Scientific skills of Investment Houses

(a)There is a clear perception amongst SME’s that the investment world really understands neither science nor the complexities of scientific companies and wants to value scientific companies as for any other. This leads to poor evaluations and little understanding of the challenges, but also the longer term opportunities open to science and technology companies.

(b)One solution would be to encourage Professional Investors of VC’s and Investment Houses that have the skills and technical capability to invest in technology companies.

(c)Additionally, it would be beneficial to require VC’s and NOMAD’s to carry out technical due diligence on companies that are seeking investment, rather than just financial due diligence.

(d)This would also require the VC’s and IH’s to work with the management of the company to build a sensible business plan and to take a long term view, not only short term financial goals.

(e) Equally the technical due diligence should include gaining an assessment of the value of the IP that is held within the company.

(f)This would allow the Investors to also build in longer term non-financial targets that focus on the “ enablers” rather than just financial results.

6. (2) Building a longer term ownership of the company

(a)If UK plc. wants for founders to retain ownership their companies as they grow and not sell on to overseas investors, they need to allow founders to retain a much higher percentage of the original company after funding. One way could be to establish a cap on the amount that VC’s and IH’s can own of a company.

(b)This would however potentially limit the amount that companies could raise in investment.

(c)Helping the owner/founder to get a better long term evaluation of the company to try and get closer to its true worth could potentially help with the total amount that is raised without breaking the investment cap.

7. (3) Training for listing and investment

(a)As mentioned above, most companies that go for floatation have little knowledge of the challenges that they will face in the process.

(b)This can result in under-valuation of the long-term value of the company, selling too much value of their company and setting over optimistic targets etc.

(c)One solution would be to require CEO’s and FD’s of SME’s who are seeking funding for the first time to go on a training course that develops their knowledge of the process, including setting sensible goals for the company and the need to “manage expectations” of the investors.

(d)Another part of the training should be to get CEO’s to look at different business models for how he will commercialize it’s invention. Few companies take the time to think through what business model will be most appropriate to maximize the value of the technology and it’s value.

8. (4) Management of companies

(a)As previously stated, starting and running science based companies (non IT) is intrinsically expensive, so access to finance is always going to be needed.

(b)What VC’s and IH’s require is for each company to have it’s own CEO, it’s own Finance Director and it’s own accountancy function which are both costly and assume that the company founder has the skills to carry out some of these functions.

(c)It is however also questionable whether within the UK there exist sufficient number of quality individuals who understand the challenges of running scientific companies and the interaction with Investment Houses.

(d)One alternative would be to encourage experienced and highly capable individuals to work part time across a number of companies with the right level of incentivisation, thus providing their knowledge and skills to a few non-competitive companies. This could potentially reduce the cost for individual companies and allow the founders to focus on what they do best.

Other than improving the funding Process what else can the UK Government do to improve the Commercialization of UK Innovation?

9. (1) Change the Culture relating to the view that Innovation only happens in large companies working with universities

Innovation can happen anywhere, mostly driven by serendipity!

Innovation means the commercialization of an idea and in many ways small companies are much faster in doing that than large companies.

In spite of the contribution SME’s make to the UK GDP, much of the UK cultural belief is that Innovation works best with UK Universities working with large companies. In many ways this denies the sector that is most in need of access to University and academic support and that can make the most impact to UK growth– SME’s

The biggest difficulty is that many universities don’t know how to work with small companies and is related to how universities are structured while small companies are often unclear, un-strategic and short of money for big research programmes. Creating demand for universities to meet and discuss with small companies their needs should be considered.

In the NW, the Knowledge Centre for Materials Chemistry (Chemicals NW funded) has played a very helpful role in interfacing the needs of small tech companies with university support. This model should be copied elsewhere.

10. (2) Give companies, especially SME’s greater knowledge of university patents

Intellectual Property that has been generated in UK universities is valuable in its own right and should be protected.

However after a period of time the university can decide that it no longer wants to financially support that patent and let the patent subside. For that to happen means that it the knowledge inside the patent and discovery is passed into the public domain where anyone can access it.

Universities should be encouraged before that happens to make companies aware that the patent exists and seek a new owner, preferably to one that will benefit from the patent and continue to maintain it.

A searchable database that companies (including SME’s) can access of all current patents within UK universities would help this process.

Should no company wish to take up the patent, then the UK Government should consider acquiring the patent as it still represents something of potential value, that has already had investment from the UK taxpayer.

11. (3) Give companies, especially SME’s greater knowledge of funding from other sources

SME’s are very small companies that are always short of resources, both people and money.

With more access to funding, SME’s can set up additional Research projects that are beneficial to both the SME and UKplc.

Creating a searchable database, that compiles all the funding that is available, across the UK by category would be very helpful.

12. (4) Create environments that foster innovation

Byotrol has been helped in its commercial activities by being located at the Daresbury Science and Innovation Campus.

There, the site management has done much to encourage networking between tenants, make connections with leaders of other organisations and create opportunities and support for small companies in a range of commercial areas such as marketing.

The site is proactive in looking to provide new laboratory facilities and previous equipment that at one stage was destined for disposal has been made available at low cost to its SME tenants.

13. (5) Build the recognition for scientific entrepreneurs in Britain

Using Dyson and others as examples, there is a need to shift the general public recognition of the role that science and technology plays in Britain’s future. In many other countries, science and engineering are given a higher status that results in students seeking studies in the natural sciences and engineering.

14. (6) Focus more on commercialization activities

There is a risk that the main focus is on spending money on research and this will equals commercial success. In our experience there is insufficient attention paid to taking the technology to market and the skills needed to do it successfully.

This requires having access to key decision makers for procurement of the technology, a challenge in itself.

So where Public sector is a potential customer, make it easier to sell innovation to it. For example the NHS, which is one of our potential customers is unbelievably difficult to have our technology accepted.

Please note that in providing this opinion paper, the author knows of no conflict of interest.

April 2012