Can academics help entrepreneurs?

First-class ideas are all well and good, but is there money to be made from entrepreneurs partnering with universities? Adam Jolly investigates.

Caravans seem like a good idea, as long we can keep some of our home comforts. We prefer to have our own bathroom, instead of risking the chemical loo at the bottom of the field. Our own kitchen would be good too. So demand is growing for larger and heavier caravans on a fixed site, for which you pay £60,000 to £70,000. Or you could opt for a lodge at a cost of up to £250,000. These high-spec holiday homes have to rest on a durable foundation. Up until recently, these chassis had all been welded by hand in a cluster of half-a-dozen companies in the East Riding of Yorkshire.

Five years ago, Chris Adams, managing director at Bankside Patterson, decided to break away from the pack. If he could upgrade himself from being a fabricator into a design engineer, he felt he could snare the top end of the market.

At his site in Beverley, he developed a bomb-proof chassis that could carry a weight of 14 tonnes, but he could not get the numbers to work commercially. So he called up the team of engineering designers at the University of Hull.

Under a knowledge transfer programme (KTP), they advised him on to how to make the switch from being a welder of components to running the whole process. ‘We buy in the steel, cut it, press it, fold it, galvanise it and assemble it. It’s all in our control,’ says Adams.

Bankside Patterson now offers a chassis that is 15 per cent lighter and 15 per cent stronger than its competitors’. Before its launch, the company’s sales were stuck at £6 million. This year, they are close to £20 million.

As a result, Adams has had to sign up the University of Hull for a second KTP, bringing in a graduate to set up a high-end IT system. ‘We are growing quickly, so we have had to change our accounting systems. We are now in much closer control,’ says Adams, who is now looking at a couple of smaller projects that he might run with the university.

Technology Transfer Offices

Such profitable interactions between academics and entrepreneurs have been the object of £500 million in government funding since 2001. Next year, a further £112 million is being invested to upgrade the capabilities of universities in commercialising their knowledge through spin-outs and licences, as well as carrying out advisory projects.

At long last, words seem to be turning to action, says Dr Emily Nott at the Technology Strategy Board (TSB), the new lead agency for encouraging innovation. ‘All the universities now have a professionally staffed technology transfer office. There is a real change in culture.’

Big ideas, big money

These efforts are starting to show a return. From 2003 to 2007, 31 university spin-outs floated on the stock exchange raising a total of £390 million at a combined capitalisation of £1.6 billion. More recently, in the two years to the end of 2007, ten other spin-outs were acquired directly for £2 billion.

In the next three years, the TSB is going to be spending £1 billion to keep this pipeline of innovation flowing. ‘We are looking to accelerate the commercialisation of technology from the research base, particularly in highly disruptive areas that could turn a market upside down,’ says Nott.

At the same time, the TSB will encourage universities to be more responsive when enterprises ask for help with technology and in employing graduates. ‘Efforts are being made to map the strength of universities,’ says Nott. ‘There are now directories of research excellence at most regional development agencies.’ In 2000, the University of Southampton had a one-man office for spin-outs and licensing. Today, its research and innovation service is run as a separate company, employing 35 people, most of whom have a background in industry. The operation is led by Tony Raven, a former serial entrepreneur who set up and sold three ventures in medical equipment.

So far he has overseen three listings from Southampton on AIM and currently has 12 spin-outs in his portfolio. ‘We have raised an investment fund for early-stage companies, so we can give them a flying start.

‘Typically, we invest £500,000 and bring in a good chief executive, who has 18 months to position them for the first round of venture capital.’

Any income from these activities goes back to the university. As well as spin-outs, licensing and research collaborations, Raven is looking to support local entrepreneurs. ‘If they ring up, we will work out what they want to do. We will then look at what schemes might be appropriate and how we can bring in government funding.’

Cizzle’ing start

Dr Dawn Coverley is leading one of the first spin-outs from the biology department at the University of York, Cizzle Biotech. She led a breakthrough in diagnosing lung cancer, which could help spot the disease faster in 20 per cent of cases.

‘The idea came suddenly,’ says Dr Coverley. ‘But there is a lot of work to prove it. For us, it developed into a spin-out quite early. Different universities and charities had been involved, so we wanted a vehicle to which everyone could assign their IP.’

In 2005, she set up Cizzle and raised £150,000 for more work in the lab. A further £500,000 has just been raised from one of her original backers, White Rose Technology Seedcorn Fund, along with Yorkshire Forward and the Viking Fund.

‘The goal is to produce milestones for our IP and prove that our tools work. We will then look for a licensing deal with a large pharmaceutical company,’ says Dr Coverley, who splits her time equally between her roles as a university lecturer and chief scientist at Cizzle.

Early rounds of funding

The conventional wisdom remains that nobody makes money at seed investing. Funds are too small, so the original investors are quickly diluted and replaced in fresh funding rounds. Then the new backers subject the original proposition to some brutal treatment. Not surprisingly, many ventures fall off this ladder of finance.

For Ernie Richardson at MTI Partners, who has been investing in early-stage technology for more than 20 years, it makes more sense for investors to put in meaningful sums and follow their money.

‘You have to stick with it. You want to gain scale and continuity. Your funds have to be chunky enough to carry a venture through spin-out and the early rounds of funding.’

Last March, MTI announced a £32 million fund to invest in ideas emerging from the University of Manchester, which has become one of Europe’s largest powerhouses for technology since its merger with the University of Manchester Institute of Science and Technology (UMIST). ‘We work with the technology transfer office. Their role is to make deals investor ready. We will then take them through several rounds of funding. Although we have priority access to the deals, the relationship remains arms length. There is no soft money.’

Initial investments will be between £250,000 and £750,000, but £2.5 million to £3 million can eventually be deployed in each venture. MTI is aiming to have 20 to 25 spin-outs in its portfolio.

See also: Spin-out success stories

‘The early-stage arithmetic will stay the same: one or two stonkers, some steady performers and a few failures. No one should run out of money though,’ says Richardson.

Synairgen has been operating on a large scale from the start. It is developing a treatment for the severe respiratory conditions that can fill half of the beds in NHS hospitals during the winter. Because of the scale of the proposition, Synairgen went straight to AIM and raised £9 million, when it span out from the University of Southampton in late 2004.

The business is based around the work of three academics, who had the idea to re-create pieces of lung tissue in the lab, which allowed them to identify the deficiencies in the drugs used to treat severe respiratory conditions like asthma, emphysema and bronchitis.

‘There was a feeling that their approach could be more commercial,’ says Richard Marsden, who joined Synairgen as chief executive in 2003 after 15 years experience in pharmaceuticals. ‘They had made the academic mistake of announcing ideas in conferences. That was the way of the world ten years ago.’

For Marsden, they needed to take out the IP and find a commercial application rather than simply seek recognition from peers. ‘Steroids work well for 90 per cent of sufferers. The other 10 per cent are on a knife edge. Given these diseases are so big and hard to treat, ours was going to be a valuable drug.’

Marsden is still using the £9 million raised on AIM. Major milestones fall in 2009 and 2010. ‘They are so significant that we should be able to go back to investors with an exciting story.’

Eventually, he will be aiming to license the programme to a major pharmaceutical company. ‘It is a potential blockbuster, so it has to be one of the top 30 companies in the world who can take it all the way to market.’

For now, links with the university remain strong. It still has a 17 per cent stake and Synairgen is based on the campus. ‘Our founders are academics, so the university benefits from the equipment we buy and the collaborations we form.’

Brave new world

David Holbrook, the general manager at MTI, is bubbling with optimism about the quality of the commercial ventures between businesses and universities.

In fact, he thinks the UK should be more vocal about promoting its successes: ‘There’s no doubt that the quality of our science is world class,’ he says.

The challenge is to turn those moments of inspiration into commercial reality and for the innovators to receive appropriate remuneration. ‘If ideas aren’t used – if they aren’t shared and developed, they’re next to useless. It’s just self-indulgence.’

Slowly, this change in attitude seems to be happening.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

Related Topics

University Spinouts