Spin-out Southeast

As the UK centre of research and development, the Southeast continues to be a hotspot for venture capital investment. Morag Dickson reports

As the UK centre of research and development, the Southeast continues to be a hotspot for venture capital investment. Morag Dickson reports

The Southeast is home to 24 universities/higher education institutions and eight science parks, generating more research contracts (2,800-plus per annum) and patent licences (over 600 in 2006) than any other UK region.

Ted Mott of science and technology investor Oxford Capital Partners makes a strong case for the use of venture capital in the region in the key sectors of healthcare and environmental technoloiges.

Last year, Oxford Capital Partners invested £1 million of a £1.5 million round in Oxitec, an Oxford-based developer of patented insect sterilising technology used to prevent the spread of insect-carried diseases, such as malaria and dengue fever. Oxitec received an equity investment of £1.5 million from OxfordUniversity’s ISIS College Fund and East Hill Advisors in 2002 to develop and commercialise the technology, which was patented in 1999.

More recently, Oxford Capital Partners led a £1.2 million investment round in Microbial Solutions, a newly-formed spin-out from the Centre for Ecology & Hydrology, a research centre owned by the Natural Environment Research Council. The capital will be used to bring to market its environmentally-friendly wastewater treatment technology, which uses a patent-protected collection of bacteria to cleanse toxic metal working fluids used in the engineering industry.

Mott and his team have since attracted £3.3 million in funds from a consortium of investors to accelerate the market expansion of pest-management systems using patented Entostat powder technology and developed by Hampshire-based business and SouthamptonUniversity spin-out Exosect.

The list goes on, but the question remains: How do venture capitalists spread their risk to protect their capital during times of market flux? “We invest across all stages of development, from start-up to IPO,” explains Mott, “and movement within the venture cycle is something we have long figured into the equation.”

Intelligent money

In February, together with Qualcomm Ventures, Oxford Capital Partners’ ICT fund manager Richard Marsh led a series B funding round, raising $10 million (£5.1 million) for UK-based wireless network optimisation provider Arieso. The Vodafone spin-out received backing from Oxford Capital Partners’ international acceleration fund to take its technology to the US market.

“We are a venture private equity specialist with a focus on emerging sectors,” he adds. “And just as an investor cannot afford to ignore the various points along the venture cycle, a savvy investor will also adopt a strategic approach to sector specialisation within its given geography and accepts that ploughing cash into a business is no longer enough.”

Steve Carle, a senior director at Lloyds TSB Development Capital (LDC), agrees. “Where historically private equity houses failed to bring any value apart from money, market expectations dictate that the value added needs to come from the brain behind the banknotes.”

For Carle, investment hotspots in the home counties tend to revolve around service-related industries where there is degree of overlap with life sciences, pharmaceuticals and healthcare – something of an attractive space to be in, according to the director.

“With pharmaceutical brands looking to avoid any further squeeze on their margins, they are focusing on their core competencies, such as marketing and sales, while outsourcing their R&D operations to smaller companies to take the drug through the research cycle. Once the technology has been approved, pharmaceutical companies often look to acquire the R&D business during the licensing phase. And it’s a similar story with the outsourcing of medical products manufacturing. Once the drugs are licensed – which can be a ten-year enterprise – the company might want to consider sourcing specialist manufacturing capabilities from a third party.”

Within its healthcare portfolio, LDC cites Penn Pharmaceutical Services, a South Wales-headquartered company that assists pharmaceutical and biotech firms to get new products to market by providing outsourcing facilities, and Aesica, a pharmaceutical manufacturing business based in the Northeast, but with facilities in the South.

Capital ideas

LDC is also a financier to funds that operate in the South, including, Cambridge-based Avlar Bioventures, an early-stage investor in biotechnology and healthcare, and SEP (formerly Scottish Equity Partners), which operates in the broader field of technology investment.

Investment opportunities in this arena have also been harnessed by Finance South East. Accelerator investment amounting to £100,000 was allocated to a Kent-based packaging solutions provider for the healthcare industry, Pill Protect.

Within the renewables space, Finance South East provided BioRegional Minimills with proof-of-concept capital of £50,000 to develop a technology that turns agricultural waste, particularly straw, into paper. The pulping technology that began life in a research lab at EdinburghUniversity is now selling technology overseas.

“We act as fund manager for 11 universities in the Southeast, providing proof-of-concept funding to academics who seek to progress the technology by spinning the business out or securing licence deals,” advises Sally Goodsell, chief executive at Finance South East.

Outside the box

In August, Finance South East partnered with Johnson & Johnson alongside South East England Development Agency (SEEDA), South East Health Technologies Alliance and Ortho-Clinical Diagnostics, investing £500,000 of private sector funding across seven projects to finance breakthrough research in diabetes diagnostics – a collaboration and business model that Goodsell could envisage being replicated across a number of sectors.

Andre Ruzycky, Technology Assessment vice president at Ortho-Clinical Diagnostics, says the collaboration demonstrated a new and innovative way to co-ordinate support and funding into health technology companies in the Southeast.

Ed Metcalfe, head of Science, Technology, Entrepreneurship and Management at SEEDA echoes: “The Southeast has the highest concentration of health technology companies in the UK, with some 600 companies providing a third of all UK employment in this sector.”

In addition, thirty per cent of the UK’s life sciences R&D is undertaken in the region.

“It’s all part of the UK’s evolution into a knowledge-based economy, driven by the deployment of intelligent growth capital in the Southeast,” says Mott.

“It began with the decline of the manufacturing industries and will continue with the emergence and development of next-generation service industries in the ICT, healthcare and environmental sectors.”

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.

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