Coming up with world-beating ideas in the realm of science is one thing; turning them into commercially successful applications quite another. Academics who excel at the former are often not very good at the latter, which is why in Europe, the transfer of technology out of universities into the private sector is still in its infancy.
The US remains the undisputed leader in this area globally. In the UK, the commercialisation of academically generated intellectual property is a better developed practice than in other parts of Europe. According to a report published by the British Venture Capital Association in November 2005, there were 126 technology transfer offices active in Britain last year, and a dozen UK university spin-out companies went public in 2004.
Specialist investor groups have emerged to help advance the field further. Among the more high-profile ones in the UK is the IP Group, formerly known as IP2IPO. Set up in 2001, the AIM-listed firm has formed long-term partnerships with eight UK universities to provide seed capital and support in return for equity stakes in any businesses they foster.
The model is not without its critics, because some of the partnering universities have ostensibly signed away significant commercial rights in return for relatively small amounts of capital. A recent article published in the Financial Times highlighted a £5 million deal done with the University of Bristol in 2005, which gave IP Group first dips on Bristol's intellectual property for a staggering 25 years.
But whether or not IP Group's partners are getting a good deal, the firm has certainly been prolific: by June 2006, according to its website, 42 companies had come out of the affiliated academic institutions. In September, the firm signed another £5 million, 25-year contract with the University of Bath.
Venture capitalists are also focused on helping universities bring ideas to the marketplace. One example is Quester, a London-based VC which, alongside a number of institutionally backed Series-A venture funds, has been managing university spin-out funds since 1999.
Unlike IP Group, Quester is not injecting seed-capital into spin-outs to maximise financial return. Instead, says Simon Acland, a director at Quester, the firm is mainly interested in helping create IP-driven start-up businesses that at a later stage of development may turn into investment opportunities for its series-A vehicles.
Seed funds such as the ones managed by Quester tend to be small, and hence generate small streams of fee income, too. Working with a company at a stage where the basic corporate infrastructure, let alone a marketable product, has yet to be created is a costly, resource-intensive undertaking. Acland says that in order to cover costs, Quester cross-subsidises its seed-capital activities with the fee income generated from its core venture business.
Thus far the strategy appears to be working. Acland says Quester's seed funds have delivered approximately one in three of the firm's current venture capital investments. Another 20 percent of Quester's venture deals originated from within the firm's university network so that in total, the firm owes about half its deal flow to its close connection with UK academia. You can see why Quester is taking it seriously.
The key task facing VCs in working with academic spin-outs? To help them identify and bring in the commercially capable individuals who can steer them towards commercial success. “The challenge has moved on from getting money into these companies to getting good management in,” says Acland.
Needed are experienced entrepreneurs capable of building companies. For people who have successfully done this before, start-ups armed with little more than a scientific concept, however compelling, may not be the most obvious projects to get involved in. Neither are died-in-the-wool academics without any private sector experience easily convinced that there is merit in working closely with the commercial types. To persuade both groups otherwise is where the venture capitalist comes in.
To discuss ways to bridge the divide between the two camps, a cast of investors, entrepreneurs, academics and policy makers gathered at a BVCA conference in London in September. “Turning good science into good business” was the theme. One finding was that plenty of work is needed to catch up with trendsetter USA, where university spin-outs benefit from deep pools of public sector funding and university endowment capital before coming to market with a more developed proposition. It's a tough act to follow. But at least efforts to get there are underway, with Britain leading the charge in Europe.
In November, Private Equity International will launch IP Investor, a new magazine dedicated to IP monetisation around the globe.