Issue Date: October 12, 2015
Investment Firms Nurture University Start-ups
In 2001, in exchange for $30 million to help the University of Oxford build a new chemistry building, the firm now known as IP Group won the right to get stakes in start-ups formed around the chemistry department’s intellectual property.
Today, IP Group commercializes technology not only from Oxford but also from 14 other U.K. universities. With its academic partners, the London-based firm identifies promising research, helps develop it, assesses business opportunities, and then creates and funds start-up companies. Its stakes in 96 health care, biotech, cleantech, and other tech companies are worth more than $700 million.
Similarly, Imperial Innovations owns shares in 98 companies worth an estimated $400 million. The firm emerged in 1997 when Imperial College London spun off its tech transfer office and tasked the new firm with creating businesses. Innovations’ exclusive relationship with the college, which still owns 20% of the firm, runs through 2020. Since 2011, Innovations has also worked with the tech transfer offices at Oxford, the University of Cambridge, and University College London.
IP Group and Innovations have become significant businesses with stock market valuations of about $2 billion and $1 billion, respectively. Their success, along with a belief that much university technology remains untapped, has encouraged a new wave of specialized firms and university-based investment funds to form, some with an emphasis on the U.S. However, several others have tried to crack this market and failed, and success for the newcomers is far from ensured.
All of the businesses seek to fill the gap between university tech transfer offices and traditional venture capital investing. When the tech bubble burst in 2001, very early stage, or “seed,” venture capital dried up, recalls Nigel Pitchford, Innovations’ chief investment officer. Innovations and others stepped in with the financing that university spin-off companies needed.
The need for seed capital remains today. In the U.S. last year, seed-stage companies attracted only about 1% of venture capital dollars and accounted for only 4% of deals, according to the National Venture Capital Association. Seed investments were down 29% to $719 million and fell 18% to 192 deals, which was the lowest number since 2002.
Tech-focused businesses such as IP Group and Innovations are willing to invest earlier than traditional venture investors. They also work differently. “We form long-term partnerships with the research institutions and labs, and we evaluate the science at a very early stage,” says Michael Burychka, managing director for IP Group in North America.
Because IP Group sees nascent university technology as an attractive asset class, it is willing to invest when there is technology risk, Burychka says. Nevertheless, it tries to mitigate risk. Often the firm will first invest a small amount at the university to develop a technology further, do prototyping or proof-of-concept work, and analyze the market. If it does decide to help create a company, it can provide management and business support as well.
University tech transfer offices generally welcome the help. “Given that so much of our technology is raw and early-stage, having anybody around that not only will further fund development to bring it closer to commercialization but at the same time is in the business of working with our faculty to start a company, what’s not to like?” says Fred Reinhart, president of the Association of University Technology Managers (AUTM).
But patience is a necessity. “Some of the greatest science in labs today may take 10 years of investing and business building before you can start to think about financial returns,” Burychka says. “If you go into some of these labs with a banker’s view, you are probably not going to see a lot that interests you.”
Innovations’ Pitchford, who like Burychka comes from an investment background, agrees. He contends that an investor’s outlook depends on the nature of its funding. Venture capitalists typically create funds that have fixed amounts of money and time limits for generating returns. In contrast, Innovations has “permanent” capital from selling its own stock and from realizing returns on its portfolio companies.
Having permanent capital removes constraints on investment strategies and exit timing. As a result, university tech commercialization firms continue to invest in companies throughout their development. Pitchford says he’d be loath to get out when portfolio companies are “just starting to scale their activities and get really interesting.”
For example, Innovations invested $39 million over four rounds in the immunotherapy developer Circassia. In 2014, when the then-16-year-old firm went public, Innovations didn’t sell out but kept a 14% stake. Circassia is now worth $1.3 billion. Overall, Innovations has stakes in four public firms, and IP Group has 17. But it is a private company, the gene sequencing technology firm Oxford Nanopore Technologies, that is IP Group’s most valuable holding.
Tech commercialization firms are seeing their portfolio values grow by double digits annually. To expand, the larger ones typically review several hundred or more inventions per year, license a few dozen, and create 10 or so companies. At the same time, in any given year, they may shut, sell, or take public a handful of companies, recycling cash into new investments.
Doing so is possible “as long as our balance sheet remains healthy,” Pitchford says. Start-up investments may begin at around $100,000, and a few million dollars per year can go to help businesses, especially ones in the capital-intensive health care field, grow. Overall, the firms may invest tens of millions of dollars per year. In the later stages of a portfolio company’s growth, outside venture investors are likely to be brought in as well.
Most of the cash that tech firms have to invest came from selling shares on the London Stock Exchange. Innovations has raised about $525 million since its initial public offering in 2006. Likewise, IP Group has raised more than $450 million since 2003. It also manages about $130 million in venture funds, including the U.K.’s regionally focused North East Technology Fund.
Not every investor in university technology is so successful. Several publicly traded tech investment firms that emerged around the same time as Innovations and IP Group have since shut down or morphed into other businesses.
Yet in the past two years, a new crop of firms has stepped up and has been making a more concerted run at the business. NetScientific, Mercia Technologies, and Allied Minds all launched sizable initial stock offerings on the receptive London market.
Whereas Mercia has taken a regional focus and works with nine universities in central and northern U.K., NetScientific works with both European and U.S. universities. With a board mostly of former pharma and medtech executives, NetScientific is focused on digital health, diagnostics, and therapeutics. In a recent realignment in this direction, the firm trimmed its portfolio from about 17 to 12 companies in which it holds majority stakes.
Like NetScientific, others also are looking to the U.S. as a relatively untapped market compared with the U.K. Examples of privately held investors include Pennsylvania-based Osage University Partners and London-based Imprimatur Capital, which also invests in Latin America, Central Europe, and Asia.
Allied Minds, which opened its doors in Boston in 2006, has been particularly aggressive. The firm has connections with 34 U.S. universities and an equal number of federal agency labs. It works with Department of Defense labs through Allied Minds Federal Innovations. To find and develop biopharmaceuticals, it partnered with Bristol-Myers Squibb a year ago to create Allied-Bristol Life Sciences.
Allied Minds says it takes a “disciplined approach” to avoid lengthy development cycles. If an identified technology or business doesn’t meet milestones, the firm will stop investing. As a result, the company has killed 11 start-ups, leaving 22 in its portfolio. For this number of companies, its portfolio value—about $488 million—is high because it holds majority stakes, often 80 to 100%, to maintain control. In contrast, IP Group and Innovations usually keep their ownership stakes between 20 and 40%.
To complement 26 consulting scientists and founders who help drive technical development, Allied Minds recently started a fellows program. From almost 500 applications, it selected 11 graduate students, postdocs, and clinical trainees from nine U.S. schools to assist in technology scouting, due diligence, market appraisal, and investment analysis.
IP Group also has stepped up its focus on the U.S. After crossing the pond in 2013, the firm has found universities “very open” to investors, Burychka says. “Our business is very young in the U.S., but we think the opportunity is tremendous.”
Through a partnership with the tech transfer adviser FedIMPACT, IP Group also is identifying technologies from three U.S. Department of Energy labs. At the same time, it has pilot programs with the University of Pennsylvania, Columbia University, and Princeton University that have resulted in a spin-off from each.
These Ivy League universities are hardly novices at commercializing intellectual property. For example, the Penn Center for Innovation (PCI) has created more than 100 companies on its own and through its five-year-old company creation program, UPstart.
Still, Penn does not have an investment fund, notes Michael D. Poisel, director of PCI Ventures, and thus was interested when IP Group came calling. “This was a huge opportunity for us to partner with venture capitalists and have them metaphorically walk the hallways and invest in our companies,” he says.
Both partners are happy with how the relationship has developed and hope to be able to do three or four deals per year. “I’m realistic. We have to produce good projects for them to want to invest in,” Poisel says. The university also has a less formal relationship with NetScientific, which has helped fund several companies, he adds.
Universities have mechanisms beyond venture capital to get money into their start-ups, such as grants and development funds. But actively engaged tech commercialization firms can provide insight to commercial possibilities at the very early stage and relieve academics of some of the pressures of finding funding.
Once a company is created, a university’s ability to be involved financially becomes limited, but tech transfer managers understand that. In 2014, U.S. universities launched 914 spin-off companies, something that couldn’t have been done “without the private sector,” AUTM’s Reinhart says.
To create a more direct link to funding sources, some universities, particularly in the U.K., are setting up new technology commercialization operations and funds. In May, Oxford launched one of the largest, a company called Oxford Sciences Innovation. OSI raised an initial $490 million to fund and build start-ups along with the school’s tech transfer office.
OSI’s start comes as Oxford’s lengthy partnership with IP Group is about to end. OSI will be Oxford’s contractually preferred partner for at least 15 years. IP Group does have a nearly 12% stake in OSI. Other investors include Invesco, Lansdowne Partners, and Woodford Investment Management. These investors also have stakes in IP Group, Innovations, NetScientific, Mercia, and Allied Minds.
The new funds and firms will both improve the opportunity for commercializing university technology and increase competition. Yet most participants in the business say they see enough room in the space. “We see it more as a rising tide that lifts all boats,” IP Group’s Burychka says.
Success for tech commercialization firms ultimately will depend on the quality of the portfolio companies they help create and their own accomplishments as businesses.
“It’s taken us a good 10 years to get to the position that we’re in right now with a strong portfolio of interesting companies,” Innovations’ Pitchford says. He expects new entrants to take at least that long to create companies, generate the cash flow needed for reinvestment, and prove themselves to their own shareholders.
Even Innovations is only partway down the path. More than 80% of its capital was raised in just the past five years, and many of its companies are still young and have yet to prove themselves, Pitchford points out. “Our model will be proven from start to finish when we can build many times over successful billion-dollar businesses.”
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