When is the right time to cash in?

As universities commercialise their research more and more, researchers need to navigate a labyrinth of choices - but how to decide the best route? Dr Robert Tansley explains the spin out landscape.

This is probably one of the best eras in which to spin out a science or technology based business in the UK. Most universities now have commercialisation departments established to help academics turn their ideas into business concepts, bringing together the right combinations of experts to scope and develop new technologies and protect the intellectual property (IP) that results.

Additionally, the UK has a well-supported public sector resource, in the shape of Innovate UK, to support the development of proof of concept demonstrators that help to de-risk the technology for private investors. As a country we are also getting better at structuring further funding to ensure the longer-term support of early-stage companies in the life science sector, which will help to reverse the brain drain to the US. A good example of this is Cambridge Innovation Capital (CIC), a recently established technology investor, which has the support of the University of Cambridge’s commercialisation arm Cambridge Enterprise. Dr Robert Tansley is Healthcare Investment Director for CIC. He was originally a doctor and spent seven years in hospital medicine before moving into the pharma industry. His experience includes founding two companies in the Cambridge region.

As a country we are also getting better at structuring further funding to ensure the longer-term support of early-stage companies in the life science sector, which will help to reverse the brain drain to the US

He says: “From a personal perspective, I believe there has always been funding available for the right companies with a good story to tell. Where there have been failings is in the quality of funding. Early stage life science investments are inherently high risk and often the technology needs time, money and a good understanding of the market in order to develop to its full potential. I think too often the investment strategy has not given companies enough time to overcome the inevitable developmental problems that all tech companies face and there has been an over-emphasis on achieving an early exit rather than optimising the longer term return.”

This was why leading figures in the Cambridge cluster of academic and business interests decided that a new approach was required to finance early stage companies and help them to stay in the UK. CIC was launched in 2013 with an initial £50m funding from institutional and strategic investors, including Invesco, Lansdowne Partners, the Cambridge University Endowment Fund and ARM. Its permanent capital structure allows it to provide long-term investment in companies with potential for high growth, and its Board and Scientific Advisory Panel includes entrepreneurs who have knowledge of creating and growing companies.

In addition to supporting established companies in the Cambridge Cluster, the fund has provided seed funding to University of Cambridge spinouts. It has also observed academics are becoming more aware of the opportunities to commercialise their research, a process that is becoming smoother as the funding pipeline is becoming more integrated. Until recently a big issue has been the ‘valley of death’, the gap between research grants and business investment, where the technology was not mature enough to attract a private investor. Now, through Innovate UK, there is support available, not only monetary but also advice and mentoring in various forms to help companies through this transition process.

Innovate UK issues a number of competitions covering sectors where there is a defined unmet need, which provides an opportunity for very early stage companies to pitch for funding within these broad themes. Also its funding can be valuable when an early stage company wants to invest in further research. For example, Congenica is a leader in genomic analysis and interpretation. It was spun out about two years ago from the Wellcome Trust Sanger Institute and is based on the work of pioneering scientists involved in the human genome project.

[caption id="attachment_53097" align="alignnone" width="620"] Congenica received a £2m grant from Innovate UK to enable them to continue their work on multi-omics.[/caption]

With the falling cost of sequencing, the genomics sector is growing rapidly and Congenica saw the potential to extend its technology – Sapientia, which can identify gene-disease associations – to support ‘multi-omics’. This would look at all the pathways in the body, from the genes through to their expression, covering transcriptomics and proteomics. Congenica has recently been awarded a £2 million grant from Innovate UK, allowing the company to explore this new direction.

Early-stage companies are not able to gain bank loans, known as debt funding, as they have no assets to secure the loan or income with which to pay the interest. Therefore the company will need to be funded with equity, where investors provide funds in return part ownership of the company. Business angels are individuals that may previously have been entrepreneurs themselves or have significant business experience. They have their own money available to invest in teams where they consider there is good potential for a strong business. Low interest rates together with the generous tax breaks of schemes such as the Enterprise Investment Scheme have increased the appetite of these investors to consider the technology sector as a means to grow their net worth while providing support to the next generation of businesses.

Business angels are individuals that may previously have been entrepreneurs themselves or have significant business experience

An early stage company needs to select its investors carefully and look at the other benefits they can bring. Angels can bring more than just money; they often have useful contacts and experience that can be invaluable to a first-time entrepreneur, particularly if they have previously been in an academic or medical environment. However, Angels will not have access to unlimited funds and, like all investors, will want to be able to get a return on their investment at some point. Consequently a fast growing company needs to think in terms of rounds of funding, each progressively larger than the last. The next level of investor is venture capital (VC). Venture capital funds invest in a portfolio of companies with the intention that, although some will fail, others will do well enough to perhaps reach an Initial Public Offering (IPO) – that is a stock market listing where shares can be traded – or alternatively is bought by a larger organisation. These are examples of an ‘exit’, which is when the investors get a return on their money.

[caption id="attachment_53096" align="alignnone" width="620"] Business angels can provide invaluable assistance and aid to start ups.[/caption]

Other forms of investment come from companies that look to invest in exciting technologies in order to ‘outsource’ their research and development. Many of the large pharmaceutical companies are involved in open innovation where they have agreements with early-stage companies to license their technology and gain early commercial benefit from the innovation. A good example is Johnson & Johnson Innovation, the venture capital subsidiary of Johnson & Johnson. It aims to create opportunities that meet its strategic needs while providing visibility to innovative emerging technology, businesses and business models. CIC is unusual as it is happy to coinvest with all the various investors detailed above, and once invested, expects to support its portfolio companies through to maturity.

Getting investment ready

There is no standard path for transitioning from research into the commercial sector but the start-up company needs to get itself ‘investment ready’ in order to be appealing to a potential investor. What makes a science-based company interesting to an investor?

1. Scientific excellence – a team with deep expertise in a particular field of science and knowledge of a clearly defined unmet need that can be addressed.

2. Well networked – being well regarded within the discipline with a diverse network of other scientists. This demonstrates influence and credibility.

3. IP strength – the company must have defendable intellectual property.

4. A vision and plan – the entrepreneur needs conviction and passion as well as a credible business plan with achievable milestones. Realism is required; it is unlikely the plan will be right first time.

5. A strong team – the company needs a multi-disciplinary team that includes commercial and financial expertise in addition to scientific excellence. Establishing a core team plus advisors is a way of accessing the skills you need without employing all of them directly.

6. A good pitch – the entrepreneur needs to have an elevator pitch – a short introduction to the business idea that can be communicated easily within a few minutes. It is best to practice this so that it is fluent, and also to have pitches of different lengths to adjust to the circumstances.

7. Know your customers – the company needs to get to know the opinion leader and, for a life science application, the patient advocacy groups, advisors, physicians and needs of large pharma. The team should talk to their customers often and involve them in pilots and early studies to ensure that you are meeting their needs.