UK markets' love affair with university IP
It is a customary to complain about the backwardness of the European financiers when it comes to supporting high tech (and I have done that as much as the next fellow). And yet, as Thorstein Veblen, great yet often forgotten economist of the early 20th century, asserted backwardness has also important advantages. These include the ability to learn from the others and to leapfrog previous champions.
I wonder whether recent developments in the UK financial markets do not constitute a good example of such advantage. It looks like the UK universities and their financial partners have now become world leaders in financial engineering and valorisation of their intellectual property, ahead, in terms of their sophistication and institutional design, even of the vaunted US financiers and academic powerhouses.
The ascent to the front rank began only few years ago and was triggered not by an explicit effort of the UK government (although the government, as practically all other European governments and the European Commission of course, spent considerable amount of money and time to promote greater use of academic R&D) but by a local interaction between a prestigious university, Oxford, and a boutique investment banking firm, Beeson Gregory (acquired in July 2002 by a firm with a similar outlook, Evolution), looking for new opportunities. This interaction resulted in the first-of-its kind partnership between, where in exchange for 20 million pounds, Beeson Gregory obtained a 50% claim on assets and revenues, resulting from commercialisation of Intellectual Property of the Department of Chemistry of Oxford University for a period of 15 years. To manage this partnership, a separate company was created. In August 2001, this company became IP2IPO with the objective to creating similar partnerships with other universities. What was new about IP2IPO was not only its focus but also its stated strategy of taking those partnerships (or their spin-offs) public as soon as possible. The new company moved quickly: by mid- 2003, it has established long-term partnerships with four universities, resulting in creation of some 15 spin-offs. Its financial strategy was as speedy and audacious: IP2IPO was listed on AIM segment of LSE in October 2003 at a market capitalisation of GBP 110 million. It achieved profitability in 2005. In June 2006, with a market cap close to 350 million, it changed its name to IP Group and moved to the main listing compartment of LSE. At that time, it had seven partnerships and stakes in 37 spin-outs of which five were listed.
Such a success was bound to attract imitation and competition, although the strategy adopted by IP2IPO contained at least two serious barriers to entry. The first barrier is the need for trusting relationships with academic institutions, which have complex governance structures and a long-standing tradition of distrust of private finance and commerce. Strong relational capital with prickly academics is a key asset, which cannot be easily replicated. The second barrier is the high level of risk and uncertainty. These were further compounded by the IP2IPO’s strategy to buy portfolios of potential inventions rather than specific and existing patents and products.
Nevertheless, companies with profiles and strategies similar to IP2IPO were launched. By February 2006, according to ScienceBusiness, which has been tracking the trend closely, there were other three companies specialised in technology management and commercialisation listed on AIM: Amphion Innovations, Biofusion and MMI. Biofusion, which has exclusive commercial access to the University of Sheffield's medical life sciences research, went public on Aim in January 2005. The company came to the market with shareholdings in a portfolio of eight spin-out companies and an interest in a ninth. It raised £8m with its share placing, which valued Biofusion at £28m. Initial market performance of Biofusion was lacklustre but the company took off in early 2006, partially as a result of some of its portfolio companies making encouraging announcements about their discoveries and partially as a result of a strong interest from new investors, hedge funds and institutional investors.
It is this interest that gave the university IP segment a considerable uplift, as new investors had vast resources. Thus, Sloane Robinson, a hedge fund, managing over £10 billion, announced in June 2006 that it gave Oxford University’s Institute of Biomedical Engineering (IBME) £12 million in exchange for 50% stakes in future spin-offs from the IBME (for the next 17 years). Sloane Osborne also pledged to offer additional funding for such spin-offs. What is interesting in this deal is that IBME will only open its doors in September 2007. According to Financial Times article on the transaction: “The deal announced today is expected to be the first of many such arrangements, with sources in London's hedge fund community saying other institutions are developing similar projects to get exposure to small but potentially lucrative high-tech companies.”
Sloane Robinson followed up its investment into IBME by taking an equity stake in Imperial Innovations, the IP licensing arm of Imperial College in London, which is often compared to MIT. In July 2006, together with seven other institutional investors, including such heavyweights as Invesco and Fidelity, it invested £25 million in exchange for 14 percent stake.
This was not an isolated case: in March 2006, NPI Ventures, an investment arm of Nikko Cordial Corp., announced a £12million transaction with Biofusion: a £2 million for a 7.37 per cent stake in Biofusion (valuing the latter at £27.14 million), completed by a £10 million side fund for investing in Biofusion portfolio companies.
However, the potentially most significant development in this market segment was a change of attitude among academic partners. Universities being a gathering place for methodological and analytical people, it was a matter of time before some of them came to conclusion that universities may as well try to make the best of market interest for IP they create and, in the best new-economy fashion, cut out the intermediaries. A spectacular example of such a strategy was offered by Imperial College, which, after selling a stake of Imperial Innovations to institutional investors, went public on July 31, 2006. This IPO was a resounding success: some £25 million were raised at market cap close to £200 million.
If past is any guide, this is unlikely to be one-of-the-kind event and therefore further financial market developments - alliances, investments, spin-offs and IPOs - are likely not only to continue but to be considerably amplified. Personally, I would not be surprised if the UK example would prove contagious and spread to other EU countries (and to the US).
An old French proverb says “Nul n’est prophète dans son pays” and the university IP success does not escape the rule of local neglect and criticism.
A stunning example of the former is provided by the Shadow Chancellor George Osborne, who took the opportunity of his June 2006 visit to Silicone Valley, to complain that Britain is not doing enough to exploit commercially its scientific discoveries and that under enlightened Tory leadership, the government would nurture “entrepreneurial culture.”
His comments represented either a case of bad briefing (somewhat surprising for an Oxford man) or a clumsy attempt to ensure that his party, should it be elected, could claim credit for financial and commercial successes, highly likely to emerge in the coming years from the already listed companies.
The whole approach has its critics. One of the most vocal is Dr Stephen Allott, chairman of Trinamo, a small management consultancy for technology companies. In a May 8 lecture at Cambridge University he argued that the evidence shows that efforts by universities to exploit intellectual property themselves had not proved successful. Instead, he suggested what he called a “people-centric” approach, focusing on students with entrepreneurial talents and customer needs. Of course, businesses, particularly innovative ones, fail or succeed primarily on the quality of their people. But isn’t the capacity to attract good students and to make them even better (scientists, entrepreneurs, managers), one of the key assets of good universities? There is no reason why universities cannot extend their training and research to technology transfer. Even more so, if one considers that this is a recent and complex activity, which entails a great deal of research and experimentation. Technology transfer is a moving target, evolving rapidly and Allott does not gain credibility when he uses studies dating from 2000 to 2002 as a conclusive evidence to back his criticism. For all its impressive growth and progress in the last five years, the commercialisation of university IP in the UK, as well as in the other countries including US, is still in its early stages.
