Mercia EIS Funds

Commercialising university IP (tax) efficiently

7th August, 2015

Since Gordon Brown first proposed in 2006 that universities should prove their economic contribution in order to secure funding, the spinout sector has steadily grown into a varied and exciting territory for IP-rich technology businesses. And with good reason: the UK boasts some of the finest academic institutions in the world, with a cohort of experienced professors and post-graduates unearthing new and impressive discoveries across a wide range of technology led sectors, including life sciences, advanced materials and digital.

“University spinouts provide a vital source of disruptive start-up technologies, which in turn offer investors the chance of investing in unique IP within potentially diverse and high growth sectors,” says Dr Nicola Broughton, Investment Director and Head of Technology Transfer at Mercia Fund Management, one of the leading technology investors in the UK. “The rate of successful spinouts has also been increasing over recent years, with many achieving successful commercialisation of their IP.”

According to the Spinouts UK Annual Report 2015, the number of successful exits by UK spinouts is continuing to rise, with the attributed IPOs, trade sales and mergers for the sector increasing year on year for the past four years.

Despite this success, and the UK’s fertile breeding ground for IP-rich investment opportunities, there is still a large funding gap that needs to be addressed if investors are to take full advantage of the exit potential of spinouts.

“Traditionally, university spinouts have struggled to find knowledgeable, hands-on investors with the breadth of capital to accelerate and scale the growth of university spinouts,” Dr Broughton says.

“There is also a gap known as the “Valley of Death” for spinouts,” Dr Broughton says. “Investors are either committing very small, early stage amounts which won’t see a company through to development, or they are choosing to invest at the other end of the scale, once the business reached a suitable size. This gap in funding can be detrimental to the early stages of the business, and consequently deprive the market of valuable technological discoveries.”

This may be due, in part, to an uncertainty of the true commercial potential of each business which, Dr Broughton argues, can be combatted by building up a strong management team – an inherent challenge for university spinouts whereby the expertise of the founders may lie solely in the technology field itself, leaving a gap in the commercial skillsets required to develop and grow a business.

She says: “Undeniably, working with spinouts can be challenging. Quite often, the IP that is being commercialised has never been seen on the market before, making it difficult to predict how the market will react. On top of this, the academics behind the technology may have less experience in commercialising their work.

“However, if you can build a strong management team that can take care of marketing, sales and business building, then you are more likely to realise a successful exit for the spinout and its investors.”

This is where a dedicated technology transfer team steps in, supporting spinouts in the early stages and building a strong team around the IP. Dr Broughton and Dr Brijesh Roy, an Investment Manager formerly of Isis Innovation, the research and technology commercialisation company of the University of Oxford, form just such a team at Mercia Fund Management.

Dr Broughton says: “At Mercia, we have strong partnerships with nine universities in the Midlands and we are increasing this network in the North and in Scotland, providing enviable deal flow opportunities. We also have a dedicated technology transfer team who support these companies through to commercialisation.

“The Complete Capital Solution offered by Mercia, combining third party managed funds (which can carry significant tax advantages) and direct investment from Mercia, enables us to offer a single investment partner solution which can help commercialise spinouts from their infancy right through to exit with both capital and strategic support.”

A key problem in the provision of capital to support the UK’s university led start-ups is the historic geographic bias of capital to London and the South East, an issue which plagues early stage investment generally. The result is that the UK may be losing innovative, high-growth businesses from universities which don’t have the support to help commercialise their IP.

Dr Broughton comments: “The Gold Triangle of Oxford, Cambridge and London is still very much the main investor focus, despite the fact that 52% of all active spinouts originate from the Midlands, North and Scotland.

“At Mercia, we are continuing to build and strengthen our university investment partnership network across the Midlands, the North and Scotland, where we are seeing fantastic, and largely untapped, opportunities across key technology led sectors.”

“As part of our commitment to supporting our enhanced university network across the Midlands, the North and Scotland, we are also about to open a dedicated EIS & SEIS tax efficient fund, the University Growth Fund, for commercialising university spinouts from this network, across key technology sectors in which we hold deep expertise.”

Nationally, the community of established spinout companies continues to expand and consolidate. The sector has become much more efficient, with more successes and fewer failures, making it an interesting proposition for investors looking to diversify their portfolio.

For Dr Broughton, however, there’s also something to be said for supporting a growing business from scratch.

She says: “Apart from the obvious cash rewards, spinouts are also about taking an academic’s life work into market, which can be incredibly rewarding. Even if it isn’t a life-changing medical discovery, spinouts offer technology that has the potential to be truly disruptive – they contribute to the economy and they create jobs. It’s great to be a part of that.

“Despite the challenges IP intensive spinouts can present, the right technology, alongside the right team, the right investment partner and the right timing, have the potential to do very well for investors.”

Mercia’s University Growth Fund, combining EIS and SEIS tax advantages, will be launching Monday 10th August. For further information or to request a copy of the prospectus, click here http://www.merciafund.co.uk/investors/open-funds/ or contact Talon Golding at talong@merciafund.co.uk.

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