"UK science has never been in better shape. We now need a renaissance in UK venture capital to realise the full potential of the investment in science"
17 November 2008
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I've been involved with venture capital in many capacities during my career, including being the recipient of investment in businesses I ran at various stages of development over the past 20 years. I also sat on Oxford University's technology transfer board and on the university's VC fund board.
So what I have to say today relates not only to my responsibilities as minister for science and innovation, but to my own personal experience.
The first point to make is that I know that this industry's achievements have been hard won: second only to the US in size; the number-one destination for American investors outside the US; all coming off the back of a record 2007, when you raised £34 billion.
At the same time, the transformation of our universities - their success at converting intellectual property into profits - has been remarkable.
I remember the situation at Oxford during the early 1990s, when any researchers with half an eye on exploring the commercial possibilities arising from their work risked sabotaging their academic careers.
That situation has changed.
Last year, universities received £2.64 billion in external income from businesses and public services - a strong endorsement of their ability to translate their knowledge into new products and services.
Over recent years, we've seen major spinouts get listed, including Renovo and Oxford Catalysts, while the likes of Cambridge Antibody Technology sold for over £700 million. Universities themselves are becoming significant players. Imperial Innovations has floated to raise capital for investment. Manchester University has built up a dedicated fund worth £30 million.
Part of this transformation, of course, is down to the Government's efforts to support science and innovation.
The science budget itself has more than doubled over the last decade.
We've put the UK research base on a sustainable footing, clearing the backlog of historic underinvestment in infrastructure. The Research Councils now effectively fund 90 per cent of the full cost of research.
And the Higher Education Innovation Fund - worth £112 million this year, £150 million in 2010 - has helped to change the culture in universities: boosting the work they do with a whole range of businesses and increasing commercial activity. Our University labs have never been in better shape.
But I'm not here for a session of mutual back-slapping.
I'm worried about the health of venture capital in this country. In fact, when it comes to investing in early-stage high-tech start-ups, I suspect the industry is currently on life support.
I'm not alone in feeling this way. When I appeared before the science and innovation select committee a few weeks ago, the talk was all about UK start-ups entering the valley of death.
Here's the nub of the problem. Although BVCA members invested £34 billion last year, little more than £200 million of that was in early-stage UK technology.
There's no question that the UK private equity sector has been a great success story, but that success has sucked funds away from the genuine VC space, which is being starved of money.
This is in stark contrast to the US, where the VC industry has remained strong. It's willing and able to stump up the cash for longer periods - to wait until markets bounce back - because it's operating on a different scale. Patience breeds success and that has created a virtuous circle.
In 2007, the proportion of total investment going into venture capital in the US was almost 33 per cent. In the UK, it was four per cent. That's a massive disparity.
The consequence for our companies is that they're not achieving their full potential and often have to sell out too early. Although we've seen huge growth in the number of spinouts from our universities and the science base, not enough of them are growing to become a UK equivalent of Genentech or Google.
This situation could obviously be magnified by the economic downturn. We have to make sure it isn't.
So far, attention has mainly been on tackling the banking crisis - and the Government has acted decisively.
The same is true with our support for UK firms. Central government and RDAs have committed to pay suppliers within 10 days; we're talking to local government and the NHS about doing the same. Under the recapitalisation deal, the banks must maintain the availability and marketing of lending to SMEs at 2007 levels. We're spending £350 million on training for SMEs, and streamlining business support so it's much easier to access.
I believe it's time to talk about venture capital - to get UK funds and UK institutions investing again in promising early-stage firms.
Not out of a sense of patriotism, but because there's good money to be made. Most entrepreneurs know that the best investments are made during a downturn.
Nor am I talking up UK business in vain hope. Having talked to US investors, I know that they're actively looking at the European market - and the UK in particular - to access groundbreaking science and technology in the emerging sectors of clean tech and renewables.
UK science has never been in better shape. We now need to see a renaissance in UK venture capital to realise the full potential of our 10-year investment in science.
UK investors and fund managers need to make better returns from UK science enterprise than they have in the past.
So what needs to be done? I think there are three priorities.
First, our national industrial strategy has to be right. We need to focus on what we're good at and fight tooth and nail to develop it here - the concepts and the high-tech manufacturing.
Second, we have to put the policies and investment in place to provide companies with practical help. We will do whatever it takes to support people and business right now, but we also know that an upswing will come and we also need to invest now.
We've got to be ready to exploit those opportunities - helping UK start-ups fulfil their potential, encouraging their managers and investors to have patience and ride out the downturn to emerge stronger and with global potential.
Those policies include: loan guarantee schemes to give small businesses the short-term liquidity they need; adapting the fiscal environment to match these difficult times; and using the Government's annual, 175 billion pound procurement spend in the most innovative ways to encourage new technologies and creating market certainty in sectors where the UK can compete and win.
All these issues are being looked at as a matter of urgency.
Third, we've got to deal with the problem of scale in early-stage VC, because there are high-quality start-ups crying out for investment.
For its part, the Government will continue to invest in high-growth science enterprise.
Since 1993, we've raised just under £9.6 billion through the Enterprise Investment Scheme and Venture Capital Trusts. We've also created Capital for Enterprise Limited, which is managing some £350 million of government VC investment and is committing up to £60 million more this year.
These schemes are the envy of Europe, but they'll only get us so far. To achieve the scale that will enable UK funds to back the best over the long haul, we've got to get the major institutions on side - the same investors who got their fingers burnt after the dot com bubble and who've been wary ever since.
I reckon those big investors are now willing to take a second look as they rebalance their asset allocations post the credit crunch.
Starting today, our VC industry needs to shout much louder about its successes.
Talking to leading VC figures over recent weeks, I've been told that, while we certainly can't compete with the US on the scale of funds, our fund managers have arguably a stronger track record of picking winners.
Promoting the industry domestically is vitally important, because UK pension funds already put their money in American VC firms.
Of course we welcome interest and investment from US funds. But it's time that our experienced fund managers look after more investment from UK institutions and then invest it in UK high-tech firms - creating wealth, success and jobs in the UK. And building a critical mass of science enterprise and investment on the Silicon Valley model.
We need to achieve scale in other ways besides. We all agree that university research clusters work - that technology transfer offices make sense - but the truth is that not all clusters and offices have the necessary expertise or the critical mass.
Last week, as part of the HE debate, my department published a report by Paul Wellings on intellectual property and research benefits. One of his recommendations is for DIUS to encourage "hub and spoke" models for technology transfer, whether at the regional level or in particular disciplines.
can certainly see merit in this proposal. We have to focus on what we do well and on the places where it happens consistently.
I want to see professional tech transfer offices, and not every institution has the deal flow to afford one of their own. Consolidating university investment and sharing expertise to achieve scale makes sense, so I'd be keen to hear what other people in the HE and VC sectors think of the Wellings proposal.
My message today is a blunt one. Times are tough - but those of you, like me, who remember past recessions know this will pass. We need to concentrate our efforts where we excel, where the UK has clear competitive advantage and where the growth potential is clear. Working through and beyond the current economic problems by scaling up our VC investment capability and our entrepreneurial ambition.
We need to highlight the incredibly strong investment opportunities that lie in tackling some of the major global challenges facing our generation: energy, climate change, population growth and ageing.
UK science offers the breakthrough technologies in everything from genetics to computer games, from plastic electronics to photo-voltaics, from regenerative medicine to renewable energy.
This won't be easy. Some companies will unfortunately fail. Some technologies won't work out. But overall, the UK has the brains and the talent to weather this downturn and come out stronger.
And I want one of my legacies as science and innovation minister to be a huge increase in investment for new and spin-out companies, as well as mid- to late-stage companies - supporting success from concept to international growth.
Our businesses have to demonstrate that they are "investment ready". Our VC managers have to show the UK pension funds and insurance companies, as well as global investors, that good returns can be made in this asset class.
Britain used to be known as a nation of shopkeepers. From now on, we need to be known as a nation of innovators.
So I call on your help, and promise my - and the Government's - support to make this happen.
We're on your side.
Thanks for listening.