Patience is a Virtue

Douglas Hansen-Luke

This week, we discuss our submission to the Government's recent consultation 'Financing Growth in Innovative Firms'. Published last month as part of the 'Patient Capital Review', the consultation sets out research and proposals for how Britain can provide the long-term capital required to scale and grow innovative companies. The results of the review are set to inform part of Phillips Hammond's Autumn Budget on 22 November.

 

At Future Planet Capital we see our mission, to connect the worlds largest investors to the best minds to profitably address the worlds greatest challenges, as an integral part of the Governments cause. Having secured commitments of $300m for innovation from global institutional investors, Future Planet Capital is a new but significant contributor to the innovation ecosystem. 

We have seen first-hand the ground-breaking innovation thriving in the UK today; not only is it world leading, it beckons the dawn of a revolution in knowledge and technology. Here, in our response to the Governments review, we set out our ideas on how best to realise that future for the UK and the world.

 

The International Investors Perspective and British Innovation

The Government highlights the lack of patient capital available to young and innovative companies. If we are going to propel British innovation above and beyond what it is today, we must do three things; think globally, focus on commercialisation and promote British leadership. Britain has innovation in spades and there is a large appetite for investment at home and abroad. 

 

Thinking Globally

Connecting with innovation can be difficult for large institutional investors, as Nick Greenwood, Future Planet’s Cornerstone Investor and Fund Manager of the Royal Berkshire Pension Fund, highlights in his submission to this review. To make matters worse, international pension funds and sovereign wealth funds – in many ways the ideal sources of true long-term capital – tend not to operate at a tempo compatible with the ever-accelerating entrepreneurial world. They also tend to find that such investments are too small to ‘move the needle’ as far as overall investment outcomes are concerned, while at the same time being susceptible to a high percentage of career-limiting failures.

That being said, such international investors have shown increasing appetite for investing in innovative startups and growth-stage companies. Multiple sovereign wealth funds and pension funds from Asia and the Middle East have established offices in the US with the primary purpose of gaining better access to technology and innovation investments in that region.

This fragmentation between innovation and investment is the key issue that the Future Planet Fund was established to solve. As the world’s first university investment vehicle with a global – as opposed to a local or regional – focus, Future Planet captures global ‘network alpha’ in connecting centres of innovation around the world to each other and to the world’s largest institutional investors. When the structure is right, the appetite is evident: we have received commitments of $300m from sovereign wealth funds and institutional investors in the last two years alone.

The UK only constitutes 1% of the World’s population and 3% of its GDP. If we are to scale British innovation to the heights reached by our American and Asian counterparts, the majority of funding must be sourced from abroad.

We urge the Government to promote the creation of intermediary investment vehicles that can be marketed abroad, connecting British innovation not just to patient capital but to international capital.

 

A Broken Funding Model

Capital –or a lack thereof– isn’t the only issue. As the Treasury has suggested, the UK has struggled to replicate the array of billion-dollar Unicorns produced by the US. We consistently rank top in the world for innovation and yet, for IP applications, we don’t make the top ten. Scaling innovation from seed to success requires not just investment but the funding models and infrastructure to go with it.

Researchers typically spend 40% of their time applying for grants. They also say that scrambling for ranking and funding is what drives the rush to publication. While this propels our Universities to the top of global league tables, commercialisation without the necessary patents in place becomes difficult, even impossible.

The government has an important role to play in shaping structures which allow academics and faculty members to profit personally from commercialisation, as well as the university itself. An alternative model should value venture and entrepreneurship, nurturing and protecting IP before sharing it with the world.

The consultation also considers the consequence of relinquishing a founder of control over their company. The 50% equity that British universities typically take in their spin-outs, may deter and demotivate entrepreneurship. However, lower equity may be untenable, especially for smaller institutions. In the US the figure is typically below 10%, incentivising entrepreneurship, while maintaining a sizeable exit stake for universities if the company is successful. Stanford maintained over 10% in Google up to their IPO, generating $399m for the University.

As a compromise, Oxford Sciences Innovation (OSI) have developed one of the best models in the UK, taking reasonable equity in return for incubation and access to their $600m fund. An incremental but fundamental improvement to this would be for universities to take smaller but perpetual non-diluting stakes.

 

Flying the Flag

At Future Planet we are seeing far greater company size and valuation achieved in California and China – Britain needs to raise its game and realise our value.

We have the talent, the technology and the money to compete with our American counterparts. Britain founded the World Wide Web, sequenced the first genome and, in London, has the undisputed European capital for digital entrepreneurship and technology. We are at the forefront of what promises to be a paradigm shift, the likes of which has not been seen since the industrial revolution.

The opportunity for the Patient Capital Review is not just to improve the commercialisation of IP. It is fundamentally to build upon our numerous strengths and to herald a new era of British leadership. The Government’s most effective contribution will not be money but providing the voice that communicates, and the infrastructure that protects and captures, the wealth of innovation we have to offer.

We urge the Treasury to be bold in its approach, and look to the future – it is surely bright for Britain.