patient capital · known as the ‘valley of death’ for academic-associated technology start-ups....

A new way of funding the commercialisation of early-stage UK scienceTony Hickson, Managing Director Technology Transfer, Imperial Innovations Group plc

Patient Capital

IntroductionThe UK has long come in for criticism about the inability, or reluctance, of its ecosystem to fund and develop the scientific research breakthroughs that are generated at its many world-class universities. In 2014 figures from the British Venture Capital Association (BVCA) suggest that, out of total private equity and venture investments of £4.7 billion in the UK, just £108 million was deployed into seed, start-up and early stage investments1.

This may be due to the fact that early-stage investors in cutting-edge science experience not only high technical and market risk, but may also have to wait a long time before they see a return on their investment. For example, the Wellcome Trust estimates that the average time-lag from research expenditure to eventual health benefits in patients is around 17 years2.

Regardless of whether the relative lack of investment into the early-stage area represents a true market failure or not, the last decade has seen an emergence of funding vehicles that look to fund early-stage high-risk technology companies with a more long-term view – so-called ‘Patient Capital’. Such organisations represent an increasingly important enabling factor in the success of new ventures associated with universities and beyond.

What is Patient Capital?When we talk about Patient Capital, we are referring specifically to open-ended or evergreen funds (or businesses) that are focused on funding academic-associated start-ups. Patient Capital businesses do not have the fixed term investment period of Venture Capital or closed-end funds to make returns to their funders (Limited Partners); instead, they reinvest any proceeds back into new start-ups and their existing portfolio of companies to make returns over longer, open-ended periods.

By adopting this long-term focus, investors in Patient Capital businesses ultimately expect to see higher returns. They may seek returns through dividends (listed vehicles), a one-off return of capital (from a significant event like a trade sale or IPO) or may be investing for strategic reasons such as gaining exposure to high-risk/high-potential businesses or a particular sector.

The rise of Patient Capital in the UKUK Universities are at the forefront of scientific research. However, inventions generated at our leading academic institutions typically require substantial development before they are commercially viable. In particular, companies based around high-technology university inventions may typically take 8-17 years from first patent filing to exit or IPO, and frequently require substantial funding to develop their technology.

Until the advent of Patient Capital around a decade ago, deep science based technology businesses were funded by two main sources:

1. Venture capital (‘VC”) funds, which are typically closed-end funds with 10-year fixed term periods. Usually, each fund will invest for 5-7 years and then follow-on/manage out the investments for the remaining period. In general, this means VCs may prefer to wait until a technology is substantially de-risked before making their initial investment – typically at Series A (the first substantial funding round following seed and other development funding).

2. Seed funds, which are prepared to invest earlier than VCs but may lack the cash to ‘follow’ their money (and hence prevent subsequent dilution of their stake) over the long, capital-intensive life of a high technology start-up. As such, seed investors often shy away from investing in certain sectors such as biotechnology and automotive/aerospace engineering, which are capital intensive and where development cycles are long.

Because neither of these models was particularly supportive of university spin-outs, this created what is known as the ‘Valley of Death’ for academic-associated technology start-ups. Certain types of university inventions found it extremely difficult to attract seed-funding, and venture finance was similarly limited.

A new way of funding the commercialisation of early stage UK science

Patient Capital

Patient Capital arose as one potential solution to help address the Valley of Death. The longer-term outlook and investment profile of these funds is ideally suited to technologies arising from academia. Patient Capital providers can afford to ‘get in early’ (at seed stage or earlier) and continue to invest (sometimes alongside VCs, Corporate VCs or other Patient Capital providers) throughout the life-cycle of a high-technology business, protecting their equity position through follow-on investment. Because they invest from their own balance sheet, they are not under pressure to return capital to their shareholders or unit holders within a short period, thus enabling the prospect of growing and nurturing more substantial businesses with time.

Origins of Patient Capital in the UKThe pioneerThough many evergreen funds have been set up in the UK over the past three decades, the rise of dedicated, university-associated listed Patient Capital businesses associated with Intellectual Property commercialisation can be traced back to Beeson Gregory/IP2IPO and a specific University departmental deal involving Oxford’s department of Chemistry in 2001. IP2IPO subsequently became IP Group PLC and listed on the London Stock Exchange. An explanation of the early evolution of IP Group can be found here3.

Fast-followersA number of ‘follower’ organisations also entered the market very shortly afterwards, each adopting slightly differing business models but all with a common focus on the patient, longer term funding of academic associated inventions. These organisations included:

• Imperial Innovations Group PLC

• Fusion IP PLC (now part of IP Group)

• IPSO Ventures PLC (no longer trading)

The backersOf course, Patient Capital investment vehicles require similarly patient financial backers. Much of this technology commercialisation sector has been corner-stoned and underpinned by long-term supportive investment from wealth management funds such as Invesco Perpetual, Woodford Investment Management, Lansdowne Partners and others. Their capital commitment to a number of private and listed Patient Capital businesses provides much of the underlying firepower and long-term support required to develop and support UK scientific ventures.

The motivations for these funds is that they see UK Intellectual Property and early-stage spin-outs as significantly undervalued in comparison to their US counterparts and so consider there to be a large potential upside to investing in UK innovation. Furthermore, by supporting Patient Capital businesses that invest in these university ventures early, they gain exposure to a range of complex, high potential businesses. This gives them a chance to understand them intimately with a view to possible direct investment from their own large funds at a later–stage once they have been substantially de-risked.

Current components of the UK university spin-out funding sectorMuch has changed in the past few decades; approaches to university funding have been tried, some have failed, and some have evolved into what we have in the present day. The list below gives an overview of the different funding options available to UK university spinouts or academic-associated businesses today:

1. Patient Capital, balance sheet investors (may be public or private)

This group includes listed entities such as IP Group, Mercia Technologies, Imperial Innovations, Frontier IP, Net Scientific and some private companies such as Oxford Science Innovation (OSI), Cambridge Innovation Capital (CIC) and Perceptive Biosciences.

All these companies focus on high technology, university-associated spin-outs, invest from their balance

Patient CapitalA new way of funding the commercialisation of early stage UK science

sheets (i.e., are not structured as venture funds) and have no fixed term (i.e., they can invest over the full lifetime of a typical university venture).

Such Patient Capital companies may start with a single university partner and then branch out. For example, IP Group began with a relationship with Oxford University’s Chemistry department, CIC with Cambridge University and Imperial Innovations with Imperial College London. Now, there tends to be a mix of associations with multiple universities – sometimes formal or exclusive and sometimes looser, ‘relationship’ deals.

2. European Investment Fund-backed venture funds associated with single or multiple universities

These include the UCL Technology Fund (focused on UCL), the MTI UMIP Premier Fund (focused initially on Manchester University) and Epidarex (focused on Kings’ College, Edinburgh, Glasgow and Aberdeen).

Though not technically Patient Capital (as they are closed, fixed-term funds) they may be backed by Patient Capital funds that could step-in to ‘continue the journey’ if the originating fund cannot follow its money.

All of these funds have been backed by the European Investment Fund, part of the European Investment Bank group, which has a remit to provide risk finance to benefit small and medium-sized enterprises across Europe.

3. Evergreen strategic venture capital funds

Syncona (owned by the Wellcome Trust) is an example for this model, alongside many corporate-owned VC funds run by companies such as Roche, J&J GSK and Pfizer. They tend to invest for strategic and financial reasons, e.g. access to the ‘next big thing’, horizon scanning etc.

Such funds have no fixed-term closing date, differentiating them from most venture capital providers. Syncona invests in start-ups in defined healthcare spaces, many of which benefit significantly from the patient-capital style longitudinal approach to funding. Despite Syncona’s backing from the charitable Wellcome Trust, it is important to remember that the fund is ultimately investing to see a return on its investment.

4. Fixed-term closed-end venture capital funds.

The UK is home to a large number of VC funds – Abingworth, Amadeus, SV Life Sciences, Index, Medici to name a few. These funds play a vital role in funding high-technology companies. Whilst they may invest later in the development cycle, they frequently syndicate (club together with) the sorts of funds listed in points 1-3 above to provide the substantial capital investments that high-technology spin-outs require over their development cycle. Syndicating with VC funds spreads risk and increases the network of access to advice/management talent available to a spin-out. As such, Patient Capital does not replace venture capital, which is still vital to the UK economy, but often precedes it and invests alongside it.

The impact on universities of partnering with Patient Capital partnersFor a university, having a defined and associated Patient Capital partner offers a range of benefits. Scientists may be encouraged by the knowledge there is a provider of capital that has a strong relationship with their institution. Potential co-investors may interpret the existence of the associated fund as evidence that the university is experienced regarding investment and founding companies, thereby increasing the likelihood of participating alongside them.

However, one downside may be that an expectation of funding grows when companies are formed at a university. If a company is formed at a university and it doesn’t then receive funding from the university-associated fund, it may be difficult for it to attract funding from other sources because the company may be perceived to have fallen at the first hurdle.

It is important to remember that Patient Capital businesses have many of the same criteria for investment as venture capital funds. Their investment must have the potential to realise many times the amount invested


to justify the risk of failure. Usually, this means that companies that receive funding from VC or Patient Capital have the potential to address large global markets. Consequently there may be some companies that are perfectly viable and have the potential to address smaller markets, but may not be of sufficient potential future scale to attract either patient or venture capital funding.

However, there are models that can address this issue. For example, Imperial Innovations runs a dedicated company creation and development unit called Co.Create, which works with all Imperial College spin-outs of any size to help them attract funding, even if they do not receive Patient Capital funding from Imperial Innovations’ Venture funding team. The universities of Oxford, Cambridge and Edinburgh have similar in-house teams and dedicated seed funds for this purpose also.

So, whilst the difficulties caused to spin-outs if they do not raise money from their university-associated Patient Capital partner can be problematic, they are surmountable as evidenced by the number of companies funded each year by alternative sources such as crowd funds, SEIS funds and angel investors. Despite these inherent flaws, it should not be forgotten that funding is cyclical and times are currently good. Without new, long-term initiatives such as Patient Capital the potential alternative could a return to sparse, uncertain funding, a larger Valley of Death and an inability to support the long-term development cycles of high technology university spinouts.

The evolution of IP and deal-flow access agreementsPatient Capital businesses are generally required to demonstrate to their investors that they are capable of accessing a high quality, long-term and stable sources of intellectual property or investable spin-out opportunities. A range of approaches to engage with university partners has been adopted, most of which can be categorised along the lines set out below (shown in decreasing order of ‘access strength’):

Type of Access Explanation Level of exclusivityIP rights Exclusive first rights to

commercialise all IP from a university

Exclusive

Founding share buy-out rights Exclusive first rights to share in/manage the university’s founding equity stake in new spin-outs

Exclusive

Pre-emption buy-out rights Exclusive rights to buy out the university’s pre-emption rights (its right to protect its initial stake in new spin-outs)

Exclusive

‘Pay to Play’ rights Exclusive rights to invest in new spin-outs which previously received small amounts of pre-seed or proof-of-concept funding from the Patient Capital partner (e.g. £25-100k per project at a very early stage before incorporation of the new company)

Exclusive

‘Participation’ Rights: The first right to ‘bid’ to invest in new spin-outs (i.e. a first right of refusal to invest)

Exclusive

‘Visibility’ rights A right to ‘see’ all deal-flow, but no special first rights to invest

Non-Exclusive


‘Vested interest’ rights No special rights, but the university feels encouraged to show deal-flow to the funding partner due to the fact that its endowment fund has invested in such fund.

Non-Exclusive

‘Relationship’ rights A soft commitment (e.g. non-binding letter) from a university to consider a particular funding entity as a trusted partner, but no more.

Non-Exclusive

In broad terms, these types of ‘pipeline’ agreements have evolved substantially over the years.

When Patient Capital businesses first began to emerge, investors looked on them uncertainly and generally required there to be clear, strong partnerships with IP sources. This meant that the early movers such as Imperial Innovations, IP Group and Fusion IP formed exclusive, ‘first rights’ deals with universities in order to demonstrate they had sufficient access to guaranteed deal flow sufficient to deploy their capital.

After Patient Capital became more established as an asset class, the need for exclusive deals reduced as such funding vehicles have proven to be able to source sufficient deal-flow through their expertise, proximity and willingness to invest in university innovations. Some businesses such as IP Group signed a range of non-exclusive deals with a number of universities, while others began to extend their range of investment through good working relationships with no deals required. For example, Imperial Innovations began to invest in Oxford, Cambridge and other London universities, Cambridge Innovation Capital has invested in Cambridge and UCL start-ups and Mercia Technologies has more recently begun to invest in university spin-outs around universities in the UK midlands.

The future of Patient Capital in the UK: trends and university dealsGiven the recent increases in availability of Patient Capital funding entering the market, it is possible that, going forward, there will be increased competition for university intellectual property. This growing mass of Patient Capital may have a number of possible effects:

• It may increase the value of university intellectual property, which could be seen as a good thing for spin-out/start-up founders (as pre-money valuations may rise).

• It may see Patient Capital providers seeking to strike or extend ‘pipeline’ deals on ‘as tight as possible’ a basis in order to protect their proprietary access to deal flow.

• It may see some Venture Capital funds, faced with rising late stage valuations and increased competition, begin to reach further back into early-stage investing to ensure they continue to see plentiful deal-flow. This effect has also been observed with some Corporate Venture Capital funds that invest for strategic reasons.

• Universities themselves may feel less pressure to tie their institute to any one particular Patient Capital provider or venture fund given the increase of ‘choice’ in the market.

2014 was a landmark year for Patient Capital as it was the first year that this new sector invested more into UK start-ups than venture capital4. It seems unlikely that this will be a one-off occurrence. Patient Capital may a relatively new entrant to the UK market, but more funds continue to appear and raise investment either privately or through listing on stock exchanges. Indeed, the relatively recent £320m fundraising by Oxford Sciences Innovation (closed in June 2015) was described as the largest single capital raise by any Patient Capital IP commercialisation vehicle to date.


The future for the sector is exciting and has the potential to develop in a number of ways. Some Patient Capital businesses such as IP Group are beginning to expand the model into other markets such as the USA, and others such as Imperial Innovations are beginning to focus more on ‘deep science, high technology’ ventures rather than solely on traditional university spinouts.

Has Patient Capital been successful? Despite the relatively ‘new’ nature of Patient Capital, there have been a number of successes for the Patient Capital model so far, resulting in both private and public companies that are now commercialising university IP, are well on the way towards it or have been properly funded from day one (allowing them to concentrate on product development rather than fund-raising). Some examples are listed below:

1. Oxford Nanopore Ltd, a business developing platforms that enable the analysis of single molecules – such as DNA, RNA, proteins etc. Oxford Nanopore was spun-out of Oxford University in 2005 to develop IP generated by Prof. Hagan Bayley, and received seed-funding from IP Group. Patient capital provision, in which IP Group has played a major role, has enabled the business to raise over £250m in private funding to date. It now employs over 250 people and is headquartered in Oxford. It has a range of products available based on its unique nanopore sequencing approach, and its MinION technology was used, for example, in Guinea during the 2015 Ebola outbreak.

2. Circassia Pharmaceuticals PLC, an allergy treatment company that is developing a ‘vaccine’ approach to treating the causes of allergic reactions. Its lead product, a cat allergy treatment, is currently nearing the end of phase III clinical trials. Circassia is based on research conducted at Imperial College London and has been backed by Imperial Innovations since its inception. The first patents were filed in 1999. In 2014, following numerous rounds of private funding to which Innovations contributed more than £25m, Circassia floated on the main market of the London Stock Exchange, raising £200m. This was the largest biotech flotation for decades. The company has since gone on to raise further funding and make a number of acquisitions to support the eventual manufacture and marketing of its allergy treatments. Circassia is based in Oxford and employs over 200 people.

3. Mission Therapeutics5, Inivata Limited6 and Autolus Limited7. These three cancer treatment and diagnostics businesses spun out of the University of Cambridge and UCL and raised over £120m between them from 2015 to early 2016 from patient capital sources. These three investments alone represent more than the entire commitment of Venture Capital to early-stage businesses in the UK in 2014 (latest figures from BVCA1).

Is Patient Capital a UK-only phenomenon?Though the model as described here was largely founded in the UK, there are Patient Capital businesses operating in other worldwide markets. IP Group has ‘pilot’ relationships with three US universities and Frontier IP is working with a Portuguese institution. Allied Minds and PureTech Health are a further two examples; they have listed on the London Stock Exchange but operate exclusively in the USA, where they invest in technologies developed at universities with whom they have formal agreements. It is likely they chose to raise money in London because stock market analysts in the UK cover Patient Capital and UK investors better understand the model.

SummaryThe rise of Patient Capital as a provider of funding to inventive academics at the UK’s leading universities bodes well for the future ability of the UK to commercialise the technology it develops. It should be a source of pride that UK universities and investors have come together to generate an innovative funding model to address the issues outlined above.

However, it is still too early to say if Patient Capital is the solution to bridging the Valley of Death:

1. It’s certainly not the only solution, with other types of funding available (e.g. charitable translational


project funds, EIS/SEIS funds, business angels, industry alliances and crowd funding platforms are also assisting here).

2. There have been early successes from the Patient Capital model that have delivered university inventions into practice and returned capital to investors; both essential factors in validating the approach. However, whilst there is a critical mass of investors who believe in the model is developing, these successes still need to grow in number and happen with more consistency for it to be truly proven. It could be said that we are in the early stages of a rising tide, rather than at the head of a torrent.

From the perspective of universities and government funders, the growth in Patient Capital is beginning to provide succour in dispelling the myth that the UK is great at inventing and terrible at commercialising new technologies. UK universities, working with their surrounding ecosystems of funding, can increasingly demonstrate that they can invent technologies, fund them sufficiently, match them with talent and allow them to flourish. If the benefits of this do not ultimately accrue to the UK (e.g. if the companies are then sold, often to US businesses) then this may be due to other factors such as a lack of scale-up capability, lack of incentives to remain in the UK and the receptiveness and absorptive capacity of the UK market– something that cannot solely be addressed at the initial point of early-stage technology development where universities are exclusively focused.

References1. http://www.bvca.co.uk/Portals/0/library/documents/IAR%20Autumn15.pdf

2. http://www.wellcome.ac.uk/About-us/Publications/Reports/Biomedical-science/WTX052113.htm

3. https://books.google.co.uk/books?id=i-LZ6w7HMg8C&pg=PA168&lpg=PA168&dq=graham+richards+ip2ipo&source=bl&ots=AaysMNogxO&sig=jaksgNYE9ahjaBTQQ17cyG3JADQ&hl=en&sa=X&ved=0ahUKEwiTvsW737PMAhUIB8AKHT1lAbkQ6AEIJjAC#v=onepage&q=graham%20richards%20ip2ipo&f=false

4. http://www.ft.com/cms/s/0/d6420472-7f0f-11e5-a1fe-567b37f80b64.html#axzz47C9OjEYL

5. http://missiontherapeutics.com/press-release/mission-therapeutics-raises-60-million/

6. http://www.inivata.com/news/42/79/Inivata-Completes-31-5-Million-45M-Series-A-Fundraising-Round.html

7. http://www.autolus.com/syncona-llp-and-ucl-business-plc-announce-the-formation-of-autolus-limited-a-cancer-immunotherapy-company/


patient capital · known as the ‘valley of death’ for academic-associated technology start-ups....

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