In 2001, in exchange for $30 million to help the University of Oxford build a new chemistry building, the firm now known as IP Group won the right to get stakes in start-ups formed around the chemistry department’s intellectual property.
Today, IP Group commercializes technology not only from Oxford but also from 14 other U.K. universities. With its academic partners, the London-based firm identifies promising research, helps develop it, assesses business opportunities, and then creates and funds start-up companies. Its stakes in 96 health care, biotech, cleantech, and other tech companies are worth more than $700 million.
Similarly, Imperial Innovations owns shares in 98 companies worth an estimated $400 million. The firm emerged in 1997 when Imperial College London spun off its tech transfer office and tasked the new firm with creating businesses. Innovations’ exclusive relationship with the college, which still owns 20% of the firm, runs through 2020. Since 2011, Innovations has also worked with the tech transfer offices at Oxford, the University of Cambridge, and University College London.
IP Group and Innovations have become significant businesses with stock market valuations of about $2 billion and $1 billion, respectively. Their success, along with a belief that much university technology remains untapped, has encouraged a new wave of specialized firms and university-based investment funds to form, some with an emphasis on the U.S. However, several others have tried to crack this market and failed, and success for the newcomers is far from ensured.
All of the businesses seek to fill the gap between university tech transfer offices and traditional venture capital investing. When the tech bubble burst in 2001, very early stage, or “seed,” venture capital dried up, recalls Nigel Pitchford, Innovations’ chief investment officer. Innovations and others stepped in with the financing that university spin-off companies needed.
The need for seed capital remains today. In the U.S. last year, seed-stage companies attracted only about 1% of venture capital dollars and accounted for only 4% of deals, according to the National Venture Capital Association. Seed investments were down 29% to $719 million and fell 18% to 192 deals, which was the lowest number since 2002.
Tech-focused businesses such as IP Group and Innovations are willing to invest earlier than traditional venture investors. They also work differently. “We form long-term partnerships with the research institutions and labs, and we evaluate the science at a very early stage,” says Michael Burychka, managing director for IP Group in North America.
Because IP Group sees nascent university technology as an attractive asset class, it is willing to invest when there is technology risk, Burychka says. Nevertheless, it tries to mitigate risk. Often the firm will first invest a small amount at the university to develop a technology further, do prototyping or proof-of-concept work, and analyze the market. If it does decide to help create a company, it can provide management and business support as well.
University tech transfer offices generally welcome the help. “Given that so much of our technology is raw and early-stage, having anybody around that not only will further fund development to bring it closer to commercialization but at the same time is in the business of working with our faculty to start a company, what’s not to like?” says Fred Reinhart, president of the Association of University Technology Managers (AUTM).
But patience is a necessity. “Some of the greatest science in labs today may take 10 years of investing and business building before you can start to think about financial returns,” Burychka says. “If you go into some of these labs with a banker’s view, you are probably not going to see a lot that interests you.”
Innovations’ Pitchford, who like Burychka comes from an investment background, agrees. He contends that an investor’s outlook depends on the nature of its funding. Venture capitalists typically create funds that have fixed amounts of money and time limits for generating returns. In contrast, Innovations has “permanent” capital from selling its own stock and from realizing returns on its portfolio companies.
Having permanent capital removes constraints on investment strategies and exit timing. As a result, university tech commercialization firms continue to invest in companies throughout their development. Pitchford says he’d be loath to get out when portfolio companies are “just starting to scale their activities and get really interesting.”
For example, Innovations invested $39 million over four rounds in the immunotherapy developer Circassia. In 2014, when the then-16-year-old firm went public, Innovations didn’t sell out but kept a 14% stake. Circassia is now worth $1.3 billion. Overall, Innovations has stakes in four public firms, and IP Group has 17. But it is a private company, the gene sequencing technology firm Oxford Nanopore Technologies, that is IP Group’s most valuable holding.
Tech commercialization firms are seeing their portfolio values grow by double digits annually. To expand, the larger ones typically review several hundred or more inventions per year, license a few dozen, and create 10 or so companies. At the same time, in any given year, they may shut, sell, or take public a handful of companies, recycling cash into new investments.
Doing so is possible “as long as our balance sheet remains healthy,” Pitchford says. Start-up investments may begin at around $100,000, and a few million dollars per year can go to help businesses, especially ones in the capital-intensive health care field, grow. Overall, the firms may invest tens of millions of dollars per year. In the later stages of a portfolio company’s growth, outside venture investors are likely to be brought in as well