This morning I was invited to stop by Tech Spin Out 2008, a conference organized by the British Venture Capital Association (BVCA), with the goal of exploring the activities that help transform small companies into big companies. As I mentioned many times in this blog, Israeli has the largest numbers of startups per capita in the world, but European countries sometimes struggle to make scientific research into profitable businesses, which makes this topic extremely relevant for the UK.
The Keynote opening was led by Lord Drayson, the Minister for the Department for Innovation, Universities and Skills. As an entrepreneur himself, Drayson had some solid ideas for what would be needed in order to take the venture capital industry from what he described as “life support”.
Seed Funding (or the lack of)
The fundamental problem begins with a very low level of seed funding compared to the US. Private Equity has been extremely successful in the UK, which caused to a dilution of funds from venture capital. In 2007, the proportion of total investment going into venture capital was 30%. In the UK – only 4%. Since there is less money, the likelihood of building another Google or Genentech is low.
Should VC be Bailed Out?
The government has acted decisively when it came to saving the banking industry. Should the VC industry be treated the same? Would it help if the British government enhanced its direct investment in SMEs (Small and Medium Enterprises)? The answer is probably yes. Not for charity, but in order to make money. Government investing in small enterprises (or early stage startups) would create additional jobs, generate more tax revenue and may even result in profits, if the company succeeds. If it worked for Israel’s incubators and Chief Scientist Office, there’s no reason it shouldn’t work in the UK, where funding for science and labs is one of the highest in the world. (the last 10 years were a record of investment in science). People will look back at these times and realize that there was a lot of opportunity.
Best investments are made in downturns
We have to be ready to invest now. Pull the trigger. For example, Drayson proposed creating Goverment loan schemes that would allow startups to borrow money in lower cost of capital. 175 billion pounds are spent on goverment procurement contracts every year – some of the sales could be allocated directly to these SMEs. Startups are in dire need of investment, but they’re currently not getting scale. One of the problems is that because of the small VC industry here, British Pension Funds are investing their money with US based VCs.
Professional Technology Transfer Officers
Times are tough, but they will pass. In order to be well position when this crisis ends in 18 to 24 months, startups and VCs need to start planting the seeds now. Technology transfer officers are the vehicle that enables creating “spin outs”: profitable companies that originated in university research. Transforming IP into dollars (or pounds in this case) requires solide management teams. One of the tasks of the VCs is making sure that they can help build a team to support the technology.
Angel investors are important, we need to raise their profile
In 2007, Angels in the US invested a total of $25 billion dollars. In the UK – $1 billion only. Angels have become an integral part in the life cycle of a startup, but in many cases, they are hard to find. Something needs to be done, in order to leverage the huge amount of capital available by angels – perhaps a co-investment by the government?
Following the keynote, there was a panel titled “what’s the best funding model for spin outs?” which included Alan Aubrey (CEO of the IP Group- very straightforward, sharp guy), Russ Commings (Chief investment officer of Imperial Innovations Group) and Ernie Richardson (Managing Partner at MTI Partners).
Some of the nuggets that came up on the panel:
- Dedicate 10% of the funds to proof of concept and prototyping
- Co-Investing is important and has worked well in the past
- It’s a great time to be a scientist entrepreneur – the Internet model is not proving itself and CleanTech and Med Tech are back in the lead
- Embed yourself in a campus, use head hunters to staff the company
- Interesting question: “Why no money has been made in Seed?” (hint: because the Seed funds don’t have enough money to follow up on the first investment and they get diluted to death after the first round)
In response to Sequoia’s Doom and Gloom email to portfolio companies, the Brit VCs said:
- Get creative – try to think out of the box on getting new clients and generating revenue
- Focus on what you can control. Focus on quality. Cut back where you can.
- Keep the young companies small – don’t grow them now. For the more established companies, re-invest if you can in the good ones, and let the other ones drown. The industry also needs failures.
- Act as if there’s no more money. Ever again.
They concluded by saying that this environment will sort the men from the boys. If the technology is proven and the right management team is put in place, chances are you will succeed.
For more reading on the BVCA see the annual report (pdf)