University spinouts receive adequate domestic seed and early-stage capital, but US money dominates beyond Series B
A group of leading investors have called on UK institutional investors to increase the capital flow to domestic science and technology startups, to enable them to scale world-class research into global businesses.
UK institutional investors have increased their exposure to the sector in recent years and now provide sufficient capital to university spinouts at the earliest stages. However, foreign capital, especially from the US, almost completely takes over beyond the Series B funding stage.
Top executives from three investment houses and a pension scheme highlighted the untapped opportunities stemming from the UK’s strengths in deep tech and life sciences at the annual PLSA Investment Conference last week.
Andrew Williamson, managing partner at Cambridge Innovation Capital, noted that the UK’s university system provides a robust foundation for innovation and a fundamental shift in appetite within venture capital has taken place.
“The percentage of capital going into science and technology businesses has grown from 5-10% ten years ago to more than 50% last year. There is recognition that this is where the action is,” he said.
UK institutional investors are providing adequate funding at the seeding and series A stages. However, he stressed that while early-stage venture capital is thriving, scaling businesses remains a challenge.
“The good news is that the ecosystem has grown to the point where we have lots of commercial scale businesses that are perfectly primed for institutional capital to really help scale up,” he said.
Ed Bussey, CEO of Oxford Science Enterprises, noted the UK has a globally attractive asset base, but most of its later-stage capital still comes from abroad. “On the £100 million we deployed into Oxford last year, we leveraged another £400 million [from foreign investors],” he said. “The Americans, and everyone else, is at the party. We would like to see more UK money alongside this.”
Untapped opportunities
Duncan Johnson, CEO of Northern Gritstone, said: “The next trillion-pound business [may] come out of what one of us is doing. We have the ingredients to create the most amazing companies in the UK. That’s why it’s exciting.”
He emphasised that investments in university spinoffs can have “phenomenal amounts of local impact” as well as “market-leading returns”. “You get the profit, but you also get the purpose. And we’re at an inflection point – we’re just reaching critical mass.”
Julia Diez of Railpen, one of the UK’s largest pension scheme investors, acknowledged pension funds remain underweight in venture and growth-stage private markets.
“It is pretty-well funded on a size-adjusted basis, so sectors like fintech are comparable to the US,” she said. “But a challenge remains… post Series B, the amount of UK institutional capital falls off dramatically…. and there is a drop off in total capital as well.”
She said that the size of the US venture ecosystem reduces risk in that market relative to the UK. “It is inherently riskier to invest in the UK, not because the ideas are not good, but because the rest of the capital isn’t there yet. That’s the challenge we’ve got to solve.”
She added that pension funds need to structure their portfolios to factor in the long-term nature of the asset class while ensuring diversification.
Growing the ecosystem
Changes to government policy changes could further bolster the UK’s competitive position, including simplifying visa and procurement processes.
“We need more talent in the UK,” said Bussey. “We can’t have visa decisions taking months when we’re trying to find the world’s leading software developer in a specific area.”
He added that government procurement also needs move faster. Whether it’s the NHS or the Ministry of Defence, “we need fast track procurement”, he said.
“We’d like to see more UK domiciled money, particularly from the pensions industry, coming into this incredible asset class. Without it, the bulk of the money from Series B onwards will be coming from outside the UK.
“This creates a gravitational pull for companies to leave the UK, to re-domicile and build out in the US. That might be the right thing from the point of view of the company, but it can’t be the right thing for UK PLC.”