From little acorns
By Dominic Dudley, Finance Editor,
New Media Age

UK universities are the prime source of ideas for new technologies, but they’re not always geared up for developing them into commercial properties, especially in the up and down world of new media. Dominic Dudley reports.

You could argue that the whole Internet industry
came out of universities, or at least non-commercial
organisations. The Web itself and the languages and protocols with which people communicate over it, such as HTML and TCP/IP, were all born out of university and government-funded research.

And it’s still the case that truly new technology, as opposed to just evolutions of existing products, is more likely to emerge from these sources than anywhere else.

These days, 199 companies are being spun out of the UK’s universities every year, and that’s expected to rise to around 325 a year from 2003. One spin-out is created for every £8.6m of research spending in the UK, compared to every £53.1m of spending in the US. This may sound impressive at first, but only a handful of them have the potential to turn into world-beating companies.

Roger Ashby is one of the driving forces behind funding for university spin outs and an executive in residence at Ariadne Capital. “To spin out a company is nothing,” he says. “You know, ABC Ltd takes £100 to register. The thing is to spin out businesses. The number of businesses spun out is pitifully low.”

So what can the country’s universities do to address this? Other than themselves, there are a few groups of people they can go to for help – government, venture capitalists and companies – although all three are linked.

VCs have a fairly mixed attitude to new media within the university sector. Investors that are heavily involved, such as Sussex Place Ventures, which has strong ties to several London colleges including the London Business School and King’s College London, end up doing very little in the new media space. The same goes for the White Rose Technology Seedcorn Fund, which spans the Universities of Leeds, Sheffield and York.

Iain Wilcock, investment director of VC firm Quester, says, “Around four years ago we decided we wanted to work in a more structured way with universities as a good source of raw technology.”

Now Quester reckons it manages around one in every £5 of university investment in the country. That equates to around £400m of research and development spending a year – a sizeable amount, especially when you consider that a few years ago BT was spending £345m on R&D and IBM £118m.

But there’s a problem with the likes of Quester, which invest money on behalf of universities. Says Ashby: “The problem is they act like VCs. They say the technology is too early-stage because they’re still analysing risk-reward too much.”

Getting outside money is vital for spin-out companies, on a par with getting the right management team in place. But it’s no easy thing. “At the moment, raising first-round finance of £0.5m-1m from business angels is still achievable,” says Tom Hockaday, executive director of Isis Innovation, Oxford University’s technology transfer office.

Second-round funding is more tricky. “VCs are interested when there’s a visible opportunity within five years, but a lot of the research is a long way from market,” points out Graham O’Keefe, principle at VC company Atlas Venture.

In any case, Wilcock says there are only 20 universities in the country that meet Quester’s criteria of having excellent science research, excellent technology transfer resources and a demonstrable track record of spin-outs.

Conflicts of interest
The problems are manifold, but some of the most difficult to solve are inherent in the educational sector. There’s the inter-university snobbishness which will stop Oxbridge academics working with someone at a former polytechnic; the invisible walls dividing faculties and departments within an institution; and the fact that academics aren’t always very commercially savvy.

As well as these, no matter how keen universities are to exploit the commercial opportunities available to them, they have a lot of other things on their plate.

“They’re time-consuming to deal with,” admits Wilcock. “Universities have a multitude of objectives to fill, of which commercial ones are relatively minor.”

Universities UK, which brings together the country’s 167 higher education institutions, estimates that funding for knowledge and technology transfer in universities will be just £100m by 2004/05, far less than the amount spent on teaching.

“There are enormous conflicts in universities,” says Ashby. “The staff are employed to teach and conduct research, but then academics are judged by their peers through publications, so when they discover something they want to tell the world.”

But a good idea needs to be kept quiet until it can be patented. Getting that commercial sense drummed into the academic mindset isn’t always easy. Just interacting with companies and promising to make Professor Jones richer than his wildest dreams might not work. He might not want the money, so you have to find other ways to incentivise him.

What motivates academics? “Personal gain to a very modest degree,” says Hockaday. “It’s more a way to generate substantial resources to carry on their research.”

But it’s a two-way process. Companies would do well to become more engaged themselves.

“Companies have a big thinktank inside and look inwards,” says Ashby. “No-one thinks about going knocking on the door of a university. The great thing about universities is curiosity. Industry doesn’t have that.”

It’s because of this freedom to head down any path of interest that totally new technology is more likely to come out of universities than from companies, and why in turn universities are worth exploring for companies. The challenge is to marry the skills and knowledge of one sector with the academic curiosity of the other.

But there are particular problems for new media inventions, compared to other sectors. “There’s a very clear link between academic endeavour and life science spin-outs,” says Quester’s Wilcock. It’s perhaps easier for universities to develop spin-outs from their science faculties than straight new media companies. And the business schools which could produce the entrepreneurs for new media firms are probably finding that, these days, their students are more interested in industries which aren’t suffering from a slump.

“This sector changes so much and so quickly. Things can change overnight and it’s difficult for a really small company,” says Andy McLoughlin, marketing manager of the International Centre for Digital Content at Liverpool John Moores University.

Different universities are adopting different approaches to address these issues, but most are at least trying. According to Universities UK, half of the country’s higher education institutions have incubation facilities and 70% have some access to seed funding.

But it wasn’t always thus. In the mid-1990s, Ashby conducted a three-year research programme for The Gatsby Trust, one of David Sainsbury’s charities, to see how things could be improved. “All this money was being spent by government but nothing was coming out,” he says. “At that stage there was only Oxford doing anything.”

The end result was the University Challenge Seed Fund, a £40m government initiative distributed to 14 universities to improve the commercial potential of research. It was followed by a second lump of money from the Government, this time of £15m. On top of that, there has been a slew of funding programmes, including the Knowledge Transfer Awards and Innovation Funds Awards.

And the research and development tax breaks brought in by Gordon Brown over the last few budgets have been “a real initiative that helps at the coal face”, says Wilcock.

While Oxford led the way, with Isis Innovations, others are catching up. UCL, Imperial and Glasgow are all well regarded, with Bristol, Southampton and Manchester developing fast.

Cambridge, one of the most renowned centres of academic excellence and technology in the country, is something of an anomaly as the academics own all their intellectual property. This has created some problems for the university in its efforts to leverage more money from research conducted there. But it has taken other measures too, such as a tie-in with the Massachusetts Institute of Technology in 2000.

Liverpool John Moores is less well-established but reckons its International Centre for Digital Content is the only digital incubator linked to a university in the UK. It helps games developers and other multimedia firms to get going. But the incubator came after the fact.

“ICDC has been accidentally spinning out companies for a few years, and that’s been going quite well,” explains McLoughlin. “It was all done quite informally, though. We thought if it was done more formally and with better support it could be done much better.”

There are four or five businesses in there now, although the Centre is looking to extend this to around a dozen by the end of the year. The motivation isn’t just to help the university. “We want to ensure skills are spread across the North West, so the economy is boosted and jobs created,” says McLoughlin. “We don’t really look for commercial gain ourselves.”

A relatively localised attitude is not necessarily the best way, and certainly not the most ambitious. That ugly word globalisation means that if a university wants to be seen as world-class it need to act like it.

“Technology doesn’t stay local these days. Companies need to internationalise very quickly,” says Atlas Ventures’ O’Keefe.

So are the UK’s universities any good in this regard? The consensus is they’re better than they were, but there’s much still to do.

“I think they’re getting an awful lot better,” says McLoughlin, citing improved links with business as proof that universities are better adapted to corporate needs and the demands of industry. However, they need to “forge those links even closer”.

“The Americans have historically been better at working things out, but the UK is getting much better,” says O’Keefe. “I think the main thing is they have a very good attitude now. Much better than five years ago. Of course, everyone can always do a better job.”

Wilcock claims, “In terms of productivity, the number of patents and spin-outs per research pound, the best UK universities are comparable to the best US ones.”

But the US has four times as many spin-outs as the UK, according to Ashby, helped by a more entrepreneurial culture and the ability to, for example, retroactively patent an idea up to a year later.

He says the central problem in the UK is an ingrained one: “Academia just doesn’t have the commercial nous.”

The network effect of links between departments and faculties within a university, and between different universities, is the key to finding new technologies. Then the links with industry need to be made to commercialise any research.

It all sounds very simple, but the fact that the UK has been relatively slow at doing it to date shows that it’s not. If the intrinsic problems can be overcome and the situation can be made to work, it’s win-win all round. Universities, companies and the wider community should all benefit, and we can all say to ourselves: why didn’t I think of that?

Article reproduced by permission of New Media Age, 17 October 2002.