Scotland: Towards the Knowledge Economy

ANNEX D: MAKING AN ENTERPRISE CENTRE ATTRACTIVE TO THE BUSINESS

This is an extract from some comments made by PricewaterhouseCoopers (PwC), briefly outlining some high level contributions to make a Science Enterprise Challenge centre an attractive proposition to venture capitalists and private sector companies. In seeking to address only this issue, the following material must be weighed against the wider context of what is required for a successful SEC model.

SUMMARY

D.1 Within the limited scope of this paper and the short time-scale within which it has been prepared the issues discussed are: SEC Centre Ownership & Management Control: Should ownership and management of the centre be composed of an appropriate mix of academic and private sector interests? The advantages of broadening centre ownership and management may be fund-amental and highly beneficial. SEC Centre Operation: In order to be attractive to venture capitalists and industry, the centre should seek to demonstrate the following characteristics Market Focus: The centre should have clear channels for bringing projects to market including rigorous methodologies for appraising and prioritising projects. Distribution Channels: The route from an academic department to the centre requires to be clear, mapped and understood by all. Partnerships with the Private Sector: Venture capitalists are more likely to invest in early stage projects if a major corporate is prepared to partner the project. Forming the linkages that encourage corporates to view/partner projects will give venture capitalists more confidence to invest. Linking Technology and Management: There is a real shortage of quality managers who understand both the technology and the market opportunity, in addition to having the appropriate skills to bring an opportunity to market successfully. There is an opportunity for the centre to be 'breakaway' if it can find effective methods of linking exceptional managers to the projects being processed through the centre. Market Analysis: The opportunity exists for the centre to provide a research function that generates commercial validation and confirms market potential for individual projects. Such a capability may assist greatly in attracting funding for projects and requires the centre to build the necessary analytical skills. Relationship with other SEC centres: The centre should drive to maintain strong links with the other seven UK SEC centres. Coordination and co-operation between the UK SEC centres may become key in establishing and maintaining all eight centres' credibility in the international market place

WHY HAVE THE PRIVATE SECTOR INVOLVED?

D.2 It is not the purpose of this Annex to examine the detailed arguments justifying the case for venture capitalists and private sector companies to become closely linked with the SEC centre. It is sufficient to propose that the focus of the Challenge on commercialisation implies building links with industry and providers of finance that are strong, rewarding and self-sustaining.

VENTURE CAPITALISTS

D.3 The Venture Capital (VC) community's objective is to finance projects that are perceived as being viable. That is projects that: Are capable of commercialisation and market launch Can attract appropriate backing (finance and other) Have the potential to achieve IRRs of 50% or above (Technology Sector) Have the potential to achieve IRRs of 30% or above in other sectors

D.4 In the technology sector most venture capitalists adopt a portfolio approach to investment decisions. Their strategy is based on increasing the probability of backing at least one success in a sector which has a significant failure rate.

D.5 As further background, there is around £12 billion of VC funds currently in the UK, of which an increasing proportion is being dedicated to technology. Many funds have increased technology activity in the last twelve months with the 'hot' sectors including IT support services, software development, telecomms, networking, call centres, internet, e-commerce, and optoelectronics.

D.6 There are a range of funds focused upon the sector including APAX, Advent, Elderstreet Investments, Nomura, 3i (30% of their funds to be invested in technology over the next three years). In Scotland, Scottish Development Finance and 3i have established a £20 million fund focusing on technology investment.

INDUSTRY

D.7 The industrial community's objective is to engage in activity that increases the wealth of the individual firm and ultimately shareholder value. To this end their key requirement is to: Recognise, quantify and justify the bottom line impact of any activity. Engage in clear, focused assessment of any opportunity to extend activity into new areas, and With respect to technology in particular, access leading edge technologies which will enhance product and processes, create or increase market share and enhance shareholder value.

KEY ISSUES

D.8 In recognising these broad perspectives concerning the activities of VCs and industry, and assuming the SEC centre requires to establish links with VCs and industry that are as strong and rewarding as possible, the following key issues arise.

CENTRE OWNERSHIP

D.9 Although any SEC bid must be led by a university (or group of universities) and the centre should be guided to a great extent by university interest, the question of whether or not to broaden the base of centre ownership and management) may be worth considering: Possible advantages of broadening ownership/ management: Create from the outset a series of deep rooted relationships and links to both VC and industrial communities Give centre access to high quality management input Ensure credibility of centre to VCs and industry Ensure centre is positioned to be marketed effectively both ways - into the HE sector and outwardly to industry and the VC community. Possible disadvantages of broadening ownership/ management VC & industry representatives may seek to 'control' centre in terms of securing the most valuable commercial ideas for themselves Risk of alienating other VC & industry parties from the centre. Risk of alienating the universities from the centre Other generic issues to be addressed with respect to ownership include Ensure clarity of focus in defining the centre's aims in order to make it highly attractive to industry/venture capitalists Define ownership/ control status for private sector participation and investment Define with some precision the nature of the ongoing relationship between centre and private investors Define exit routes for private sector investors

CENTRE OPERATION

D.10 In order to be attractive to VCs and industry the centre should demonstrate:

Market Focus There should be clear channels from the HE sector to the market for ideas/technologies (projects) which have strong market potential. The centre should have a process for prioritising and assessing projects.

Clear Distribution Channels The route from an academic department to the centre must be clear, mapped and understood by all. Currently a number of HEIs have 'commer-cialisation' departments that act as a filter and gateway to the private sector. There is a clear opportunity for the centre to resolve the currently fragmented system of bringing ideas to market.

Partnerships with the Private Sector VCs are more likely to invest in early stage projects if a major corporate (BT, CISCO, Lucent, Siemens etc) is pre-pared to partner the project -by providing IPR, management, funds or distribution routes to market. If linkages can be formed to encourage these key players to view the projects and technology, this will give the VCs more confidence to invest.

Methods of Linking Technology and Management There is a shortage of quality managers who understand both the technology and the market opportunity, in addition to having the appropriate skills to bring an opportunity to market successfully. VCs will often try to establish their own teams, but there is a real opportunity for a centre to be 'breakaway' by finding, at an early stage, methods of linking effective and exceptional managers to the technologies being processed through the centre. Linkages with Connect, SE and the Angel Network are appropriate as networks for generating quality candidates.