Written evidence submitted by the
UK Innovation and Science Seed Fund (UKI2S) (BER0050)

 

On behalf of the UK Innovation and Science Seed Fund, I am writing to submit the following evidence to the Science and Technology Committee inquiry into the balance and effectiveness of research funding. 

In the sixteen years of its existence UKI2S (formerly the Rainbow Seed Fund) has developed a strong record of achieving both societal and economic benefits from public investment in UK science innovation.

I believe the evidence and learning we have built-up over this time can support government approaches to fostering innovation in the UK. There is now the opportunity, in line with the ambitions of the UKRI strategic prospectus and the Government’s Industrial Strategy, to extend and enhance the ability of UKI2S to support the most promising research based companies with funding, mentoring and leveraging in private capital.

UKI2S has a growing pipeline - satisfying more of which requires further capital investment. With that, we can increase impact from the public sector science base through partnerships with UKRI and public sector research establishments.

Given the growing investment by Government in the science base there is a comparable requirement to increase efforts to discover and enable potential start-ups, which can then go on as candidates for efforts to 'scale-up' UK scientific and technological companies, as per the expressed aim of UKRI/BEIS.

We should welcome the opportunity to provide oral evidence to the inquiry alongside the written evidence submitted here. We look forward to your response and I hope this evidence assists the valuable work undertaken by the Committee (on a forerunner of which I served many years ago). 

Ian Taylor, Chair, Advisory Board
UKI2S
 


About UKI2S

 

  1. UKI2S is a bridge between public sector research and private capital.

 

We continue to create high-value jobs, drive up exports and increase productivity by helping to build new UK companies built on innovative ideas born out of the UK’s public sector research base. We enable this by investing equity capital very early, where there is still a clear risk and patiently supporting and developing businesses until they are attractive to private finance.

 

  1. The UK Innovation & Science Seed Fund (UKI2S, previously the Rainbow Seed Fund), is a £27 million seed fund investing in the earliest, highest risk, stages of innovative companies emerging from the publicly funded UK science base. Created in 2002/03, by the predecessor to the Department for Business, Energy & Industrial Strategy with Government funding, the purpose of the Fund is to:

 

    1. Make early-stage ‘patient’ capital investments in commercial companies (developing products based on publicly funded research)
    2. Earn a financial return on investments, to be retained and re-invested (to keep the fund active)
    3. Leverage private capital into ventures backed by UKI2S.[1]

 

  1.  The UKI2S Fund is a partnership between nine of the leading UK research bodies.

 

It is led by the core partners:

    1. Science and Technology Facilities Council
    2. Biotechnology and Biological Sciences Research Council
    3. Natural Environment Research Council
    4. Defence Science and Technology Laboratory

 

Other partners and members, including leading public sector research establishments (PSREs), are:

    1. National Physical Laboratory
    2. National Nuclear Laboratory
    3. Public Health England
    4. Animal and Plant Health Agency
    5. The James Hutton Institute
    6. Culham Centre for Fusion Energy  

 

The Fund is also partnered with Innovate UK in two programmes which combine equity and grant funding to further accelerate the growth of science-based companies

The Fund is reviewing comparative models for early stage investment with Research England, which now attends UKI2S meetings as an accredited Observer.

 

  1. The Fund is managed by a specialist private sector fund manager with a highly experienced advisory committee consisting of a Chair and external members with strong backgrounds in finance and technology, together with representatives from the core partners. [2]

 

  1. The Fund makes individual investments of between £25,000 and £1 million depending on the sector, with the upper figure being a cap originally imposed by BEIS. The Fund (through its fund manager Midven) works very closely with the knowledge exchange and commercialisation offices of the Fund’s partners and the National Research & Innovation campuses.

 

  1. UKI2S consists of an “original” fund which invests in companies based on its Partner’s research and the campuses they support, and a “synthetic biology” fund which is backed by £10 million investment from BBSRC to support the commercialisation of synthetic biology technologies

 

  1. UKI2S has proven the advantages for the science base of access to early stage, patient capital and mentoring for companies. This is helping to develop a range of beneficial products and services including: gene therapies, drug development, green chemicals, fusion energy, security scanners at airports and resource mapping for international development.

 

  1. UKI2S provides a platform for partnership with UK Research and Innovation (UKRI) and public sector research establishments, allowing for increased impact from the public sector science base.

 

  1. The advantages of using public investment to kick-start companies in order to leverage in private capital is identified of growing importance by organisations such as the UCL Commission on Mission-Oriented Innovation and Industrial Strategy[3]

 

  1. UKI2S has now invested approximately £14.4 million at a steady rate in over 50 start-up companies and a further 30 early stage pump-priming investments in projects and companies across a wide range of sectors. Companies are supported holistically, not on a project basis like a grant. UKI2S is looking to make a financial return and is incentivised to make a profit on its investment even if over a more patient timescale than private VC funds, and to take risks. The bulk of the profits are retained in the Fund for further investment.

 

  1. In the context of the Government’s ambition to achieve 2.4% GDP target for research and development, UKI2S is a proven mechanism for realising the benefits of research and in leveraging private finance into the commercialisation journey. The overwhelming majority of the Fund’s portfolio companies have a provenance in public sector investment in research; UKI2S is the bridge that takes public sector investment in research and innovation to the private sector.

 

  1. The Fund has experience in equity risk management, proven record of accomplishment of successful exits and continuous reinvestment, has been enhanced by growing partnerships and, more recently, the ability to offer ‘blended finance’ with Innovate UK.[4]

 

  1. Innovate UK has aligned with UKI2S to make grant funding to change materially the risk profile of embryonic ventures when combined with UKI2S equity investment plus expertise. The Fund’s partnership with IUK has led to several early stage investments and was significantly expanded mid 2018. 

 

  1. UKI2S remains a fund of relatively small size and capacity. Now is the time to increase that capacity, to grow and develop a strong future pipeline of opportunities in the commercialisation the cutting-edge science. Growing UKI2S will require further investment of public sector funds.

 

  1. We would note for reference these earlier responses to previous inquiries held by the Committee:

 

    1. Submission by Midven, which manages UKI2S, to Bridging the valley of death: improving the commercialisation of research” in 2012-13.[5]
    2. Submission by Rainbow Seed Fund (now UKI2S) to Science budget and Industrial Strategy in 2017.[6]

 

UKI2S as an effective mechanism for public spending on R&D

 

  1. As a national seed fund UKI2S nurtures and grows innovative businesses arising from the great science undertaken in the UK. We do this through our unique position as the principal source of patient, committed capital for ideas emerging from the UK’s publicly funded science base.

 

  1. Our approach aims to identify, to spin out and position for scale up the innovative companies arising from our research base – to deliver commercial benefit back to the UK. This proven, long-term approach to investment and support offers our portfolio companies access to funds at the earliest stage and helps leveraging later further private finance needed to scale-up.

 

  1. Key to success of UKI2S has been the ability to provide the mentoring and commercial expertise to assist portfolio companies in refining their propositions, recruit the right management and introduce later stage investors.

 

  1. The high value of UKI2S support has been verified independently, with a review by SQW (2013) concluding that the Fund had made a strong economic contribution to the UK and “demonstrated the highest level of additionality we have yet seen”. A full copy of the SQW assessment is available online.[7] Using this independently verified model, the Fund was shown to have (by the end of 2017) GVA (Gross Value Added) risen by almost 20% year on year (to £65.7 million) and delivered more than 300 high end jobs in the UK.
     
  2. UKI2S operates in a high-risk environment and does not expect all investments to succeed. We have written off the value of almost one third of our portfolio but we are still delivering high impact and provide 10.8% ROI. Our success in such a high-risk situation underlines the huge potential of the UK’s research base and endorses our nurturing approach to developing innovative young businesses.

 

  1. Our support helps the UK to build innovative businesses, leverage private investment and grow jobs. In ten years, we have successfully grown our portfolio’s value, its exports, job creation and the levels of co-investment leveraged.

 

  1. UKI2S capacity and focus naturally aligns with the Industrial Strategy and Government ambitions to ensure innovation thrives in the UK. Companies in the UKI2S portfolio of direct relevance to answering the Four Grand Challenges that Government has set, including:
     
    1. AI and Data – Synthace, Eagle Genomics, Spectral Edge, Northrow, TravelAI
    2. Clean Growth – Tokamak Energy, Oxsensis, Mirico (CCS, emissions monitoring), KEIT (process optimisation including fermentation for biofuel production), Zuvasyntha, SFH, Chain Biotechnology, 
    3. Ageing Population – Cellcentric, Cytox and Jupiter, The Electrospinning Company, AgPlus, The Healthy Food Company, Quethera
    4. Future of Mobility – Oxford Space Systems and Pireta

 

Rationale for balance of public R&D funding

- individual research disciplines, research councils and cross-disciplinary schemes;
- the two research funding streams of the ‘dual support’ system;
- research and innovation;
- pure and applied research;
- block funding, responsive mode funding and directed funding for the Industrial Strategy;
- the ‘golden triangle’ of London, Oxford and Cambridge, and the rest of the UK

 

  1. UKI2S partnership with IUK has led to several additional early stage investments and is being significantly expanded this year. In addition, UKI2S has widened its investment remit to include the Catapult Centres to further strengthen its relationship with IUK and UKRI.

 

  1. One of the most effective investment mechanisms for public sector research funding began last year with a new Innovate UK 'blended' finance programme that combines grants with venture capital investment. This £8.5 million 'investment accelerator' pilot is the first time IUK has combined a venture capital investment with its grant schemes. UKI2S is one of seven investors taking part, with a focus on areas that align with the industrial strategy, including life sciences and infrastructure.

 

  1. Through the IUK investment accelerator, UKI2S has invested in nine additional companies. These companies operate in the synthetic biology and medical device sectors and focus on solving world-impacting problems such as addressing antibiotic resistance, increasing efficiency of chronic wounds treatment, increasing safety of health staff in clinical settings, and improving peripheral nerve injury treatment.

 

  1. The investment accelerator combines IUK's strength in identifying opportunities and grant funding, with UKI2S expertise in identifying the best commercialisation opportunities. This means that companies that succeed in securing finance have had to prove themselves through the two distinct competitive processes. 

 

  1. As a national seed fund, UKI2S is not confined to the Golden Triangle and with its partners are well positioned to roll out further its model across the UK and help government research campuses realise their industrial goals on both national and regional levels.

 

  1. UKI2S has campus locations across the UK and access to the UK catapult network. Almost half (49.6%) of UKI2S investments have taken place outside of London and South East.

 

The effectiveness of and balance between the different available UKRI/Government levers for encouraging innovation, including: R&D tax credits, the Small Business Research Initiative (SBRI), Innovate UK loans and grants, measures proposed in the ‘patient capital’ review, and other initiatives

 

Assumptions about the public/private mix in delivering the 2.4%/3.0% of GDP targets

 

  1. The outcome of the Patient Capital Review has underpinned the framework for second stage private investors attracted to companies that UKI2S has backed, and the science that UKI2S has validated. These investors make use of SEIS, EIS and Venture Capital Trusts, and will be encouraged by the review and the publication of the British Patient Capital Programme. 

 

  1. The Government’s target of 2.4% GDP spending on research and developing is a worthy first stage ambition. Achieving this will be dependent upon maximising the respective strengths of public and private funds. We believe our approach and the results it has achieved in leveraging private sector capital can help to guide this mix, providing a market for future targets.

 

  1. UKI2S uses public funds to support companies which would otherwise fail to attract the necessary private investment due to any or all of the following:

 

    1. The high-level of risk
    2. Required patience for investment return
    3. Lack of an experienced team and therefore the mentoring or support that companies will require to grow
    4. The relatively limited level of investment required that is below the thresholds set by VC investors as well as too early stage.
    5. The specialist nature of the company’s technology

 

By accepting and managing these risks at an early stage, UKI2S can ensure that the commercial potential of some of the great science developed in the UK is not lost. 

 

  1. Once a UKI2S portfolio company has passed through the most challenging early stages of development, private investors are able to come on board as necessary to allow scaling-up of the business. The UKI2S share of the business is naturally diluted

 

  1. UKI2S is a patient investor, so does not seek to force any exit within a short, defined time period. Once a company reaches maturity, the UK benefit grows from increased R&D investment, retention of scientific expertise, the creation of high-value jobs at various sites across the UK and the economic contribution of the company itself. A sale of the company may lead to greater investment and increased market penetration (particularly into the global market).

 

  1. For every £1 UKI2S has invested, an additional £6.6 GVA (Gross Added Value) has been delivered, with £326 million of private sector investment leveraged, more than 300 high value tech jobs created and exports worth more than £150 million delivered. 

 

  1. UKI2S has now reached capacity in terms of what the current fund size allows. We recommend initially increasing the size of the fund by £30 million to allow us to be consistent with our remit to focus on very early stage investments and enable more scope to handle the increasing pipeline of opportunities.

 

Annex – Case Studies

 

  1. The Fund’s successful portfolio companies deliver both a financial return and a positive societal and economic impact to benefit the UK.             

 

Case Study – Tokamak Energy

 

  1. Tokamak Energy aims to accelerate the development of commercial fusion power. The company, which grew out of Culham Centre for Fusion Energy in Oxfordshire, has a unique solution that will enable fusion to be implemented efficiently and quickly.

 

  1. The company is building on two areas of science and technology where the UK (still) has a world leading position: fusion energy and superconducting magnets.  Fusion is likely to be the most important source of clean energy in the next century and the development and deployment of the technology will have enormous economic significance.

 

  1. Tokamak Energy is pioneering the compact spherical route to fusion power. It is developing its own compact spherical tokamaks (the device in which controlled fusion can take place) that will use high temperature superconductors to create strong magnetic fields to contain the hot plasma.

 

  1. The Tokamak Energy approach is based on well-established science and is advancing rapidly. The company’s latest-generation compact spherical device is the ST40, which has recently achieved plasma temperatures of more than 15 million degrees Celsius - hotter than the centre of the Sun.

 

  1. The next target for the company is to push on to achieve the plasma temperature and density needed for controlled fusion on Earth in a compact spherical tokamak.

 

  1. A UKI2S director sits as an Observer on the board of Tokamak Energy. Our support has helped the company to grow, expanding to employ 50 people in 2018, leverage more than £30 million of private finance and appoint senior leaders to help drive the company forward.

 

Case Study - Cobalt Light Systems

 

  1. Cobalt produces innovative products for non-invasive, through-barrier chemical analysis, for applications in airport security, hazardous chemical ID and pharmaceutical QC, using a technologically advanced Raman spectroscopy technique.

 

  1. A spin-out from the UK’s Science and Technology Facilities Council (STFC) Rutherford Appleton Laboratory it was funded from the earliest stages by UK Innovation & Science Seed Fund.

 

  1. Cobalt received the 2014 Royal Academy of Engineering MacRobert Award, the UK’s most prestigious prize for innovation in engineering for the Insight100™product, which identifies explosive threat materials inside containers in seconds without opening them.

 

  1. Privately held and ranked as one of the UK’s fastest-growing technology companies in 2014, Cobalt’s customers include 21 of the world’s 25 largest pharmaceutical companies, the U.S. Food and Drug Administration, and more than 75 airports across Europe and Asia-Pacific, including eight of the 10 largest European airports, with over 500 devices deployed at airport checkpoints.
     
  2. After being acquired by Agilent, the Cobalt HQ became the company’s global centre for Raman spectroscopy on the growing Harwell Science and Innovation Campus in Oxfordshire UK – a significant commitment to inward investment for UK research and development.

 

  1. The successful sale of Cobalt to Agilent provided UKI2S with additional funds to re-invest in ideas emerging from the UK’s world-leading research base.

 

  1. Cobalt is a good illustration of the commercialisation journey from research origins at STFC to global market. This outcome demonstrates strategy of providing very early investment to validate and develop research with high-growth potential.


Declaration of interests

 

  1. Ian Taylor, Chair of the UKI2S Advisory Board, was a Member of the Science and Technology Facilities Council from 2011-2018 and remains on the Legacy Council.

 

 

September 2018

[1] The Fund does not displace private capital – over many years we have demonstrated that UKI2S has levered in 30 times the amount it has invested.

[2] https://ukinnovationscienceseedfund.co.uk/team/

[3] https://www.ucl.ac.uk/bartlett/public-purpose/news/2018/jun/iipp-holds-patient-capital-and-industrial-strategy-workshop-uk-parliament

[4] Also note that UKI2S is comparing ‘patient capital’ experiences with Research England https://re.ukri.org/blog/alice-frost/the-missing-ingredient-in-innovation-patience/

[5] https://publications.parliament.uk/pa/cm201213/cmselect/cmsctech/348/348vw36.htm

[6] http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/science-and-technology-committee/science-budget-and-industrial-strategy/written/72106.html

[7] https://ukinnovationscienceseedfund.co.uk/wp-content/uploads/2015/10/SQW-RSF-FINAL-2-2.pdf