Analysis: UK outspins rivals in US

A revolution in attitudes to science and its funding has led to a new era of growth in entrepreneurial zeal in British universities. Steve Farrar and Caroline Davis report

Two years ago, John Cruickshank was looking forward to an exciting new challenge as a long career in academic research drew to its close. The 55-year-old scientist had just left his university to join a biotech spin-off company that he felt had great potential.

"I wanted to be involved with something that was exploitable, of actual use, and there's no denying that the intellectual challenge in biotech equals that of academic work," Dr Cruickshank - not his real name - said.

That dream turned sour. Funding dried up, valued staff were laid off and recently Dr Cruickshank chose to go without pay in a bid to keep the ailing business afloat. The learning curve was very steep. But despite the hardship, Dr Cruickshank's enthusiasm for commercialising research has been undimmed. In fact, he has thought about a new venture even though his current firm looks increasingly doomed.

A decade ago such a scenario would have been almost unthinkable. Longstanding values and practices had sheltered UK academics from the corrupting influence of the market.

That attitude was swept away by nothing short of a cultural revolution. Last week, prime minister Tony Blair hailed the new era. He said: "The promise is that Britain can be as much of a powerhouse of innovation and its spin-offs in the 21st century as we were in the 19th and early 20th centuries.

He cited the oft-quoted figures from last year's "Higher Education business interaction survey" by Newcastle University's Centre of Urban and Regional Development Studies (Curds).

The study looked at patenting and licensing intellectual property, but it was the spin-off company statistics that made the soundbite.

Curds showed that in the year 1999-2000, 199 companies were spun off from UK universities, compared with an average of 70 a year over the previous five years. This translated into one company for every £8.6 million spent on research. In the US, Curds found each firm matched up to £53.1 million of research spending, confounding the idea that British universities were less entrepreneurial than their American cousins.

If British scientists strike gold in the forthcoming comprehensive spending review, it will be in no small measure down to his steadfast insistence that well-funded research could invigorate the nation's economy like nothing else.

How successful these spin-off companies are, however, is largely unknown. Hard data on how research investment translates into commercial success are available in the US but no such benchmark exists in the UK. The interim results of a new survey being compiled by the University Companies Association (Unico) and Nottingham University Business School were presented last week.

So far, 43 responses, representing more than half the research spend in the UK, have been analysed. The results largely concur with Curds'. But recent growth made success hard to define and identify. Many companies were too new to assess, while statistics were skewed by the uneven spin-off rate over recent years.

The only sound measure the researchers can offer is to focus on the external funding these businesses manage to attract. Only an average of two companies per university have obtained venture capital funding over the past five years, with 21 institutions securing none and one securing more than 40 funding deals.

The survey identified four main impediments to university spin-offs: lack of seed finance, lack of commercialisation know-how within the university, lack of incentives for academics to spend time on technology transfer and the absence of clear procedures.

Yet the Curds' statistics suggest that UK universities are starting to get things right and their success is drawing interest from around the world.

When Lita Nelsen walks into Imperial College, London, next month, it will constitute tacit acknowledgement of the extent to which British academe has embraced the new entrepreneurial culture. The head of Massachusetts Institute of Technology's technology licensing office, one of the most respected outfits in the US, will sit down with Susan Searle, managing director of Imperial College Innovations, not to lecture but to listen. Ms Nelsen hopes to return home with fresh ideas on how to improve MIT's record on exploitation.

Ms Searle is proud of what Imperial has achieved. Eight years ago she struggled to get the university to recognise the commercial potential of its research. Now she has seen its portfolio mushroom to 53 spin-off companies with one of these, Turbo Genset, which makes high-speed magnet machine systems for power generation, transportation and industrial applications, recently valued at £740 million.

Interest from the City has grown too. Two weeks ago, Imperial signed a long-term partnership deal with two London investment houses - Fleming Family and Gordon House. This will inject millions of pounds of external finances into 36 unlisted spin-off companies in return for a 30 per cent stake in the college's holding.

Imperial's approach is hands on, with a high level of support and advice from a staff of 23. Each firm is helped to put together a strong board and management structure and then given control of its core intellectual property.

The argument that it is important to exploit research to bring in extra funds as well as to reward individual academics who want to see their work transformed into commercial practice has been taken to heart.

Ms Searle insisted that the government schemes to encourage exploitation have been a crucial element in the success story. "We have done something quite amazing in the UK," she said. "We have enabled an entrepreneurial culture to emerge over the past six years."

Gerry McKenna, vice-chancellor of the University of Ulster, sees this as nothing less than a means to help the province carve out a future in high-technology industries. "There is an enormous responsibility on Northern Ireland's universities to harness their intellectual capital to drive economic activity," he said.

While the number of firms spun off from the University of Ulster is modest compared with Imperial - 16 in the past two years - this total is making itself felt.

Professor McKenna admitted that a deliberate policy of encouraging knowledge transfer had been opposed by some members of staff in its early days. But this had paled as the approach led to the creation of 500 jobs across the four campuses and brought £120 million into the economy each year. The university recently launched a £12 million venture-capital fund to channel funds from the US to its spin-off companies.

Professor McKenna observed that it did not hurt that the academics could directly benefit from seeing their ideas turned into commercial reality.

UK academe is littered with such living incentives. Scientists such as David Rhodes, professor in electronic engineering at Leeds University, founder of the wireless communications firm Filtronic and listed in the UK's top 100 entrepreneurs, entice imitation. There are many other academic millionaires - at least on paper - in universities across the country.

It is the model of success that politicians love - the mortar board thrown on to the back seat of the Jaguar and a designer Italian lab coat left hanging in the lab but it is not the only measure.

Venture capital companies want to see a fast return on their money. They may fund five out of 500 business plans of which they would expect one to make a million, two to fail and two to become "living dead" - still active but unlikely to return the investment.

To many universities, however, such living-dead companies may not be regarded a failure, according to Ederyn Williams, director of Warwick Ventures. "These companies are very valuable," Dr Williams said. "They fill the science parks, employ the university's graduates, enrich the region and meet market needs."

Companies based on services or consultancy rather than a product may never get involved with venture capital. Dr Williams warned: "It's easy to get into the venture capitalist model of a company having to float on the stock market and make everyone millionaires to be a success. But that's not our primary objective."

This alternative interpretation of success is epitomised by a firm set up by the biblical studies department at Sheffield University. It is more than half-way through publishing an eight volume Dictionary of Classical Hebrew - the first of its kind for 150 years.

Over its lifetime, the company may not make much money, but it benefits the author and the university not to hand all the profits from such a niche venture to a publisher.

Another company that does not fit the brash biotech spin-off mold is Pictorial Meadows at Sheffield. The firm, set up two years ago by Nigel Dunnett from the landscape department, sells mixtures of meadow and ornamental seeds for urban parks and has already brought in £18,000 this year.

Proudly promoted by Sheffield and the only company in the university's portfolio to have made any money to date, it has not been without problems.

"The university is geared to big biotechnology spin-offs, not small companies ready to trade," Dr Dunnett said. The company had to pay all its own set up costs, with professional overheads still eating all its profits. Although the university lent scientific credibility to the venture, Dr Dunnett felt the system may not have been suitable for the small business.

Generally, the academic's parent institution can provide vital help in the early days when funds are scarce. Simply being able to use university facilities and having the director's salary paid by an academic department can buy a company valuable time to get its product right before financiers start breathing down its neck.

An initiative in the Midlands is trying to extend the spin-off culture to universities that do not have the resources to mimic the successes of institutions such as Imperial.

Spinner is a consortium led by the universities of Warwick and Birmingham, together with Aston, Central England, Coventry, Keele, Staffordshire and Wolverhampton universities. Between them, they spend £160 million annually on research but spin off fewer companies than might be expected.

The £6 million project - funded by the Higher Education Funding Council for England and the Regional Development Agency - aims to boost the group's total spin-off count from ten a year to 30.

Spinner offers grants of up to £15,000 to pay for patent filing, business plan development, market research and prototyping - all activities vital before external venture capital or seedcorn funding is sought.

Although Birmingham and Warwick are seasoned at spinning off companies, they hoped that working in a consortium would help them generate more. For the other members, especially the new universities, the consortium may prove critical.

The consortium allows a would-be entrepreneur to use off-the-shelf solutions such as spin-off policies, licences and contracts successfully employed by other members while a pool of 16 shared business development managers provides commercial know-how.

The University Challenge Fund, which gives minimum £1 million seedcorn grants, received only one application from Birmingham and Warwick's smaller partners last year. Since Spinner was set up in January, 42 applications have been put together.

How many of this army of businesses will survive is not clear. Some experts fear the surge could be followed by an equally overwhelming series of collapses.

Ian Harvey, managing director of BTG, the technology exploitation business that has successfully commercialised research from UK universities for decades, feels that the government initiatives may have artificially boosted the number of spin-offs.

"One could argue there's an over tendency to go for start ups rather than alternative forms of exploitation," he said.

Dr Harvey pointed to the German experience where a huge surge in biotech spin-offs was leading to a stream of failures. It is an experience he hoped would not be repeated in the UK.

At Imperial, MsSearle said there had been only two failures so far and in both cases there were ongoing efforts to exploit the technology in different forms.

Nevertheless, she expected there to be some. And she felt this may not be a bad thing. Failure is not necessarily indicative of a poor idea and lessons are often learnt.

In Silicon Valley, the high-tech entrepreneurs who have contributed so much to the US economy proudly bear failed ventures like battle scars. They show a brave willingness to try new ideas, not a shameful inability to succeed.

Perhaps UK academe's new-found entrepreneurial zeal will similarly strip the stigma from failure. The signs are there.

At Imperial, Mervyn Maze, professor of anaesthetics, and Nick Franks, professor of biophysics and anaesthetics, have just linked their spin-off company Protexeon with the US corporation Air Products.

They are developing a way to protect the brain against the kind of damage that can be suffered during heart-bypass operations. The approach, which uses the inert gas xenon, could have enormous potential if its efficacy can stretch to the victims of head injuries or strokes.

Yet it is not so long ago that Professor Maze watched his previous spin-off crash and burn. In 1993, while at Stanford University in the US, he tried to launch a company to develop drug technology. But the university at the heart of Silicon Valley did not help with resources or advice and the venture failed before it had even got off the ground.

Professor Maze emerged from the experience with more motivation than ever and is confident Protexeon will succeed, not least because of Imperial's hands-on approach. Its technology transfer experts provided Protexeon with a business framework and some resources, and paid for the initial filing of patents and then handed over the intellectual property rights to the company.

Now the xenon therapy is entering its clinical trials and a joint development programme has been drawn up with the company's industrial partners.

"We are translating this into real clinical utility much faster than we could have done in an academic environment," Professor Maze said.

The future for the university entrepreneur looks bright indeed.

FIVE STEPS OF THE SPIN-OFF

Spin-off companies have a five-stage development path, according to research by Nottingham University Business School.

Mike Wright, Andy Lockett and Ajay Vohora examined nine companies spun off from five universities in the top ten research elite.

The first phase is academic research, where no commercial plans exist and the intellectual property is created. The first critical juncture here is opportunity recognition.

During the next phase, the potential market for the IP is identified by the academic and the university technology transfer unit to see if it is worth trying to commercialise the research. This is seen as an intensely uncertain period.

Entrepreneurial commitment - which in many cases is held up due to lack of commercial skills in the academic or the university - leads to the pre-organisation phase. The location, size, market and administration of the company are resolved. A business plan and strategy are developed.

Once this reaches a "threshold of credibility", the company enters a reorientation phase.

The application of the technology to the market niche must be perfected, while the company must acquire the skills and capacity to enable them to manage and run the company. This may involve many iterations of the business plan.

When this reaches a threshold of sustainability, the company enters its final phase - sustainable high growth. The company becomes a business.

The researchers identified four keys to success:

* A good management team to steer through sustainable high growth

* The company is profitable

* The venture will have moved off campus into a commercial environment n A company that has close links to the university, typically with the academic remaining in academia.

Available funding for spin offs

* Joint Research Councils' Business Plan Competition (£25,000 pre-seedcorn funding)

* Bioscience Business Plan Competition (£10,000 pre-seedcorn funding)

* Small Business Research Initiative (£100,000 to £200,000 to secure research contracts)

* Medical Research Council Technologies Incubator

* MVM (£100 million venture capital fund set up by the Medical Research Council)

* Natural Environment Research Council innovation fund.

* University Challenge fund (£25,000 to £250,000 seedcorn funding)

* Wellcome Trust's Catalyst Biomedica (£20 million development fund).