Private Sector Investment In University Research
July 11th, 2013
Universities are the birthplace of innovation. The research efforts of academicians spawn the innovative pharmaceuticals, medical devices, software products and services of tomorrow. However, the route from laboratory bench to commercialization is typically a long, expensive and risky road.
Most investors have one main goal: return on investment, or ROI. Long timelines to an “exit event” – such as the sale of the company or a public equity issuance – increase risk and reduce ROI. University-based researchers compete for investment capital from the same investor pool as more advanced investment opportunities. They’re up against young companies with management teams, and products nearer to commercialization which, at face value, present more attractive opportunities for investors.
And the competition for investment capital is fierce. Over a 12-year period, one of the world’s largest angel funding organizations reports that only 2% of qualifying applicant companies received funding. That means that 98% of the applicants were declined. With this fierce competition, and an available pool of seemingly attractive, more advanced investment opportunities, why would a company like York Bridge Capital invest in university-based research?
What many investors may see as too risky, too immature and with too many unfilled gaps, we (and other investors like us) see as an attractive investment opportunity. Of course, most of these opportunities are very early stage. But this provides us with the chance to shape the opportunity, to establish the initial management team, to set the business strategy and to be a partner with the researcher in getting it right from the beginning.
Our experience tells us that universities are potentially excellent partners for private sector investors. A university’s technology transfer office acts as an investment screening and due diligence partner, screening and scrubbing investment opportunities and providing the private sector investor with “the best” opportunities. This is a significant advantage over an investment opportunity presented directly to the investor by the entrepreneur.
Many university opportunities also come with a very significant amount of prior invested capital (in the form of funded research grants, etc.). This capital is typically “non-dilutive,” in that it isn’t added into the company’s initial capital base for initial valuation purposes. In simpler terms, this prior invested capital is “free money” and helps offset the risk on the road to market.
Is any of this a guarantee of success? Of course not. The risks are real and not every investment will pay off. But when universities like Dalhousie create environments that foster innovation and partner with investors who, like York Bridge, bring expertise on navigating that road to market, the chances of success are greatly improved. All of the above, in our view, results in university-based research as an excellent investment opportunity for private sector investors.
Ken Richards, (Bsc’79, BComm’81, MBA’82) is a partner in York Bridge Capital.