Signs of consolidation in UK university technology commercialisation

The investment is part of a £4.5 million fund raising by Fusion, which has long-term contracts and rights of first refusal to commercialise intellectual property coming out of Sheffield and Cardiff, two of the UK’s leading research universities.

David Baynes, CEO of Fusion IP, told Science|Business he is, “Tickled pink” at the investment. “I don’t think you should be competing in this space: we’ve got our universities, IP Group have got theirs; what you need is collaboration.” He added, “IP Group must think we are good to take this stake; it’s a huge endorsement.”

On the one hand, Baynes said, IP Group has the same interest as any investor in seeing Fusion IP do well, on the other it is an investor with intimate knowledge of the university technology commercialisation space.

As part of the deal, IP Group gets the right to co-invest in companies started up by Fusion. It can acquire for cash, at a predetermined portfolio company valuation of £500,000, 20 per cent of the equity in any new start-up Fusion forms under its agreements with Cardiff and Sheffield. This will normally equate to a 12 per cent stake. If IP Group chooses the exercise this right it is bound to invest at least £200,000 cash in the start-up.

“IP Group has an option, they don’t have to invest. We will look at companies together, which is good because we will get their feedback. And if they take a stake they have to invest in the first seed round of funding, which means we have to put in less money,” Baynes said.

In addition, IP Group will make its in-house services available to Fusion companies in which it takes up co-investment rights. “Two heads are better than one,” said Baynes. “IP Group is bigger than us, with a wider reach and more resources. It’s good to be getting access to these resources.” These include a recruitment team that finds managers for start-ups and a four-person capital markets team for sourcing funding for portfolio companies.

Apart from access to wider resources, the partnership should bring economies of scale, given the amount of time and effort that is put into the formation of each university spin-out. “We’ve got 20 companies and set up eight in the last year: that’s a lot of work. Having a big portfolio is lot of effort, so it is good to have access to additional expertise,” Baynes said

Fusion’s partner universities of Sheffield and Cardiff are “delighted” and see it as an endorsement at a time when it is so difficult to raise money. As part of the overall deal, Fusion has ended a co-investment agreement with the investment firm CCVU signed in March 2006, leaving it with £3.2 million of new money to invest in portfolio companies. Baynes said CCVU was not a long-term investor and the sale of its six per cent stake has removed any overhang on Fusion’s stock. The share price rose three per cent to 33.5 pence when the fundraising was announced.

Despite his rosy view, Baynes admits that financing start-ups is difficult. The 80:20 rule still applies and four out of five companies won’t make the grade. “That’s another reason why it makes sense to club together: then you only need a small number [of companies] to hit it big,”

But such big hits are thinner on the ground than ever. The initial public offering (IPO) market remains firmly closed. In any case, argues Baynes, it is some time since the IPOs of technology start-ups represented an exit for the venture capital investors. More usually it was akin to another funding round.

“Exits are harder than ever,” Baynes said. “Fusion only thinks in terms of trade sales; there are no IPOs. It means you’ve got to be patient.”

But it’s not all gloom. Finance apart, the environment for technology transfer and commercialisation has never been more supportive,” Baynes believes. “We are right on top of what is a very topical area. When we first started people thought it was a bit wacky, but now what we do is seen as central in promoting innovation.”

“Shipbuilding has failed; car building has failed; financial services can’t save us. The government is now looking to technology, and as soon as you do that you look to the universities, because that’s where all the new technology is.”