EXCLUSIVE: Parkwalk, the venture capital fund which backs technology developed by British universities, is raising a £200m fund for scaling companies.
Ten of its portfolio companies want to raise between £15m-£50m each in later stage funding.
Portfolio companies include Congenica, a rare-disease diagnosis technology; Paragraf, which is creating graphene chips for computers a thousand times more powerful than today’s silicon chips and use a hundredth of the power; and Yasa, an electric motor five times more efficient than the one used in a Toyota Prius and is set to be used in Ferrari supercars. The first two were spun out of the University of Cambridge and the latter, University of Oxford.
The VC is talking to local authority pension funds, insurance giants and government about investing in its new Series C fund, which it hopes to close by summer 2020.
The venture capitalist, which manages the UK’s largest EIS fund, thinks there is a dearth of Series C funding for British tech start-ups, which means they are often bought by foreign rivals.
Parkwalk underlines the urgency in research published this week showing investment in UK university spinouts fell by 9 per cent in 2019 to £1.24bn, despite a record £12bn of venture capital going into wider UK start-ups, according to Beauhurst.
The VC hopes its new fund will keep breakthrough technology developed in Britain within these shores, rather than relocating overseas.
A case in point being Yasa, based in Oxford.
“If we don’t find the right investors, I can guarantee it will be bought by a Chinese or German company within a couple of years and it won’t be based in Oxford anymore but in Shanghai or Berlin,” said Parkwalk CEO Moray Wright.
Too often, says Wright, British technology is bought out by foreign companies with deeper pockets.
For example, in 2006 US DNA sequencing giant Illumina bought Cambridge university start-up Solexa for £600m; today, the American company has a market cap of $45bn and employs 11,000 people in California.
And AI developer DeepMind, which sprang out of University College London – was bought by Google for $500m in 2014 – a price ex-Google CFO Patrick Pichette later admitted was “a steal”.
Wright said: “The UK punches above its weight in blue-sky research and the gap in the UK funding cycle between early investors and institutional investors needs to be filled to prevent lost opportunities for the UK as our technical lead is lost as many companies are sold to better-funded international rivals.
“Our long-term goal is that we can have university spinouts as an asset class on their own.”
University spinouts are bleeding-edge tech start-ups spun out of taxpayer-funded research. Until a decade ago, universities were laisser-faire about how their research was commercialised.
Technology developed by English universities has become commonplace. The MRI scanner used in all hospitals was developed at Nottingham University, CDs and DVDs were invented at Surrey University, while LCD screens were invented at Hull University and DNA was famously discovered at Cambridge.
‘We as a country were very good at this kind of technology’
Perhaps the most egregious example of a university failing to capitalise on its own tech breakthrough was Manchester discovering the wonder conductor graphene – and then failing to patent it. Currently, there are 35,139 patents using graphene technology, 30,000 of them in China alone.
“We as a country were very good at this kind of technology but lacked the process for commercialising it,” said Parkwalk director of business development Tom Hopkins.
However, UK universities have become much more professional about commercialising research. It was then prime minister Tony Blair who told universities they had to be more professional in their approach.
Wright said: “The whole ecosystem has been professionalised over the last 10 to 15 years.”
The government has committed to reach 2.4 per cent of GDP being spent on science and R&D by 2027.
The UK, said Wright, punches well above its weight when it comes to scientific research. Although Britain only has one per cent of the world’s population, it accounts for 16 per cent of the world’s most highly cited scientific papers.
“We’re getting a massive bang for our buck in terms of our research capabilities but we’re failing to commercialise on that. That should be addressable and should lead to commercial success.”
Parkwalk was founded in 2009 after co-founders Wright and Alastair Kilgour decided that university spinouts were undervalued. Universities often incubate deep tech departments for 5-10 years using taxpayer money running into the millions.
The difference between university spinouts and general start-ups, said Wright, is that their technology has global reach, as well as years of taxpayer-funded research and development behind them.
Over the past five years, nine out of 10 university spinouts are still operating compared to 50 per cent of general start-ups, which go bust after a couple of years.
Parkwalk operates a pipeline of university spinouts from early stage through to Series A and hopefully Series C.
Its flagship fund is an evergreen Enterprise Investment Scheme (EIS) aimed at Series A rounds, which raises £65m each year.
The Parkwalk Opportunities Fund invests on average £2.5m in each of its portfolio companies, with investments ranging between anything from £750,000 up to £7m per round.
Investors, who are sourced through wealth managers and financial advisers, have their money tied up for an average of 4.5 years before exit.
To date, Parkwalk has exited from 29 companies, returning £29m to investors. Its most profitable return was 16x its original investment, which it earned out after just 18 months.
Parkwalk points out that even when its portfolio companies have gone bust, their IP has been bought by somebody else.
The London-based VC also manages private annual early stage EIS funds for individual universities including Cambridge, Oxford and Bristol. The venture capitalist is about to announce a new fund allied to a prestigious London university. These EIS funds are aimed at alumni and supporters of those universities and raise anything between £2.5m-£4m per funding round. Cambridge is on its seventh seed fund and Oxford on its fifth. They invest anything between £250,000 and £500,000 per company in each seed funding round.
To date, Parkwalk has invested £240m overall in university spinouts.