Investing in DeepTech: why creating societal impact generates good returns for investors
The UK is excellent at DeepTech, writes Moray Wright, CEO of Parkwalk Advisors. We have made some of the greatest discoveries at our venerable academic institutions and they have spun out companies such as Solexa and DeepMind.
The Government understands that university research is one of the areas in which the UK truly excels. Indeed, it is home to four of the world’s top 10 universities, punching above its weight by producing 15.2 per cent of the world’s most highly-cited research papers, and with a G8-leading citation impact, in spite of having just 0.87 per cent of the world’s population.
It also wants to rebuild, rebalance, and level-up the UK economy and become less reliant on services and finance. To that end, the current plan is to hugely ramp up annual investment in R & D to £22 billion by 2024. This will lead to further novel inventions across many sectors, including life sciences, AI, medtech and many more, that will benefit mankind and the planet we all occupy.
To reap the rewards of this R & D investment, we must have a financial ecosystem that can support these ventures through to commercial success. We are incredibly fortunate, in Cambridge, to have a thriving ecosystem that offers innovators support at many levels – the University, Cambridge Enterprise, mentors, entrepreneurs, management teams, and a healthy supply of early-stage capital.
Joint research between Beauhurst and Parkwalk shows just how strongly Cambridge performs in the UK spinout sector. The University of Cambridge led the way over the past year, with companies originating in the university securing the most deals in 2020 when compared to any other UK university. Cambridge spinouts completed 62 funding rounds totalling £229 million in investment, with the top sum of £39 million raised by genome analysis tool maker Congenica in November.
Add to this the University’s launch of its eighth Enterprise Fund in February this year, and it’s easy to see why Cambridge is Europe’s most productive technology cluster.
Spawning eighteen unicorn companies valued at more than $1 billion to date, Cambridge has a long history of producing disruptive technologies, and is showing no sign of slowing down.
Parkwalk has been investing in the university spinout sector for more than ten years, and in Cambridge spinouts specifically for eight of those years. We’re proud to have invested more than £100m into 107 funding rounds across 48 Cambridge companies in various DeepTech sectors – ranging from life sciences to AI and machine learning, cleantech, medtech, materials, sensors, software and big data, quantum computing, and genomics. Our investments in those rounds have ranged from £100,000 to £7 million.
That portfolio has raised in excess of £350m of equity capital over this period. This has led to some attractive returns: £8.8m of the invested amount has generated £25.1 million of exits and £14.1m of escrow and earn-outs, and the remaining portfolio is currently valued at £139.2m.
Of the 107 investment rounds, 100 are currently valued above cost. There were 8,134 underlying investors across those investments, making 11,699 individual investments. That is democratising access to some of the world’s best science and research!
However, what happens to the portfolio now? As these companies grow and start to scale, looking like they might have a chance to become global leaders in their field, we see a dearth of later-stage investors here in the UK.
There are few VCs large enough to write bigger tickets in later-stage growth rounds, our own EIS funds have their investments capped at £20m per company (a limit we have hit on occasion), and these growth rounds are often too small for larger private equity, pension funds, or insurance companies – natural long-term investors with long-term liabilities who need to see growth.
We tend to see opportunistic non-aligned funds or corporates participating at this stage, often from overseas and perhaps steering the successes to other domiciles – whether through investment and influence or outright acquisition.
Add to this the impact of portfolio consolidation in the wake of Covid-19 and the challenge becomes even greater. In 2020, we saw a jump in funding for academic spinouts but the bulk of the funding was focused in a limited number of companies – less than three per cent of deals accounted for more than 40 per cent of capital invested.
The pandemic has highlighted the issue of concentrated capital and the lack of UK investors, with the number of first-time deals falling dramatically. This can be explained by fund managers focusing on existing portfolio companies and universities closing during the year due to the pandemic. However, this fall in first-time deals will have knock-on consequences for the UK’s ability to produce the next generation of large university spinout companies.
If we really want to create global leaders in the most important sectors – such as life sciences, genomics, and personalised medicine, mobility, cleantech, or quantum computing – we need to be able to support them here in the UK to allow the country to benefit from the output of this taxpayer-financed research.
We must try to ensure we have a financial ecosystem that can allow liquidity for investors while allowing the companies access to the capital required to flourish.
We all know the stories of Solexa and DeepMind, companies acquired and their technology delivering huge value elsewhere. To replace the lost industrial giants of the last century we must allow this new cohort to thrive with aligned investors. Cambridge is clearly a leading force when it comes to DeepTech excellence, but there are still challenges ahead.