Being good at science isn’t enough to start and grow a business, or to attract venture capital. That was the stark message from a panel of experts at the UKSPA 40th anniversary conference at Warwick University.
While venture capital can bridge the gap to take a technology or life sciences start-up and create a thriving world-class business generating major profits, it is not a silver bullet. Most companies looking for VC funding will be turned down.
Dr Sandy Reid, fund principal at Mercia Ventures, said science parks needed to explain to their tenants: “Being good at science isn’t enough. Having the best science rarely will win.
“As a house, we probably see 2,000 to 3,000 inquiries a year for investment. And we do a tiny percentage of that. One percent, maybe 2% of those turn into investments, which tells you there’s a lot of people out there looking for VC money that we say ‘not good enough’.
“There’s lots of people think they’re good enough, but in terms of making venture returns a group of scientists with just a scientific idea is not actually enough to make a good return.”
She continued: “What I frequently see is a huge lack of knowledge of how their product is going to get to market, to fit into a market, how it would be sold, who would be selling it, who their competitors would be, who would even be interested in buying it.
“If I see one more company come to me and say, well, my first market is going to be the NHS, I think I’m going scream, because they’re the very worst people to sell anything to. You have to sell to every trust, so you have to do it 90 times over. Don’t tell me you’re going to make your fortunes from selling to the NHS.
“That’s like a big red flag, because it means they don’t understand the market where their really fantastic bit of science is going to fit, or how it’s going to get out there.
“I don’t have an easy solution, but it’s about having experienced people come into those management teams, people who know the commercial side of business and then you’ve got to supplement that with somebody who understands the fundraising journey and how you go about it.
“Because that’s the other downfall. It happens, even in our portfolios, we are imperfect at this. We will say, ‘why do you think you can go out and raise £15m? You’re not ready. Don’t do it.’
“’Oh but we know what we’re doing and look at this big raise in America. Look at this big raise over here. They waste six months trying to raise £15m or £20m, during which they burn cash the entire time and then go ‘we couldn’t get it away’. And you sit there just grinding your teeth. Six months where they could have been working on their business or their product or getting more milestones there.
“It’s not just about the science. Engage with your tenants and say to them if you want to be on this journey, what are you doing about your management team? Where are the gaps in that? Have you been to an Accelerator programme there? Those types of programmes are critical.
“The science base in this country is fantastic. There are lots of really good science going on but that doesn’t make higher returning investments for these venture capital requirements.”
Her forthright response came from deep experience. Mercia Ventures has around £2 billion of assets under management and makes investments of up to £10m. Around a third of its portfolio is life sciences. It also does work with university spinouts.
Also on the panel was Dr Imelda Juniarsih, investment director at Pioneer Group and responsible for managing the fund to invest in early-stage healthcare startups. She said they were seeing more companies having to run at least a couple of rounds of bridging finance or extension rounds as they tried to move from the seed capital stage to a Series A funding round.
Sandy Reid suggested the issue was partly companies being over-valued by their founders and a general lack of funds in the market.
“We’re definitely seeing that trend of pre-seed and seed companies not making it to Series A and taking extension rounds. And it’s a combination of overly ambitious founders who have unrealistic expectations and Series A investors becoming more risk averse because it’s on a downswing on the market and saying they need more proof points, such as another phase in the clinical trial.”
Chair of the discussion panel was Dr Rebecca Todd, from VC fund Longwall Venture Partners. She said: “We have all been living at the front end of these market ups and downs. There have been plenty of cycles like this before, but every cycle is caused by a slightly different trigger and recovery looks slightly different.
“I certainly feel like we’re sitting in a world of two messages and quite mixed messages, where we’ve got this huge cycle correction from the heyday of 2021 when healthcare and life sciences was particularly in vogue.
“The pandemic triggered an unexpected reaction – everybody wanted to pour money into healthcare and life sciences. There was a massive ‘hype’ cycle and there’s been a big correction from that.
“Now VC funds are finding it very difficult to raise money and companies are finding it difficult to raise money but, at the same time, we’re hearing that the economy is going to be saved by technology, that life sciences in particular is the future of the UK economy. Mansion House has promised us that all these pension funds are going to invest in venture capital and help build that new economy. And yet none of us seem to have seen any of that wall of money that we’ve been promised down the road.”
Tej Panesar, a partner at Prism Ventures, said data comparing the UK and US ecosystems, in particular returns and life sciences, showed the UK VC sector compared well with the US in terms of pooled returns.
But, while life sciences funds were consistent performers, for an institutional allocator, he’s saying, well, how does that really compare with private equity? How does that really compare with private credit funds that I’ve also got available in my menu of options?”
In terms of the Mansion House Compact, he said, “it is really important to see how the commitment to 5% illiquids by DC (defined contribution) pension funds will translate into actual allocations and whether they will move some of that capital into early stage and into early stage UK and early stage UK life sciences.”
Umerah Akram, chief operating officer of FLOWW, a private markets business backed by the London Stock Exchange, said: “I think the challenge is that pension funds’ primary job has been to manage risk and manage cost to almost to the point of well to the point of actually not driving return for savers and people holding those pensions.
“We always overestimate where you are in a year and underestimate what’s possible in 10 years. So I think in 10 years’ time things will look quite different because there are a number of things that are being done to actually execute the compact.
“Of course the 10 signatories of the compact are all competitors so they may not be collaborating and sharing as much, but I’m encouraged by, for example, Phoenix launching a joint-venture fund with Schroeders.
“I’m sure each of them want to go and do their own independent things as well. But the challenge is how do you allow them to marry up the risk management and the cost management that they need to do with the risk taking that venture requires?
“They are going to have to look at not just at the fund-of-funds approach, most certainly direct investment, and to just actually balancing that with other types of finance like private credit.
“So I think there will be some innovation within their own incentive comp structures to to enable that kind of activity.
“But maybe also the VC community needs to do a bit of a PR exercise to demonstrate that actually these returns are strong and ultimately comes down to demonstrating the transparency around that.”
Tej Panesar added: “I think there’s some good early signs. But the question is what is the path between the 5% of illiquid commitment that, in theory, equates to £50bn to £75bn of allocation and how that is going to be deployed on the ground.
“That’s a vast wall of money and there simply aren’t enough early stage VC investors and growth stage investors in the UK to absorb that capital. I know, speaking to former colleagues, that the Business Growth Partnership conversation is not easy.
“It is not obvious that they will just be a straight conduit for all that capital. So there is a huge cultural shift that must occur within those pension fund institutions that must occur for them to deploy directly themselves or for other VC’s to be established to absorb this capital.
“A huge cultural change just has to occur internally at their board levels and elsewhere. These guys are great at making the right sounds but they will not do anything that will in any way contravene their targets for their key stakeholders.
“In the last couple of days we’ve been seeing what the institutional market really thinks, because when government has started to make noises about potentially mandating, then you’ve immediately heard a backlash against that from Manchester pension authority and superannuation service as well saying ‘do not mandate us, we need to do this in our own time, in our own way’ and and that’s what they really think.
“So I think you’re looking at a five to seven year cultural shift for a small portion of reallocation. I’m very worried that a lot of this illiquid commitment will go into private equity and other safer forms of assets.
“I’ve come to the conclusion personally that an element of smart mandating may be the way in order to get money into early-stage companies.”
Author: Simon Penfold
Photography: Ed Nix
