Bioe News

Published online: 17 March 2005, doi:10.1038/bioent852

UK on a quest for early-stage financing models

*Peter Mitchell is a freelance writer based in London.

Several UK universities have given exclusive rights to finance their startups to specialist seed investors, but this monopoly may not be the only way to finance early-stage biotech startups.

David Baynes, CEO, wearing lab coat, and Peter Grant, operations director at Biofusion, are signing exclusive deals with universities in the UK to finance their startups. VisMedia

British universities looking to start life science companies are considering whether to commit themselves exclusively to one funding channel through specialist's seed funding companies, in the hope of a more efficient spin-out mechanism. The University of Sheffield, for example, recently elected the newly floated investor Biofusion as the exclusive source of funding for its startups. Others, though, still believe it is best to keep their options open and play the field of all possible seedcorn investors.

Biofusion raised 8.2 ($15.7) million, in an initial public offering on the London Stock Exchange's Alternative Investment Market (AIM) on February 2. The money will be used to help guide and provide initial funding to Sheffield University's promising spin-out or licensing ideas, following an exclusive licensing deal between Biofusion and Sheffield announced in January.

"Spin-out companies find it very hard to raise cash in those early, highly dilutive funding rounds," says Biofusion chief executive David Baynes. "So we will provide startups with seedcorn money in the region of 125,000 ($239,000)—enough to draw up a business plan, recruit third-party management and get the business systems in place." What's more, academics will be allowed to hold minority equity positions in the spin-outs and will thus share in the harvest, he says.

The Biofusion/Sheffield startup portfolio already contains eight life science firms. As the spin-outs develop, Biofusion will put together more substantial funding rounds to hand them on to specialist third-party investors. "A couple of rounds later, we make our exit while still holding 15–30% of the company, so there's a substantial return on our investment," says Baynes.

Glenn Crocker, chief executive of Biocity, a bioincubator linked to Nottingham University, notes that the amount raised by Biofusion was not large and suggests that investors might be wary of this type of venture. But such ready-made funding channels could offer a good bargain for many universities. "And specialist early-stage investing can be very useful because no university can afford to get this depth of specialist knowledge in-house. There just isn't enough volume of IP [intellectual property] coming through to justify it," he adds.

In return for the money invested in startups, Biofusion gains all the university's rights to commercialize Sheffield's life sciences IP over the next ten years. The exclusivity angle is very important, says Baynes. "If we didn't have exclusive ownership of the IP, we couldn't give our investors absolutely 100% confidence that, when a really good idea comes along, we will own it." For now, Biofusion is on the lookout for more such deals with university life science divisions to enhance its portfolio.

		"'We think the exclusivity model is unnecessary', says Clifford Gross, chief executive of technology transfer company UTEK of Plant City, in Florida."

Biofusion is not alone in providing such services in the UK. Another more experienced early-stage financing firm called IP2IPO, in London, opted for the same exclusivity model. In a 15-year agreement starting November 2000, IP2IPO has sealed a 20 ($38) million exclusive deal with Oxford University's chemistry department retaining up to 50% of the university's equity share in any technology startups. Similar deals with Southampton University, King's College London and York University let IP2IPO retain an estimated 20% equity share.

But not everyone agrees that this model is ideal. "We think the exclusivity model is unnecessary," says Clifford Gross, chief executive of technology transfer company UTEK of Plant City, in Florida, which has operations in the UK and Israel. "Schools are very happy to negotiate license transactions on a case-by-case basis," he claims. He believes that a lot of technologies are not transferred partly because universities and companies have difficulties getting together. "It's better for universities to present their wares to companies all over the world," he adds. UTEK deals with more than 200 universities in North America and Europe and upwards of 16,000 technologies available for license.

Perhaps choosing one vehicle or the other for financial backing depends where you are sitting. Stanford and Cambridge are facing different challenges from those of Sheffield and York. Ederyn Williams, director of Warwick University's technology transfer office points out: "There isn't necessarily one model right for everybody."