Sunday July 6, 09:30 PM
Angels unlikely to spread wings over academia
By Andrew Bolger
Braveheart Investment, a Scottish syndicate of business angels, intends to back fewer companies this year as it copes with the credit squeeze. Geoffrey Thomson, chief executive, said that with capital tight he would be concentrating on the Perth-based
company's existing portfolio of stakes in 33 companies, though he did not rule out making some further investments.Braveheart, which joined Aim last year, specialises in financing high-technology spin-outs from academia, and now has formal relationships with the universities of Edinburgh, Strathclyde and Aberdeen. Last year, Braveheart invested £3m across 12 companies. Over its 10-year history, it has completed more than 70 deals, including six flotations, three trade sales and eight write-offs, and has achieved and average investment rate of return of 37 per cent. Mr Thomson said the flotation market was currently effectively closed but there was continuing interest in trade sales. Archangel Informal Investment, Scotland's biggest syndicate of individual business investors, last year invested £8.4m in 15 companies. Archangel has now invested in 35 companies, of which three have floated - Optos (LSE: OPTS.L - news) , Stem Cell Sciences (LSE: STEM.L - news) and Tissue Sciences Laboratory. John Waddell, Archangel's chief executive, agreed that the IPO market had ground to a halt and said institutions were now "just not interested" in flotations of companies with a market capitalisation of less than £50m. But he said: "Deal-flow is still good. If you are long-term investors like we are, it is not a problem. Our high-net worth investors are still looking to back good ideas, and there is continuing interest in trade sales, though prices are not so clever." The attitude of such business angels is important, because they have a good track record at spotting winners among the steady stream of university spin-outs that hope to achieve commercial success. A recent report says there have been about 200 spin-outs from Scottish universities - the vast majority since 1997. Of these, 30 per cent are no longer trading and 55 per cent employ fewer than 10 people, while just 15 per cent employ more than 50 people. About 3,000 people overall are employed by Scottish spin-out companies. Targeting Innovation, the technology consultants who produced the report, said that in spite of an increase in the number of spin-outs from Scotland's universities in the past 10 years, fewer were thriving, with top performers, such as Axis Shield (LSE: ASD.L - news) and Wolfson, having been established 10 or 20 years ago. This failure rate is roughly on a par with any start-up company in Scotland - just under 30 per cent, according to the Department of Business, Enterprise and Regulatory Reform. But the report states: "Given the level of expertise and public funds spin-outs have access to, one might expect success rates to be higher, so why have Scotland's spin-outs met with limited results?" George Boag, chief executive of Targeting Innovation, said: "It has long been recognised that technology from Scotland's universities represents a great opportunity, but this study shows that efforts so far to exploit it have had limited success. "Many of the more successful companies have taken at least 10 years to realise their potential. This is considerably longer than the traditional venture capital exit horizon, which is typically nearer five years." There were two key areas where the report highlighted as problem areas for spin-outs: Securing funding and incomplete technology and management. The researchers found universities often developed novel research that was not aimed at any specific market. Because there was a lot of risk at this stage, the private sector was wary of investing until it was clearer how the technology could be exploited and which market it was aimed at. Mr Boag said: "There is a gap to the market that universities are not well-equipped to address. The real challenge is to find ways to successfully bridge this gap." The report recognises that choosing which technologies and ideas to spin out is difficult but suggests closer relationships with venture capital and angel investors could assist with identifying the most promising technologies. Targeting Innovation said that university spin-outs face many challenges that are not always offset by superior technology. While often internationally competitive, technology was rarely sufficient on its own to ensure success. The technology was usually less important than the appointment of a strong management team. Companies could also be relatively immature when they spun-out, and often required considerable effort to enable them to function effectively. Mr Boag said: "A choice needs to be made between spreading resources thinly to give as many spin-outs as possible a chance, or progressively focusing on a select few. Effort and funding might be better directed to ensuring that fewer spin-outs emerged, and were nearer to market when they did, and that they employed stronger commercial management sooner."
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