Edinburgh leads the way

Edinburgh University has had one of the strongest entrepreneurial performances of any UK university over the past year, launching three spinouts and 41 startups, which attracted £237m ($372.1m) in investments.

Part of that success is due to Old College Capital (OCC), the investment arm of Edinburgh University, which was set up in 2011 with an initial £2m commitment. The fund recently secured an additional £6m in May 2015.

OCC was set up to defend the university’s stake in spinouts. Andrea Young, fund manager, explained that before the university began investing in its own spinouts, it saw its equity stake diluted very quickly by external investors.

She said: “OCC getting in on the earlier stages of doing an investment allows that position to be defended. Our sweet spot is up to about £230,000 per company, with a maximum of £400,000 over the life of a company.”

Of course, this means that Edinburgh’s stake will still get diluted over time, but getting in on the ground floor enables the institution to strengthen its shareholding at a crucial stage.

While the university has no stake to defend when it comes to startups, Young explained that investment is still important, albeit for a different reason: obtaining risk capital at an early stage is still difficult. Crucially, the industry has very much welcomed the university backing its own horses.

Grant Wheeler, head of company formation at the university’s tech transfer office Edinburgh Research and Innovation (ERI) meanwhile underlined the importance of extending the relationship with spinouts beyond the one-off deal that is the licensing agreement.

He explained: “We have an active portfolio, and when we do spinout deals with companies, they do so in the knowledge that we are potentially a future investor. And that changes things in many respects. At that early stage it is a completely different perspective to start off with.”

OCC operates as a co-investment model, looking for professional leads from venture capitalists, angel syndicates and corporate venturing units. Young however was quick to point out that the fund makes its own investment decisions, and particularly relies on the private sector for valuations.

She said: “OCC has a very calibre investment committee that is constituted from individuals outside the university, and all from the financial services and venture capital industry here in Scotland. It is them who make the investment decisions of whether to invest or not.”

While the setting up of OCC and the work of ERI partially explain the success of Edinburgh, Wheeler noted that it is above all the result of many years of hard work, which has fostered a stimulating enterprise culture at the university and the wider community.

He said: “The breadth of activity in the enterprise space, not just within ERI, is impressive: whether it is BioQuarter, the Centre for Carbon Innovation, Informatics Ventures and all the rest, or on a smaller scale the society, the clubs, the networking groups, the eClub at the Business School, and also the variety of engagements that we have with, for instance, Jamie Coleman at Codebase.”

Such a long list of players, Wheeler noted, means that in many respects it looks like a mess.  He continued: “But that is a good thing, in a way. In terms of creating the opportunities, the lifeblood of the company formation pipeline, it is great that so much is going on; especially when other people are doing so much themselves.”

That creative chaos is balanced by a more established corporate structure provided by the university, which according to Wheeler has to develop processes that produce companies, particularly spinouts, in an efficient way.

It is also important to note that, while OCC and ERI may appear as two distinct entities, they are working closely together and share offices. As Wheeler put it, “there is not much going on that [Andrea Young] does not know about” and she engages actively with ERI’s work.

When it comes to generating the spinout pipeline, ERI takes a two-fold approach: on the one hand, the tech transfer office aims to make it as easy as possible for researchers to approach them, and on the other hand they go out and actively try and identify the next big thing, also relying on a network of people to feed that information to them.

Wheeler named PureLifi, a spinout that turns commercially available LED lights into wireless access points and was listed as one of 12 spinouts to watch in 2015 by GUV, as an example for a more structured approach.

He elaborated: “PureLifi came through a particular proof of concept route. Therefore we saw it coming from a long way out and could start formulating strategies that allowed us to build up a bigger project from the very start and influence how that was structured from an early stage.”

Once a company is spun out, ERI also offers them access to virtual boards, staffed by experienced businessmen and women who are dedicating their time and expertise free of charge.

The office also increasingly collaborates with corporates in Edinburgh and elsewhere, according to Wheeler: “We are engaging with industry to involve them in the spinout creation at an early stage. If a company is coming out with an industry partner or at least a prospective industry partner then suddenly they look much more compelling.”

Young noted that this corporate involvement feeds into the OCC pipeline, explaining that such a spinout becomes a much more attractive proposition to the investment committee.

They also both underlined the importance of Scottish Enterprise, Scottish Investment Bank and the Co-Investment Bank, with the latter essentially doubling the depth of pocket of angel investors. This leads, according to Young, to a much better capitalised company at an early stage which in turn enables management to focus on building the business rather than worrying about the next funding round.

While this makes it seem like Edinburgh has it all figured out, the university is still struggling with the lack of venture capital activity in the city and Scotland in general.

Wheeler revealed that Edinburgh is working with Strathclyde and Aberdeen universities to solve that issue, and the university community has set up a networking group dubbed Research Commercialisation Directors Group, which meets quarterly and takes forward strategic projects.

However, with Queen Margaret University remaining a much smaller university and Glasgow having inked a commercialisation agreement with IP Group, the challenge remains one particularly for Edinburgh, Aberdeen and Strathclyde.

Wheeler showed himself hopeful though, and pointed to Expidarex Capital, set up Sinclair Dunlop with the support of Edinburgh, Aberdeen and Glasgow as well as Scottish Enterprise and Scottish Investment Bank.

He concluded: “Epidarex is essentially operating now as a discreet fund and that was always going to be the case. In a way it will be interesting to see how it performs and how they look to Fund II in the future – that is where the real strategic impact will be.

“If Epidarex becomes a permanent fixture in the Scottish scene then that project will have been a fantastic success, and could well be an attractor for other fund managers to come to Scotland.”

Either way, Edinburgh Research and Innovation and Old College Capital appear to have established an ecosystem that should ensure the university will remain at the top for a while yet.