Accelerating Patient Capital

Accelerating Patient Capital
Accelerating Patient Capital

0712 Innovate 433x242The mix of funding that underpins our innovative firms is key to ensuring they receive the investment required to thrive and grow; this, in turn, has a profound impact on growth in the wider economy.

As the Industrial Strategy observes, we must empower our innovative companies with the confidence they need to plan for the long term. In this context, the right finance is critical.

The Patient Capital consultation, published August 2017, made interesting distinctions when it set out to understand the current UK landscape for financing growth in innovative firms. As you would expect, it looked into the economic factors which impact the supply and demand for ambitious long-term investment in innovative companies. But critically, it also looked into the factors that determine successful deployment of patient capital, and in particular the challenges of matching patient capital to companies with the highest growth potential.

The key weakness identified - level of business R&D

The Patient Capital consultation also put its finger on a key weakness; the low level of business R&D investment going into young UK companies compared to the United States, despite the UK having a higher quality research base than the US upon which to attract that investment.

The difference is stark. In the US, 45% of business R&D investment goes into young companies whilst in the UK it is only 15%. Three times as much of the R&D investment is going into young companies in the US, compared to their counterparts here in Britain.

Finding new solutions for accelerating patient capital deployment

The challenge for young companies in the UK is further compounded by the low level of our total R&D investment, which has plateaued at around 1.7% of GDP for the last 20 years, whilst our global competitors such as the US and Germany have increased their investment to 2.8% and 2.9% respectively. Whilst Government’s commitment to increase investment to 2.4% of GDP is important, finding new solutions to accelerating patient capital deployment is going to be critical if we are to compete more effectively globally. To grow the industries of the future, we must harness the capabilities of innovative young companies.

75% of R&D is carried out by just 400 businesses

"We need a way to accelerate patient capital more broadly into young agile companies, which can drive growth and prosperity right across our economy."

The foundations for tackling this challenge have been set out by the Government in its Industrial Strategy, and attendant ambition for the UK economy to lift its total investment in R&D over the next ten years much closer to the OECD average.

This is a challenge which is more about breadth than depth. The UK has excellent examples of R&D intensive industries - e.g. in automotive, aerospace and pharmaceuticals, but as the Industrial Strategy points out, 75% of our private sector R&D is carried out by just 400 businesses. We need a way to accelerate patient capital more broadly into young agile companies, which can drive growth and prosperity right across our economy.

The demand is there but what is missing?

The demand is there; we see it every day in the number of high quality applications received for our funding competitions. The long-term supply of finance has also been strengthened, with an additional £20bn available for innovative and high potential business.

What is missing are new ways to bring supply and demand for business R&D together, in order to drive new patterns of capital deployment right across the UK economy.

Our first of a kind Investment Accelerator took on that challenge by bringing together:

  • Innovate UK expertise identifying high potential businesses
  • Venture capital expertise identifying the teams and business plans capable of realising that potential
  • Innovate UK grant funding to create a risk profile that crowds-forward private sector investment into early-stage R&D
  • Venture capital equity funding increasing the occurrence of follow-on private sector growth funding
  • 100% project funding combining grant funding from Innovate UK with matched equity funding from venture capitalist for successful companies

Investment Accelerator pilot success

The pilot competition received over 750 registrations, the majority of which were from businesses who had never approached Innovate UK before. This led to over 220 applications with more than 50 in the strand for Infrastructure and over 170 in the strand for Health & Life Sciences. From these applications, we are on course to securing in excess of 40 joint investments by Innovate UK and our Venture Capital partners.

Create a step change in growth

The UK government has set itself the ambition to become the world’s most innovative economy. We already have the high potential companies, and plans are in place to drive up the supply of patient capital. If we now align the core strengths of our public and private funding communities, through solutions such as the Investment Accelerator, we can break out of our historic investment bias and create a step change in growth across our economy.

 

Tim Sawyer is Investment Director at Innovate UK

This article first appeared in the 2018 State of the Relationship report, commissioned by Research England and compiled and published by NCUB.

READ THE FULL REPORT HERE

 

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