Resilience, Covid-19 and access to finance

In 2019, Mike Rees, Founder of Strategic Vitality and Chairman Athla Capital Management, published a much anticipated review on university-investor links, commenting on ways to strengthen university access to finance that supports spin-out company formation and university-investor relationships. In his article below, Mike Rees offers his insights on access to finance and collaboration in 2020.

At the beginning of 2020, and with the UK leaving the EU at the end of the year, investors the world over were poised to watch what the UK’s trade deals might look like, hopefully instilling some much needed confidence in an uncertain future.

Then Covid-19 happened. And from what was then looking like clarity might help bring some stability, the UK was plunged into further economic uncertainty with only speculation about which sectors may recover rapidly (e.g. pharmaceuticals, energy, technology), which ones may take years to return to pre-Covid levels (e.g. manufacturing) and others where the impact of the pandemic may mean a certain decline or significant reduction as we know it (e.g. aviation, food and hospitality).

My report on UK university- business investor links published last year demonstrated that, contrary to popular belief, UK investments have grown in USOs at all stages (seed, venture and growth) over the period 2011-2018^[1].

But as we enter a recession and a potentially long drawn out recovery, the single biggest challenge facing UK spinouts and startups is collaboration. A key theme in my report was the concept of collaboration, collaboration in and between disciplines, and now bringing in collaboration between academic researchers, universities and businesses.

Covid-19 has made these collaborations a challenge. With so many focused on survival, the whole world of collaboration has been paused. Networking, relationship building, negotiating. All of the social intangibles that make collaboration possible have been paused.

Withdrawal from Europe too, has brought plenty of uncertainty. The investment world has been devilled by uncertainty over the last 3 years. Leaving the EU, followed by the election, Covid and then UK-EU trade deals again have meant investor sentiment has retreated as the UK emerges in a very different position than it was a few years ago.

Once you get beyond that uncertainty, there are challenges about attracting international students and talented academics and about how the UK stays competitive in an increasingly globalised world. If we want to export to Europe, we will still be bound by European standards. A large part of our economy is increasingly service-related. Hospitality was 9 per cent of our economy and now it’s less than 4 per cent.  We cannot act unilaterally. Asia’s economy is recovering well and it is likely Asia will rebound quicker than anywhere else in the world and the U.S. is seeing a resilience very few can understand. So where does the UK fit and if there is no Brexit deal, this will create more uncertainty.

What challenges can we expect in the longer term?

A big challenge at the beginning of the crisis was how much liquidity do startups have? As many of these companies are growth-focused and heavily reliant on equity, they have largely been unsuccessful in securing any Government aid.  Fears of recession will mean that investors are changing their behaviours, reducing investment and preserving  funds rather than looking for new opportunities. As startups rely on equity or customer orders to remain viable and with limited cash reserves, many startup companies will be unable to continue with product development and progress their business plans. This could impact startup companies’ ability to plan and focus longer term.  If we attempt to provide liquidity into the sector to sustain it, many startups will continue to spend money and employ people to get their product to market. But there is a fundamental disconnect between the reaction of investors who will want startups to retrench and stop spending. Startup loans and future funds will be necessary to help bridge that transition into the new norm.

Concurrently, universities are facing the challenge of the potential loss of foreign student income. How do we sustain this level of global-leading research and how can we maintain the financial viability of universities? When building a startup, there are stages:  conduct research, obtain grant funding, and bid for pre-seed finance. All of these need to align to enable success. If we cannot sustain research and understand the whole value chain, a whole seaground of startups will disappear. Therefore, how do we ensure we are keeping the bedrock of future research alive?

We are also starting to see a whole shift in where companies choose to invest. Many research- intensive companies are making the decisions to invest in startups rather than fund R&D.

An example of how investment is changing is through the work the global corporate venture association is doing to mature the venture capitalist world. Companies like BP are realising the benefits of the corporate venture arm push-pull. Through programmes like TENX, they have access to some of the leading academic developments and work with other companies to solve a commercial problem. This concept is similar to Google’s DEEP MIND which is doing a lot in artificial intelligence. These corporate venture arms sit at the heart of commercial business but universities, used to directly funded R&D, may struggle if this pattern becomes more dominant.

Developments like these cannot be helped by Government, they have to come from the private sector. So as the venture capital market matures, so will the UK’s drive for 2.4%.

Covid has created some opportunities

It is not all bad news however. The Covid crisis has unleashed a level of innovation and entrepreneurism that has not been seen before with universities reporting more engagement than ever from new startups and SMEs wanting to pivot and adopt more digital technology. It has also caused a step change in the digitalisation of the economy, with remote working, online shopping and companies more willing to adopt digital technology. While innovation can become more difficult because businesses are trying to protect their core business, with a crisis, there is a threat to core business and innovation becomes a necessity.

The Government cannot achieve the 2.4% target alone. Globally, the UK is seen is a leader in academic research. My concern is how to sustain that in a world where everyone is trying to emulate the UK and to what extent the UK can appreciate its status as a global leader. Collaboration must remain a key priority if we are to emerge out of this period of uncertainty. If we sustain the quality of our universities and protect our research base, companies will not want to leave. We should be building on our strengths and not taking away from what we are good at.

^[1] https://re.ukri.org/documents/2019/developing-university-spinouts-in-the-uk-tomas-coates-ulrichsen-v2-pdf/

This article was first published as part of the State of the Relationship 2020 report.