The great cash dash

08 March 2010

State aid is not just for banks. The government has begun handing out money from the £200m UK Innovation Investment Fund, which will fund small to medium-sized businesses in life sciences, digital and advanced manufacturing.

The idea is to plug an investment gap afflicting UK technology companies. Since the financial crisis began, it has been much harder for them to raise money from traditional sources including angel investors, private equity houses, the public markets and the banks.

The UK IIF is run by the Sheffield-based quango Capital for Enterprise and gets half its money from the European Investment Fund, an EU institution. Its presence in the market is necessary because many venture capital investors have failed to raise new funds, creating a shortage of early stage private sector investors and making new technology start-ups ever more dependent on public funding of one kind or another.

The Northwest Regional Development Agency has spotted this as a major issue affecting the region's ability to foster the growth companies of the future. It has estimated that North West businesses could be doing twice as well in terms of drawing down public sector research and development funds.

With a pot of e9.9bn available across Europe in 2013, this is one area of public funding which is expected to grow and it would be remiss of the region to ignore it.
The NWDA is currently recruiting advisors for a £3m project to help firms to submit bids. The objective is to pull in £14m public R&D income to the region, with £7m private match over the three-year programme.

Ask those in the boardrooms of technology companies what they need and the answers come back loud and clear.

Martin Keighley, chief executive of water treatment business Arvia Technology, said the company had experienced “both success and frustration” in accessing grants. The University of Manchester spinout received money from the UMIP Premier Fund and the NWDA in the initial proofing stage of developing its water treatment technology.

“Arvia has found it considerably more challenging to access funding to assist towards the commercialisation of its technology,” Keighley said. “This is significant, as that is the stage where many companies traditionally fail. This issue needs to addressed, as support should reflect the various stages of a company's development rather than all in the early stages.”

Arvia, whose products destroy aqueous organic pollutants in an environmentally friendly way, won the Institution of Engineering and Technology's North West Innovation Award last July and its customers include water utilities and groundwater remediation companies.

Scott White, chief executive of Nano ePrint, another University of Manchester spinout, said his company had received grants for R&D and commercialisation from the Technology Strategy Board, the NWDA, and the Northern Way.

“Timing, or the lack of, can be crucial,” said White. “As a start-up firm you need to move quickly, so relying on grants can be dangerous due to the time and effort spent in the application process. Having said that, the bureaucracy associated with grant applications is perhaps less in the UK than elsewhere.”

Accelerating growth

Nano ePrint, set up in 2006, is based on university research into planar nanoelectronic circuits for semiconductor fabrication. It produces devices which achieve very high speeds while dramatically reducing both circuit size and manufacturing complexity.

Richard Henderson, senior partner at Watford-based MTI Partners, which manages the UMIP Premier Fund from its office in Manchester, said: “If used properly, grants can prove vital in accelerating growth and commercialisation. But the key is investing the capital effectively, and not being too distracted by the process, because from MTI's experience, companies seeking grant funding can fall into some classic traps.

“These can include: becoming diverted from the path to commercialisation in order to conform to the criteria of the available grant; becoming grant application "machines' thus forgetting why they are in business; and committing too much management and staff time to applications.”

Doug Stellman, investment director at private equity firm YFM, said public funding often helped companies get through the R&D phase and into early commercialisation, at which point they have a much better chance of attracting private investment.
“I don't think there is an unhealthy reliance on public funding. Once businesses get further down the track and people can see what they're about, there are plenty of private funds available,” he added.

Stellman pointed out that the North West has a record of producing companies which changed hands in $100m-plus deals, such as Tepnel Life Sciences, Transitive and SurfControl — and he sees no reason why there should not be many more.

YFM, which has invested in Manchester-based technology companies Nanoco, DxS and Epistem, is managing an interim venture capital fund for the NWDA and Stellman said there had been no shortage of applicants, largely because there are now fewer sources of early stage private capital than there were two years ago.

“There are a lot of businesses that are deserving of support and we are trying as hard as we can to get deals put together,” he added.

The interim fund is a precursor to the £140m Northwest Venture Capital Loan Fund, which is due to get up and running in two months' time and will have £15m set aside for each of three priority sectors: biotech and healthcare; digital and creative media; and energy and environmental.

Stellman said businesses seeking funding will always stand a better chance if they have already secured some investment prior to pitching for venture capital.

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