Since the demise of the dotcom, venture capitalists have been searching for new places to invest. University spin-offs are attracting much of their money.

Spinning-off advanced research into start-ups is seen as the new route to well-paid jobs and new economic clusters for future growth.

As government and private industry commit more resources to support spin-off activity, venture capital money is flowing to university research teams, especially those in the fields of life sciences, photonics, materials science, and biotechnology.

Nowhere is the trend more evident than in Switzerland and the United Kingdom, where industry and government alike hope to avoid the mistakes of the past which saw the commercial benefits of innovation from both of these countries being exported to foreign soil.

Successful start-ups

Successful businesses built on university research in Switzerland include: OptoSpeed AG, u-blox AG, GlyCart Biotechnology and Modex Therapeutics. In the UK, successful spin-offs include: Virata, Oxford Glycosciences, Autonomy, and ARM.

The currency of advanced-research-led investment is patents, licences, and intellectual property rights, now considered to be the best bet for reaping giant financial rewards and a healthy return on investment.

Two years ago it was two HTML-savvy 20-year olds demanding millions for a piece of their billion-dollar dotcom idea.

Today the start-up teams looking for seed capital are typically run by four talented eggheads from a research lab in rumpled shirts, bad haircuts, and a product that is so couched in industry-specific jargon that no one except other scientists really understands if it is innovative or not.

Corporate investors keen

The university spin-off is also attracting the interest of corporate investors, such as Intel Capital, Novartis Venture Fund and Hoffmann La-Roche's New Medical Technologies.

These funds want to tap into the cutting edge of research for their corporate parents. Private equity investors are interested because they wish to profit from the commercialisation of the technology, cashing in along the way as a project goes from start-up to a global organisation.

A recent survey by FirstStage Capital of 37 UK universities revealed spin-off activity has tripled since June 1998, with 310 new businesses created since then.

While no such survey exists yet in Switzerland, a quick round of the major technology transfer agencies reveals the high rate of spin-off activity. For example, the Federal Institute of Technology in Zurich has turned out more than 125 spin-offs in the past few years.

The Unitectra technology transfer agency lists 30 spin-offs from three institutions, the University of Zurich, The University of Bern, and The Priority Program Biotech (SPP), a government funded research program running in a number of universities.

Commercialising researchers' work

Information from the UK suggests that a key success factor is the technology transfer agencies that undertake to persuade researchers of the benefits of commercialising their work.

"There tends to be a greater correlation between the number of spin-offs and the size of the tech transfer departments rather than the amount of research output," says Tim Cook of Isis Innovation, the technology transfer arm of Oxford University.

Knowledge-driven economy

The British, like an increasing number of people in Switzerland, believe that a knowledge-driven economy and defensible intellectual property are core competitive advantages.

Governments, private companies, such as Generics Groups, and venture capitalists are developing strategies to capitalise on research spin-offs.

When a university start-up has no business plan, a very sketchy revenue model and no clear working product, the financiers are not likely to take notice. Trying to apply conventional risk models and fundamental research to a scientific project doesn't always work.

In Britain, the government has stepped in with the University Challenge Seed Fund, introduced in March 1999, which stumps up cash for projects which can't attract venture capital. It has approved 127 projects for funding and committed £8.3 million (SFr19.3 million) in investment. The result is 44 new spin-offs and 13 new patent applications, as well as an additional £4.8 million in investments from interested third parties.

Conflicting values

Venture capital fund managers are not always able to access the university research groups. There is a sometimes a problem between the values of the academic and the values of the financier.

"If an investor or consultant approaches the academics with money as the motivator, they won't be very successful," says Phillippe Wallart, of the technology practice at PriceWaterhouseCoopers' Corporate Finance division in Zurich.

"What drives this type of entrepreneur, in general, is the desire to see their inventions used widely. They want to advance the state of science and technology," he adds.

Industry knowledge

The advanced level of the technologies involved is also problem for investors. It is difficult to assess at the research stage a technology with regard to its commercial applications and consequent value.

The knowledge is highly specialised, soaked in jargon, and embedded in a history of scientific developments, schools of thought, beliefs, and academic conflicts. Few investors have a clue whether the technology is really something new.

Matters are complicated further because market knowledge, and not just technical know-how, is required to assess the value of one of these projects.

An increasing number of funds managers are employing scientists to act as members of their Advisory Boards or even hiring professors to work on their investment teams to overcome this lack of industry knowledge.

Lombard Odier, for example, was one of the first investment banks to adopt this practice. It is probably Switzerland's most active bank investing in emerging biotechnology companies and has been able to achieve that status by working with a Scientific Advisory Board. New investment proposals are submitted to its network of Advisors, which includes renowned scientists and Nobel prize winners.

Firms such as Generics Group AG, which has offices in Zurich and Britain, sees this situation as a market opportunity. "The potential increase in value of an investment made at this early stage is very high - if you get in early enough. You have to groom the raw technology, understand it, and know what further development needs to be applied, what the commercial potential is," explains Ralph R Strasser, Managing Director, Generics AG.

Generics Group AG focuses on consulting, product development and investment and which generates intellectual property with a view to spinning it off. It scans the current research, identifies opportunities, makes deals with university professors, refines patents, and manages the next phase of development. Along with Venture Partners AG, Generics has launched a technology transfer fund it calls ETeCH, in Zurich to target just this kind of project.

Newly wealthy employees of successful technology companies are also active investors in these early stage investments. Peter Ohnemus, Daniel Aegerter, or Rainer Rueppel are some of Switzerland's successful entrepreneurs who made millions during the dotcom boom and are now investing in fledgling technology companies at home and abroad.

British observers show some cynicism about this happening in the Cambridge area, arguing that most of these people are in fact buying fast cars and driving up property prices.

by Valerie Thompson

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