David Adams 8 Feb 2018 11:05am

Money for new scope

Ingenious ideas are two-a-penny, but how are governments and industry turning innovative concepts into commercial success? David Adams investigates

Caption: Innovation alone is not usually enough to guarantee business success

Even if you’re having a truly dispiriting day it’s impossible to ignore the ingenuity of our species. Even if you’re having a truly dispiriting day it’s impossible to ignore the ingenuity of our species. Consider how the objects in the room around you were created, or watch an aeroplane soaring across the sky outside. These miraculous transformations of raw materials are all the products of technological innovation – often the work of entrepreneurs and small businesses, or researchers and inventors working within academic institutions.

But innovation alone is not usually enough to guarantee business success. Innovators need support from funders and advisers; and need to work in an economic environment that helps make it possible to turn their ideas into commercially viable products or services. So what are the most important steps policymakers can or should take to enable the commercialisation of the best ideas?
In the UK, 2017 was a record-breaking year for investment in start-up companies created within universities and other research establishments. More than £1bn was invested in these spinout
firms by December, according to research commissioned by law firm Penningtons Manches.

There are many examples of such companies growing into effective businesses. They include Cambridge Graphene in the UK; biotechnology company Crucell, originally a spinout from Leiden University in Germany; and Google, founded by Larry Page and Sergey Brin when they were PhD students at Stanford University and first seen running on the university’s website.

The UK is arguably one of the best countries to create, or invest in, an innovative business. The Global Entrepreneurship and Development Institute ranks it as fourth in the 2018 Global Entrepreneurship Index (GEI), below the US, Canada and Switzerland.

The index is created by scoring each country against 14 pillars, including start-up skills, cultural support, human capital, competition, product innovation and risk capital. The countries with the highest overall ratings score well in all 14. So, Australia, ranked fifth in the index, has high scores on human capital (95%), start-up skills (100%) and on other pillars that suggest a culture and environment that assist entrepreneurship. Its score for product innovation is a relatively modest 59%. By contrast, China scores 100% for the product innovation and risk capital pillars, but only 52% for human capital and just 24% for start-up skills. Its overall rank in the GEI is 43rd.

The GEI suggests policymakers focus on pillars where a country’s score is weak, but finding the right policy mix can be extremely difficult. For example, South Korea, generally regarded as one of the most technologically literate countries in the world, is not taking full advantage of its potential for creating innovative businesses. While the country was ranked at the top of the Bloomberg Innovation Index in 2016 and 2017, and is thought to spend a higher proportion of GDP on R&D than almost any other country (4.23%), much of this is accounted for by the major technology companies that dominate its economy. Many entrepreneurs and economists working in the country would like to see a reform of regulations that protect successful businesses but hamper the progress of start-ups and have restricted the progress of innovative foreign companies such as Uber and Airbnb in the country.

In nations where policies are more entrepreneur-friendly, start-ups also often benefit from clustering of entrepreneurs and sector-specific groups of companies, investors and other sources of support in particular locations. Clustering could open up opportunities for accountants able to specialise in a particular area, suggests ICAEW business director Matthew Rideout. “You have a concentration of people who really know and understand those industries in those areas and there is a need for service providers with a good understanding of the issues affecting that sector,” he says.

Often, one or more universities are at the heart of such clusters. Arguably the most impressive example of an academic institution creating support networks for entrepreneurs can be seen in the range of training programmes, resources, networking events and business competitions run by the Cambridge Judge Business School. Rideout says he would like to see similar resources made available in other parts of the UK.

Universities also play a key role in supporting innovative businesses in the country that is often seen as the best place to be an entrepreneur: the US. Peter Barrett is a senior fellow who teaches a course on commercialising science to MBA students at Harvard Business School. He is also a partner at the venture capital firm Atlas Venture. Barrett teaches students to develop business plans based on intellectual property emerging from research labs at Harvard, MIT and elsewhere (including their own ideas).

For Barrett, the location of the course is logical, offering a chance for students and the business school to plug into the rich environment of scientific research, innovation and commercial activity in the Boston area. “There’s an entire ecosystem here in life sciences – academia, laboratories, hospitals, companies and funders,” he says.

The strength of the US venture capital industry is also an important factor in the success of innovative US companies. There were 1,285 venture capital deals completed in the US during the third quarter of 2017, with a collective value of $19.9bn; compared to $5.2bn invested in 548 deals in Europe, according to PwC and CB Insights’ MoneyTree Report.

Michael O’Brien, a partner and head of technology at Kreston Reeves, works with UK technology companies. He suggests that comparing any venture capital industry to the US one is pointless, as it has such deep roots there. “People ask ‘Where is the British equivalent to Facebook?’ but those companies were created in an ecosystem funded by the people who were behind companies like Cisco or Microsoft,” he says. But he believes a similar infrastructure is developing in the UK, including various incubator and accelerator schemes, as well as venture capital and angel investor networks.

Rideout believes another strength the US has compared to countries like the UK is a culture that encourages entrepreneurs to use equity investment to grow businesses. UK entrepreneurs sometimes shy away from offering equity “because they feel like they’re giving ownership away”, he suggests – but some seem not to realise that using debt to fund growth could be risky.

“Equity is risk capital and will work with you; debt tends to be less flexible, so if things change from plan the bank can call the security and take control of your business,” he explains.

Peter Hewkin, CEO of the UK Centre for Business Innovation in Cambridge, admires another US innovation, the Small Business Innovation Research (SBIR) scheme, which supports SMEs by allowing them to bid for procurement contracts for government departments and agencies. Under SBIR legislation, all federal agencies that spend over $100m on R&D must spend a proportion of external R&D budgets (currently 3.2%) on procurement from US-based SMEs.

Hewkin says: “It’s a really clever idea. A lot of people whinge and say they need investment. The tough love response is to say ‘No, you need a customer who has a need. If you can fix that need, they will pay you’. That’s what SBIR does.”

One company to have used this is Owlstone, founded in 2004 by two engineering PhD students at the University of Cambridge in the UK, Andrew Koehl and David Ruiz; and a research assistant, Billy Boyle. The company developed Koehl’s invention of a new miniaturised chemical detection method that has multiple possible applications in the energy, chemical, healthcare and other industries.

Their business had a US presence from early on and won SBIR contracts, while also obtaining backing from a venture capital fund. It has also benefitted from the UK version of SBIR, the Small Business Research Initiative (SBRI), launched in 2008; and is currently trialling use of the technology with NHS England to detect the early signs of lung and colorectal cancers.

Many innovative companies also receive an important boost through government policies intended to improve the economic prospects of specific regions. One innovative UK company supported this way is Iceotope, based near Sheffield, in South Yorkshire. It has developed an extremely efficient liquid cooling system for computer hardware that could that cut energy use and costs.

Company founder Peter Hopton started to develop the technology in 2003 after graduating from the University of Sheffield with a degree in electronic engineering. Support from what was then a regional growth fund helped the business to get off the ground. Today it employs 32 people, turns over £500,000 a year and has attracted significant external investment.

But it has only closed in on the point where its solution may be adopted by large-scale technology users in the past two years, says Stephan Hollingshead, chief operating and finance officer, and an ICAEW member.

The reason for the delay between initial development of the system and the major success the company hopes to see soon is that innovation can be very difficult to sell, even when it offers huge benefits.

“Most of our competitors are not really business people: they tend to sit there and say ‘This is a great idea, why aren’t you buying it?’” says Hollingshead. Instead, innovators are more likely to succeed if they consider exactly what their potential customers need, he suggests.

The final piece of the puzzle is simply access to potential customers. The UK’s reputation as a good place to create and run innovative businesses could be threatened by the consequences of Brexit. Many UK companies have benefited from EU-funded or directed programmes that have provided funding, support or momentum for their businesses in various forms. One example is the €80bn Horizon 2020 Research and Innovation programme. Iceotope is involved in two Horizon 2020 projects, one of which is building the EuroExa supercomputer, a world-leading project.

Rideout hopes the government will continue to increase support for R&D activity but he is concerned by the possibility that EU funding that has paid for research in universities and has helped create start-ups during the past 30 years will be withdrawn. “The possible withdrawal of that money is a real threat. The government’s commitment to support R&D is a positive move, but the question is the longer term impact to these changes in R&D support,” he says.

Supporters of Brexit might argue that leaving the EU will free up UK businesses and universities to seek new opportunities in an ever more globalised world. If not, the hope must be that the strong links that have enabled the UK and other EU countries to effectively support innovation in multiple countries can be maintained. One way or another, it is vital that truly innovative companies continue to receive the support they need from governments, investors and skilled service providers and advisers. Innovation created the world we live in; it is still our best chance of creating a better world in the future.

How to help innovative companies

Accountants can play a vital role helping innovative businesses turn great ideas into strong business ideas, whether working inside or outside the business. ICAEW business director Matthew Rideout sees great scope for accountancy firms to support innovative SMEs and start-ups. “We can also support businesses going through local enterprise growth hubs and those that are looking to develop exports,” he says.

ICAEW is working with government and other organisations (including Enterprise Nation and the British Business Bank) to provide additional support to such businesses, particularly those seeking to develop exports.

Kreston Reeves’ Michael O’Brien believes the value accountants can offer lies in their experience of working with other growing companies and service providers. “It’s about the support network we can bring: lawyers, banks, venture capitalists, angel investors,” he says.

They can also provide operational and strategic support. “For some of our clients we become their virtual finance team,” says O’Brien. “That might include mentoring and working with the board to develop strategies for growth and expansion.” And as economia readers will know, accountants may also serve as non-executive directors, or advise start-ups in more informal ways.