Investing in university spin-outs can help your profits grow

The Social Network, the film that depicts the founding of Facebook by Mark Zuckerberg and his Harvard friends, is a compelling drama that also causes viewers idly to speculate: ‘If I’d been able to back this university start-up in 2004, how rich would I be now?’ 

Facebook is now an $880bn giant. The share price has risen from $42 in 2012 to $309. Yet its early performance was disappointing, a point to note amid the buzz over Oxford Nanopore, the DNA sequencing technology business spun out from the university that is set to make a stock market debut this year. 

For savers in the failed Woodford equity income fund, Oxford Nanopore’s move has been a fresh source of chagrin, as the stake was sold by the administrator Link at a fraction of its current value. 

A shot in the arm: A number of companies and trusts have selected ventures set up by academics that could provide brilliant share price appreciation

This has reminded people of the risks involved in backing innovation, at a time of heightened nervousness about tech company valuations. Founders such as Sergey Brin and Larry Page who created their web search algorithm at Stanford University are very much the exception, rather than the rule in becoming billionaires, thanks in their case to the success of Alphabet, the owner of Google. 

Most bright ideas hatched at universities – like brainwaves that occur anywhere else – come to nothing. And even if the idea is marvellous, there is still the issue of how to commercialise it – something the UK has not always succeeded at in the past.

Richard Penny of the CRUX UK Special Situations fund comments: ‘The winner tends to be the company with the better business model. For example, IBM brought out the first PC in 1981, but the biggest beneficiary has been Microsoft with its Windows operating system.’ 

Penny continues: ‘You have to be careful of falling in love with a science. You have to focus on how brilliant science can scale up to produce brilliant share price appreciation.’ 

If you are still keen this year to allocate some of your cash to backing ideas from the brightest minds, and perhaps play a role in Covid recovery and the fight against cancer and other illnesses, there are ways to lessen the gamble. 

A number of companies and trusts have selected ventures set up by academics that could, with good fortune and great management, provide that brilliant share price appreciation. The stakes held by the AIM-listed Draper Esprit, for example, include Riverlane, a quantum computing spinout from Cambridge. 

The IP Group forms intellectual property partnerships with universities, owning about 100 such stakes. It was a seed investor in Oxford Nanopore in 2005 and its 15 per cent holding is now valued at £340.3m, thanks in part to the use of its system in spotting and tracking coronavirus mutations. 

IP Group is recovering from its association with Woodford who was a shareholder until September 2019 when he disposed of his shares at 53.5p in a fire sale. 

The shares are now 131p, thanks to the flotation – on a sevenfold return on the original investment – of Ceres Power, a specialist in fuel cell technology that converts hydrogen and natural gas into electricity. 

Syncona, the investment trust that was known as Battle Against Cancer, focuses on life science companies, such as T cell therapy group Autolus (another former Woodford holding) which was spun out from University College London in 2014. 

At present, the trust is at a 21 per cent premium. This may be due, in part, to factors such as improvements in clinical trial processes that have been made during Covid-19, which, as the trust has suggested this week, could boost its holdings. 

Henderson Opportunities, another trust, has a small holding in Oxford Sciences Innovation which invests in Vaccitech, the business co-founded by Professor Sarah Gilbert who led the development of the Oxford AstraZeneca vaccine. Vaccitech – which owns the biotechnology behind the vaccine – is set to go public in the US this month. The Treasury is said to have a stake. 

Schroder UK Public Private has a stake in Inviata, a Cambridge spin- off whose liquid biopsy platform identifies amounts of cancer DNA in cancer patients’ blood. 

The complexity of the science behind all these innovations will be, for many private investors, a very good reason to steer clear of university spin-offs. 

Some people prefer to commit their savings only to things they understand or can research themselves with relative ease. Of course, the teams at the trusts and companies that back spin-offs subject them to huge scrutiny, but this does not guarantee success. 

Being prepared for a substantial degree of risk is not the only quality necessary for investors in this area. If you want to make the leap of faith required to back technological and other advances, you need a particular mindset. 

As Saul Klein of venture capital group LocalGlobe puts it: ‘You have to be able to focus on how significant the opportunity is and how significant the upside.’ 

Good advice, but only feasible if you can afford to take a long-term view and lose your cash. 

If this is not the case, be reassured that you are, as a taxpayer, already a backer of all sorts of start ups through the government’s Future Fund which has lent £1.2billion to about 1,200 ventures. May they include names that will provide us a decent return on our money, and inventions that will improve our health and our lives. 

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