Britain is getting better at making money from the brains in its world-class universities. Matthew Partridge explains why, and picks one very exciting university spin-off company.
University spin-off companies can be very lucrative indeed
Britain is sending a robot to Mars. We'll play a lead role in the next European Space Agency mission in 2018.
Amid the news of stamp duty reform and dodgy deficit maths, that was one of the more unusual titbits from George Osborne's Autumn Statement this week.
But we shouldn't be surprised. Britain has some of the best universities in the world. According to the Times Higher Education supplement, we have three in the top ten (Oxford, Cambridge and Imperial College London) and 11 of the top 100. That's far higher than you'd expect, given our population or economic size.
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Our problem has always been exploiting our discoveries. Artificial intelligence, the internet both have their roots in British breakthroughs, but went on to be commercialised primarily by Americans.
But this is starting to change. And even better, investors are able to benefit from it.
Why Britain is getting better at commercialising its good ideas
British researcher Alan Turing is widely seen as the father of artificial intelligence. Tim Berners-Lee played a huge role in the creation of the World Wide Web. Even Arpanet, the American network seen as the earliest form of the internet, was actually based on a working prototype carried out by the National Physical Laboratory near Twickenham.
However, in the end it was US firms, not their British counterparts, that dominated the computing industry. The US has the Nasdaq index, stuffed with tech stocks. We've got Aim, stuffed with dodgy Russian mining stocks.
But that's changing. Universities are making a bigger effort to exploit their discoveries and spin out their companies. That's for two main reasons.
Firstly, there has been a lot of pressure from central government and funding councils. If you want to get funding for a research project today, you have to show that it will deliver economic impact'.
Now, that's not as restrictive as it might sound. It can mean a wide range of things, including social impacts. However, pointing to a company that you have set up is clearly a lot more convincing than just producing a few leaflets.
The second big motivating factor has been the experience of other countries, especially Germany and the US. Germany's long tradition of university-firm collaboration has been recognised as one of its key strengths. The only problem with the German model is that UK firms tend to spend less on research and development.
So the US model is seen as the more viable solution. This focuses on the institutions, and on helping the staff to set up companies. These are then either sold to private investors or listed. This raises money, which can be used to fund further research, or ploughed back into the university as a whole.
One very exciting university spin-off
And these deals can be very lucrative indeed when they work out. Take Solexa. The company was set up by a group of Cambridge academics in 1997 (after a night in the pub, naturally) as a result of their research into cutting the cost of gene sequencing. Just ten years later, in 2007, it was bought by biotech company Illumina for $650m. Illumina in turn, went on to become a multi-billion dollar company.
Of course, not all spinouts are that successful. Many fizzle out before they are large enough to justify a listing. A general rule-of-thumb is that it takes around four to five years for a company to get to a state where is ready to be floated.
But it's a very exciting area, with massive potential. For example, there's one listed company, spun out of university research, that's operating in one of the most talked-about fields on the planet just now graphene, the supermaterial'.
Graphene is essentially a very thin film, just one atom thick. But it is incredibly strong, and it conducts electricity extremely well. It could have uses in everything from consumer goods to electrical equipment.
One company at the forefront of the race to commercialise graphene is Applied Graphene Materials (LSE: AGM). It was spun-out from the University of Durham, and floated last year. Now, as you can imagine, this isn't a stock for widows or orphans. There is potential competition from Chinese firms, and it currently makes a loss.
But the company is getting closer to entering the market. The management team has identified 20 specific products where the technology could be used. They have also agreed joint ventures with DuPont, Teijin Films, and PolyPhotonix.
If they can get it right and there are currently few other firms with similar capabilities the rewards could be immense. One estimate puts the market for graphene at $675m by 2020 with a growth rate of 50% a year between now and then.
So it's one to consider if you enjoy taking high-risk but exciting punts. However, if you like the idea of backing British science, but you're not so keen on putting all your eggs in one basket, there is another way to invest in products derived from university research before they even go public.
My colleague Dr Mike Tubbs a highly respected expert on this field has found a simple way to buy into diversified portfolios of these sorts of companies. To find out more about what he's discovered, click here.
Dr Mike Tubbs' Research Investments is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Customer services: 0207 633 3600.
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Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
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