Select Committee on Science and Technology Second Report



10.1  As noted in previous Chapters, UK industrial strengths in design and architecture are distributed across a mix of small and medium-sized companies. Together, these companies represent a significant force. As noted by the DTI (p 1), the United Kingdom has 40% of the European market for electronics systems and semiconductor design.

10.2  The exploitation of research in this environment requires quite different processes from those which connect university research groups to large, well-established companies. Similarly, any new industry based on alternative device technologies would have to develop from scratch. (We are not aware of any large UK company ready and waiting to adopt such research.)

10.3  The basic elements required to exploit research in these areas are those of entrepreneurship, venture capital and spin-out companies. These matters have been studied intensively elsewhere. For example:

(a)  this Committee's March 1997 Report on The Innovation-Exploitation Barrier[94];

(b)  the Government's July 2002 Report on Investing in Innovation — a strategy for science, engineering and technology in July 2002. Many of the matters discussed in this Chapter are covered at greater length in that report; and

(c)  the August 2002 Report from the House of Commons Public Accounts Committee on Delivering the Commercialisation of Public Sector Science[95].

Those Reports contain a mass of highly relevant detail. We cannot replicate that detail in this Chapter and therefore concentrate on the headline points that have arisen from our Inquiry.

Entrepreneurship in the United Kingdom

10.4  Silicon Valley is often regarded as the ideal entrepreneurial environment, with the United Kingdom being far behind. However, there are encouraging signs that the environment has been improving in recent years. The Minister noted (Q 486) that UK universities spun out almost 200 companies in 1999-2000 — one spin-out for every US$8 million of research funding. This was markedly up from the average of about 70 spin-outs a year in the previous five years, and significantly better than one spin-out for every US$50 million of research funding found in the US. Evidence from Apax Partners, a major venture capital company, indicated that the US can no longer assume that it is the automatic choice of entrepreneurs. A new global index produced by the Economist Intelligence Unit put the Netherlands, Denmark and the United Kingdom ahead of the US which was pushed off the top spot because of a comparatively weak performance on tax and red tape (p 135).

Intellectual property mechanisms

10.5  UK universities are increasingly aware of the potential value of the IP they create. While most claim ownership of inventions[96] made by staff in their employ, they typically have exploitation arrangements that are more generous to the inventor than typical industrial contracts of employment. In particular, most universities encourage inventors to found spin-out companies and allow them to take an equity interest.

10.6  While, as noted by Apax Partners (p 135), the investment community recognises university technology transfer units are useful and important, there is a great deal of variation from university to university in how these matters are handled. During our discussions with representatives of the venture capital community[97], we noted that each university seems inclined to reinvent the wheel. Apart from the variable quality, there are confusing variations in practice, in part arising from lack of clarity about the objectives. It would be useful to have a guide on how IP rights should be handled together with arrangements for exploitation and for involving academics as shareholders and directors and, most significantly, a pro forma agreement for university IP exploitation.

10.7  The Minister noted (Q 491) that a report had been published on best practice in university handling of IP[98] and that the Government was "gradually edging them towards having proper procedures". We have to say, however, that there can also be wide variations in the practices of industry and Government Agencies. Most benefit will accrue from a wider effort to standardise practice. Consequently, we recommend that the Government should revisit general practice in exploiting intellectual property, with particular reference to the complex field of computing, and seek to establish principles that will lead to a greater uniformity of approach between Government departments and agencies, industry and universities.

Improving the entrepreneurial climate

10.8  One of the most marked differences we found during our visit to Silicon Valley[99] was the positive value placed on experience of failure. As the Minister noted (Q 493), the Americans do not refer to success and failure but to "success and learning experiences". Sir Robin Saxby agreed (Q 367) that a really successful chief executive had probably learned how to "get it right" from some earlier failure.

10.9  We warmly welcome the Government's initiative (under the Enterprise Act 2002, the Parliamentary passage of which coincided with our Inquiry) in changing the basic approach to bankruptcy to make a distinction between honourable and culpable failure. We hope the legislation will help overcome caution among the UK financial community[100] and hasten the significant change in culture needed to recognise the positive value of the experience lodged in those currently branded as failures.

10.10  On specific fiscal questions, we agree with the Minister (Q 499) that the introduction of R&D tax credits has been a significant enhancement in the financial environment for small and, more recently, larger UK companies. We note the CBI's disappointment that the improvement was effectively offset by the recent increase in employers' National Insurance contributions (Q 466). We also note Sir Robin Saxby's view that the £30,000 limit on approved share option schemes was unreasonably low (Q 379).

10.11  Notwithstanding those points, the United Kingdom was seen generally as having a favourable environment for start-ups in comparison with competitor countries. But that should not make us complacent. There is a large agenda for the Government and others flowing from the Reports noted in paragraph 10.3 above, perhaps appropriately summarised in 3i's suggested key recommendations to the UK government to improve the climate for entrepreneurship (p 139):

(a)  prune and focus areas of regulation;

(b)  reduce rigidities in employment regulation;

(c)  review the education agenda to ensure that entrepreneurial attitudes and knowledge are part of it; and

(d)  share best practice on how to improve the entrepreneurial climate.

UK start-ups

Senior management

10.12  To be successful, a high-technology start-up company must have not only the technology but also finance and appropriate senior management. As noted by Dr Taylor (Q 494), the single biggest problem venture capital and seedcorn fund managers face in launching companies is finding the management team that understand business plans, finance, cash flow, and routes to market. The core technical team will usually come from the university research group or the mother company, but this team will frequently not have the management and marketing experience to turn their technology into a successful business.

10.13  The question here seems to be that of establishing critical mass. Where, as in Silicon Valley, there are many companies in a continuous cycle of starting-up, growing, establishing markets and going through acquisitions and launching on the Stock Market, there is a steady turn-over of experienced senior staff. The United Kingdom has not yet developed to this level, and finding a good chief executive is still a major difficulty. As demonstrated by Silicon Valley, there are substantial benefits in clustering, and it was noted by 3i and the Minister (QQ 413 & 498) that what others have called the Cambridge phenomenon represents one UK cluster that is developing strongly.

Support needs

10.14  Even in advance of assembling the right senior management, high-technology start-ups need good support on matters of finance and marketing. We were greatly impressed during our visit to Silicon Valley[101] by the extent to which venture capital firms there worked alongside embryonic companies in providing that support, particularly on the marketing front. We are aware that forward-thinking UK venture capital firms also follow that pattern, but there are two obstacles in the way of this becoming the norm.

10.15  The first problem is that the available expertise is not always mobilised effectively. That position would be usefully improved by the concentration of common interests in the clustering of industry that is beneficial for wider purposes. It would also be useful if the UK finance industry more generally could complement its undoubted financial expertise by developing a fuller understanding of high-technology industry. This can have arcane and abstract products with unusually long lead times — but with commensurately great potential benefits. The second obstacle is that of finance. Although the additional support should yield dividends over time, it has an immediate cost which needs to be better recognised in seedcorn and other start-up funding schemes than it seems to be at present.

Existing market

10.16  Many advanced technologies take many years to achieve commercial success. Once a start-up company is established, it can spend money at an alarming rate. As noted by Pond Venture Partners (p 212), investors therefore expect to see at the outset that the technology the company is developing meets an existing market need, not some speculative future need. Apax Partners indicated that venture capitalists expect significant returns on a 5-10 year timescale; longer term investments such as long-term fundamental research require government support (p 135).

Government-sponsored schemes

10.17  There is a range of schemes encouraging universities to work in collaboration with established industry. The DTI noted the support for collaborative research through LINK schemes and Faraday partnerships (Q 487). The Teaching Company Scheme and Case studentships supported research students working in industry.

10.18  Entrepreneurship is encouraged through various enterprise training schemes (Q 491), the Higher Education and Innovation Fund (which is £140 million for resources to handle IP) and the University Challenge Fund (which provides seedcorn funding to investigate the market potential of university IP). There was some concern that the University Challenge Fund was insufficient in many cases to take an idea to the point where venture capital investment could be sought — as Pond Venture Partners noted (p 212) this would often cost £150-250,000 rather than the £50-100,000 typically available from the fund for an individual business proposition.

10.19  This leaves a funding gap that must be bridged to take promising research results through a market evaluation to the point where venture capitalists would take a serious interest. Confirmation of this gap came from 3i (Q 389) and was also backed up by a recent survey of university commercialisation activities by the University Companies Association (UNICO) and the Nottingham Business School. That survey[102] found that a key impediment to spin-outs was the lack of finance for establishing proof of market.

10.20  Against the background of the preceding paragraphs, we recommend that the DTI should consult Universities UK, the British Venture Capital Association, the CBI and the Institute of Directors to ascertain: the nature and extent of the funding gap identified by a number of our witnesses; the lack of suitable managerial skills available to new high-technology companies; and such companies' other support needs.

Public sector procurement

10.21  In addition to its role in setting the policy framework, the Government (both directly and through its various agencies) is also a major consumer of computing. For example, the National Health Service (NHS) is already a very large (but uncoordinated) user of information technology[103]. As advances are made in, for example, bio-sensing and diagnostic techniques informed by rapidly increasing knowledge of genetics, there will be massively increased needs in the NHS not only for computers to manage all the additional data but also for novel computerised devices for diagnostic and monitoring purposes.

10.22  The Ministry of Defence will also need a range of better mainstream computing and novel computerised devices to maintain the Armed Forces' general preparedness. At the leading edge of computing, the world-class activities of the Meteorological Office on weather forecasting and climate change turn crucially on access to very high-powered supercomputing.

10.23  When we discussed these matters with the Minister, he accepted the need for the Government to be an intelligent customer, and distinguished this from providing an easy market or subsidy for the industry (Q 510). The Director General of Research Councils, Dr John Taylor, reinforced this by emphasising the need for the Government only ever to buy in competitive mode in the world market (Q 511).

10.24  We fully agree that the Government should not be a soft touch, but note that the US government seems less inhibited about actively stimulating domestic industry (and the R&D that supports it[104]). We feel that the UK computing industry could benefit from a more strategic Government view of procurement. We therefore recommend that the Government should consider whether the aggregate future public sector demand for computing capacity, in all its forms, can be articulated and communicated in ways that better assist not only the public sector but also the industry.

The role of the private sector

10.25  We discussed in paragraphs 7.32-7.35 the case for individual companies and those in the finance sector to attach greater value to R&D. As noted in paragraphs 3.21 and 4.25, the chip technology and design matters at the centre of our Inquiry are not the products that will capture the imagination of the mass market. They are, however, the crucial facilitators of those new high-technology mass market products.

10.26  We suspect that this chain of interrelationships — which works in both directions — is insufficiently understood. Accordingly, we recommend that Intellect[105], the British Venture Capital Association and others they think appropriate should consider ways of better informing and enthusing UK industry and the wider finance sector about projected advances in high technology, with the aim of not only stimulating the necessary long-term support for these advances but also, in a two-way dialogue, encouraging the development of new products for the global marketplace.


10.27  In conclusion, there are many encouraging signs that the environment for entrepreneurial activity is improving in the United Kingdom, and many universities are taking effective measures to exploit the opportunities presented by high-tech spin-outs. The position would be enhanced if there were a greater commonality of approach. The critical points, however, relate more to the general culture and are therefore harder to address: the availability of experienced senior management, and the clustering of entrepreneurs, financiers and technologists to achieve critical mass.

Third Report Session 1996-97, HL Paper 62. Back

95   Fifty-ninth Report Session 2001-02, HC Paper 689 - which drew on a February Report of the same title by the Comptroller and Auditor General (HC 580, Session 2001-02). Back

96   Exceptions include UMIST and Cambridge University, which provide for the inventor to retain ownership of their IP and, at the time of writing, Cambridge is proposing to change this (amidst considerable controversy) from January 2003. Back

97   Public hearing on 26 June 2002, with particular reference to QQ 398 and 406. Back

98   Managing Intellectual Property: a guide to strategic decision making in universities, AURIL, Universities UK and the Patent Office, March 2002. Back

99   See Appendix 6. Back

100   See, for example, the exchanges in QQ 416 &417. Back

101   See Appendix 6. Back

102 Back

103   As noted, for example, in Chapter 6 of this Committee's Report on Human Genetic Databases: challenges and opportunities, Fourth Report Session 2000-01, HL Paper 57. Back

104   For example, the development of EUV lithography and ARPANET, see paragraphs 4.38 and 6.3. Back

105   The result of a 2002 merger of the Federation of the Electronics Industry and the Computing Services and Software Association (p 200). Back

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