June 1, 2020
Innovation is a word that gets thrown about in business circles but for good reason – it is what drives economies forward and lays the foundations for future growth.
At a time when most economists are forecasting a v-shaped recovery to this crisis, that GVA-generating, innovation pipeline has never been more important.
Many have argued that part of the reason it took so long for the economy to recover from the last recession in 2008 was because we stopped investing in innovation. As corporate debt levels rose and budget deficits increased, we became more risk averse, unwilling to put shrinking piles of cash into innovative projects where returns were not always guaranteed.
The innovation edge of our local economies became one of the casualties of the financial crisis and this has been attributed to the lower productivity and sluggish growth we saw over much of the last decade.
One of the more encouraging features of this crisis is that there is a clear desire to support innovative, high-growth, early-stage businesses this time around.
In the North East, there have been numerous initiatives rolled out in recent years to try and support start-ups and the innovation side of the business landscape.
One of the best examples is Northern Accelerator, a collaboration between Newcastle, Durham, Sunderland and Northumbria universities to drive a step change in the commercialisation of academic research and strengthen the region’s knowledge economy.
Professor Roy Sandbach, the former director of the National Innovation Centre for Ageing, is chair of the accelerator’s strategic advisory board and describes its inception as being “a response to the issue that there weren’t enough academic research businesses coming out of our universities.”
Turning more academic research into a businesses – commonly known as university spins-outs – has been Northern Accelerator’s primary purpose.
“We are trying to get academically-based ideas, inventions, products and services to a point where an investor say, “yes, that’s investable,” says Professor Sandbach.
“It’s been unbelievably successful. We took the spin-out numbers from two to nearly 20 over three years and are now third only to Oxford and Cambridge.”
Another organisation that has played a key role in driving forward innovation in the North East is venture capital investment fund, Northstar Ventures.
Northstar’s investment director for life sciences and biotech businesses is Alex Buchan.
He says: “We’ve been based in the North East for 15 years and we were set up to help invest in new technology businesses at a time when the region is transitioning from old industries into more modern types of businesses such as data, biotech and life sciences.
“We invest in companies with innovation at their core.”
Some of the most innovative business prospects in the region at the moment are in life sciences, where you have university spin-outs like Atelerix, Magnitude Biosciences, Changing Health and AMLo Biosciences, which are genuinely worldleading in what they do.
“The life sciences eco-system in the North East is very strong,” Alex adds.
It is hoped that this pool of high-growth, knowledge-intensive start-ups will establish themselves into scalable companies that can generate millions of pounds and create thousands of jobs for the local economy.
Professor Sandbach adds: “In the North East, we don’t have enough billion dollar businesses – it’s one of our biggest problems.
“If you don’t create these, then you never get a chance to change the way a region like ours looks from the point of view of its total revenue.”
The coronavirus pandemic is definitely a bump in the road for start-ups, particularly those that are pre-revenue, pre-profit and at a capital intensive stage of development.
That’s why Crowdcube founder Darren Westlake launched the Save Our Start-ups campaign to petition Government to provide an equity based liquidity package to support those at risk.
The Government responded with the Future Fund – a £250 million matched funding scheme of convertible loans available to businesses who have raised at least £250,000 in equity from third-party investors in previous funding rounds.
Undoubtedly there will be a lot of well-established start-ups that find this scheme very helpful but in the North East, many could be locked out due to the high bar set in terms of eligibility.
“Companies must have raised £250,000 from third-party investors historically to be eligible for the Future Fund,” Professor Sandbach explains.
“There are a lot of spin-outs [in the North East] where that’s not the case yet. In addition, the total amount a start-up is asking for has to be matched by private investors.”
As a convertible loan, the Future Fund is also not part of the Enterprise Investment Scheme (EIS), which means it could be more difficult to find private and angel investors willing to make the match.
With these criteria, start-ups in the earliest stages of development, perhaps just six or 12 months down the line, will for the most part be unable to access the Future Fund.
But organisations like Northstar Ventures and Northern Accelerator should help ensure that early-stage businesses in the North East can still access finance and do not fall through the cracks.
In a rapidly changing world, that’s incredibly important.