In the last couple years, university spinouts have been hot property in Europe. Governments and VCs want in, while university folk want to support spinning more research out of the lab and into the market.
London HQ’d Legal & General — one of Europe’s largest insurance and asset management groups — is also planning to go on the offensive. Eight years since it started investing in European tech as an LP and doing a handful of direct investments, it wants to double down on university spinouts and up its direct investments into startups, it tells Sifted.
“There are more companies now coming out of the [university] system, particularly at that early scaleup stage, than there ever has been,” says Alastair Stewart, head of healthcare and life sciences in the VC team at L&G Asset Management.
“We’re seeing a different type of investor come in, […] we’ve seen increasing amounts of international capital and a large increase in institutional capital like L&G looking at this area,” he adds. “So we think all of those pieces are coming together.”
L&G’s spinout strategy
L&G’s spinout strategy is twofold, says Chris Hopkins, managing director of VC at L&G Capital, the arm through which the firm makes its investments: LP investments in VC funds that back spinouts at the earliest stages, and direct investments in startups alongside its fund partners at Series B onwards.
Hopkins says that when you’re backing companies created from academic research — whose deep science focus can mean they have long go-to-market timelines — a traditional 10-year GP-LP fund structure is “difficult to make work from a fund returning perspective”.
“[You need] some element of evergreen at that very early stage so you’re not imposing time restrictions on allowing those companies to mature and get to that commercial inflection point.”
Two of the firm’s earliest investments as an LP were into Cambridge Innovation Capital, a VC which invests a lot in University of Cambridge spinouts, and Oxford Science Enterprises, which does the same with spinouts from the University of Oxford. It’s since become an LP in Northern Gritstone — an investment company set up to back spinouts in the north of England from the universities of Manchester, Leeds and Sheffield, which closed £312m this year. Hopkins says L&G is also looking at “new [investors] coming through in London.”
“Having access at seed, spinout level through those platforms and then working with them and observing the ones that start to break out in this sort of early commercial traction Series B stage, that’s when we feel as though we can come in directly,” Hopkins tells Sifted. “Then you can use more of a standard GP-LP structure once the companies get to that stage. That’s really our thinking behind it.”
In the last 10 years, investment into UK spinouts has grown fourfold. Just £514m was invested in 2014 across 259 deals; funding then peaked in 2021, with £2.73bn invested across 426 deals. Investment this year is on track to hit £2bn across 410 deals, according to new data from spinout investor Parkwalk Advisors and data platform Beauhurst.
Much of that investment has been in the so-called ‘Golden Triangle’ of London, Oxford and Cambridge, with Imperial College London and the universities of Oxford and Cambridge seeing a lot of deal activity. But that power dynamic is shifting slightly: a 2023 report found that places like Manchester and Bristol are also emerging as spinout hubs in the UK.
“There are these pockets outside of [the Golden Triangle], and it’s just taking time to mature,” Hopkins says.
Investors who back the right academics also have a lot to gain. There have been 204 spinout exits (32 IPOs and 172 acquisitions) in the UK since 2014, according to Beauhurst data. Among those are a £3.38bn exit for DNA/RNA sequencing company Oxford Nanopore Technologies, a £2.37bn exit for drug design and development company Exscientia and a £1.72bn exit for cyber security company Darktrace (which, after IPO’ing in 2021, was taken private earlier this year by private equity firm Thoma Bravo in a deal worth £4.3bn). Among the top 15 spinout exits in the UK, only three are outside life sciences.
Which sectors does L&G have its eyes on for direct investments?
While most of its investments to date have been primarily into funds, Hopkins says L&G is “evolving”.
“We’ll be doing more direct investing partnering with our funds and others we might not have LP interest in,” he tells Sifted.
L&G has invested in two Oxford-based startups this year: UK nuclear fusion startup Tokamak Energy in January; and post-quantum cryptography startup PQShield in June (Stewart sits on the company’s board). It’s also looking to invest more in the healthcare and life sciences, as well as continue to put money into deeptech at its Series B sweet spot.
“We’re looking for companies that have some strong IP behind them and that are demonstrating some sort of early commercial progress,” Hopkins says. “That might not be revenue scaling yet,” says Stewart, “it might be partnerships, pilots, a number of proof points that just give us comfort that this company or this product is about to scale into the market.”
Hopkins picks out PQShield as an example of that. “It’s a big, very large market opportunity,” he says. “There’s not many experts in that area in the world, and they have a very strong pool of cryptographers, products and very strong customer relationships.”
Stewart says the firm is also interested in companies applying AI to healthcare admin and diagnostics in areas like cardiac health.
Opportunities in deeptech areas like the future of compute and data centres are also attractive — they’re areas that have received government and Big Tech backing recently. The UK’s Department for Science, Innovation and Technology recently said it would list the country’s data centres as “critical national infrastructure”, which would give them additional government support in anticipating and recovering from things like cyber attacks. Amazon’s cloud arm Amazon Web Services also said it plans to invest £8bn in British data centres over the next five years.
Investing as an LP
L&G will still invest in VC funds, and it’s looking to back investors focused on “the buckets of university innovation,” Hopkins says, which includes the life sciences, healthcare, space, clean energy, energy transition and deeptech.
It counts firms like UK-based Seedcamp, Balderton, Ada Ventures, Kindred Capital and One Peak, Netherlands- and Germany-based Forbion and France-based Sofinnova Partners among its portfolio. “We’re in a lot of the European early-stage funds,” Hopkins says, adding that “anyone is eligible to pitch to us.” It’s keen on VCs with a pan-European strategy, but doesn’t invest in first-time fund managers.
“A few more opportunities now coming along”
Hopkins says that, like elsewhere in Europe, in the UK “we’ve been through quite a quiet period the last couple of years” — but that “we feel as though there’s a few more opportunities now coming along”.
It’s not plain sailing though. “There are still challenges with companies getting funded that don’t have outstanding unit economics […] and aren’t there or thereabouts to profitability,” he says.
“We’ve seen quite a lot of extension rounds in good companies,” Stewart adds. “Valuations have been pretty flat, but good companies are getting funded, as they always do. Now we’re starting to see a bit of a bifurcation: there’s some quite big rounds happening in certain companies, and then there’s still some companies on the other end that are struggling to raise […] I’m hopeful that moving into next year we’ll start to see some of those companies that have done extensions raise priced rounds.”
As for the exit market, “it’s still not quite there yet,” Hopkins says. “There’s a bit going on but the IPO window hasn’t really opened, so there’s a fair amount of caution still in the UK and Europe.”
“I think there are some early signs on the corporate side that they’re getting a bit more interested and a bit more acquisitive,” he adds.
Hopkins also says they’re seeing a lot in the life sciences space ahead of an upcoming “patent cliff”. Other investors have told Sifted that as a number of drug patents expire in the years to 2030, pharma companies could lose hundreds of billions of dollars in revenue, meaning many are looking to partner with startups promising to reduce the timelines of bringing new drugs to market.
“I think we’re kind of probably cautiously optimistic for next year,” he says.
Read the orginal article: https://sifted.eu/articles/seedcamp-balderton-kindred-legal-general-spinout-investments/
