13 December 2010
Risk and Reward
Business as usual is clearly failing us and over the coming years we will need to adapt to many different challenges if we are to survive - the most notable challenge being the reduction of the daily environmental impact of our lives. The adoption of innovative new ideas and technologies is essential for this adaptation. Realisation of this innovation, however, requires funding. What is not clear is where the funding has gone and if it has not gone then why ‘venture` (the undertaking of risk) has left venture capital and how can we get it back?
Whilst it may be argued that investment levels during 2010 have returned to pre-recession 2008 levels, the so-called low-carbon or ‘cleantech` sector is still suffering. This is for a number of reasons, ranging from unproven technology in an unproven market to knock-on credit crunch effects. This means that cleantech business runs a high risk of failure and has an insufficient track record of cash-for-cash returns to enable venture capitalists to raise new funds. This is further compounded by the IPO market losing its nerve, leading to decreased exit options and frequently decreased valuations. Additionally, customary investors in venture capital funds are either not investing or are investing in funds with which they have time-tested relationships, i.e. not the newer untested cleantech funds.
The above covers technology and traction, but what about the last but not least of the three ‘T`s that matter so much to investors - team?
Speak to any venture capitalist about raising capital and you will be told a strong capital-raising strategy entails building a strong management team, with relevant experience, drive, self-confidence, and expertise, i.e. investment is in the jockey and not the horse. In fact many venture capitalists even rephrase the old real estate catch phrase — "location, location, location" to "management, management, management." Sadly in the world of new innovative technology the people with the great ideas are not always the ones able to deliver them to market or provide enough business comfort to afford the large sums required for investment.
So barriers to entry for investment are many, but there are ways of reducing the perceived risk, one such being by means of the clustering of technologies.
The Loxbridge "Cluster" Model
Loxbridge Research LLP (Loxbridge) is an example of such a cluster, albeit in the biotech/medtech space, but a model, nonetheless, able to be rolled out across all sectors driven by innovation, including cleantech.
Loxbridge`s mission is to find, arrange investment in, and undertake executive management of exciting innovative health technology projects which have the potential to solve a massive unmet clinical need.
Using a ‘hub-and-spoke` service support model, Loxbridge sits at the centre and provides executive management and support to a group of Loxbridge companies, each set up as a Special Purpose Vehicle (SPV). So whilst each SPV is comprised of a core scientist and associated team, the overall project management, especially with respect to strategy, administrative support and commercialisation is managed centrally by the core Loxbridge team, allowing the scientists to get on and do what they do best - innovate.
The scientific teams within the SPVs are given a great deal of independence from business and administrative concerns, which are managed directly by Loxbridge personnel as ‘flying squad` executives, who allocate energy to the appropriate project at the appropriate time.
Funding comes from one private source, the Chairman of Loxbridge, with a typical investment range of $1-10M over the development period. This funding is administered by Loxbridge centrally to each project on a need-by-need basis. The SPV companies are usually principally owned (>50%) and controlled by Loxbridge. The principal executives are Loxbridge personnel (CEO, COO, FD roles). Maintained within Loxbridge is a core team including scientists, clinicians and legal personnel, as well as close liaison with accountancy personnel and fully equipped central premises from which day-to-day business is run.
Loxbridge`s innovative model has been described as Executive Venture or ‘Venture Pilot` investing - specific differences from traditional Venture Capital or early Private Equity operating in the biomedical space being, firstly, that the investor group pilots the projects in the full entrepreneurial role, with executive control and day-to-day management of the SPVs, rather than traditional investor non-executive positions. Secondly, Loxbridge executive teams cover several projects and leverage transferable resources and assets for each as appropriate; thirdly, expertise is maintained in-house for executing clinical trials (the principal value multiplier, yet principal expense, in the biomedical space) rather than rely on expensive Contract Research Organisations.
Loxbridge aims to provide its SPV group member companies with management services, aiming to facilitate their transition from early-stage projects, to full proof-of-concept and a ‘value-point` at which a commercialization strategy can be realized. The commitment varies by company, depending on the needs of the particular project, the stage, and the in-house skill blend within the SPV. The involvement may vary from guidance and occasional assistance with administration, to full-blown project management and daily supervision of tasks. In practice, the input needed varies dramatically with stage, and is often maximal around the time of applications for ethical and regulatory approvals, grant applications and launching clinical trials.
Loxbridge therefore achieves high capital-efficiency whilst taking on and balancing enormous investment risk across a range of technologies under a strong management team familiar with the market.
Nothing ventured nothing gained
To quote Georges van Hoegaarden from his recent article What is wrong with Venture - not innovation, "The deployment of subprime risk can only produce subprime returns, according to rudimentary economic principles".
Indeed. If we are going to solve the challenges at hand it`s time to be creative and clever about structuring and managing our risk.
This article was contributed by Zoe Crookes, a Senior Consultant of Forbury Environmental and COO of Loxbridge Research LLP and Greeenstar.
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