Thursday, 15 August 2013

Alumni-focused venturing in UK institutions

I'm seeing increasing levels of alumni involvement with University venture activity and expect this trend to continue. Here's my take on this...

In recent years, UK universities have been working hard to develop their alumni networks with a view to raising their endowments. They have had to do so in order to mitigate the very real risk of losing ground to competitors in the United States and elsewhere amid a gulf in funding levels. At the same time, they have also had to develop their corporate relations, and this in turn has brought about improved and more systematic links between universities and industry.

One very positive by-product of this backdrop of reform is increased levels of more formalised involvement of alumni in University venture activity. The great benefit of this type of activity is that it allows multiple objectives to be achieved in terms of broader alumni and corporate engagement.

The outstanding example in Cambridge is the University of Cambridge Enterprise fund, which was launched in May 2012 to allow alumni and friends of the University to invest in new companies while benefitting from the attractive SEIS and EIS tax reliefs. In doing so, Cambridge was the first university to launch its own SEIS fund, and the first to combine the SEIS with the more established EIS. The fund is managed by London-based investment firm Parkwalk Advisors, and invests in new companies supported by Cambridge Enterprise.

 Another example of alumni venturing in Cambridge comes from the Cambridge 800th Anniversary Campaign. The University of Cambridge Discovery Fund, launched in 2008, is an evergreen fund making proof of concept, pre-licence, pre-seed and seed investments, enabling young companies based on Cambridge research to succeed. This fund was launched as a means for philanthropic support, from corporations and individuals, for the very early high risk stages of new company formation. It is essentially benevolent seed money which in the past would have come from central funds.

In Cambridge, the Judge Business School is on trend, having established “Accelerate Cambridge” as a start-up accelerator in May 2012, as a valuable new part of the ecosystem of support for entrepreneurs in Cambridge. With less of an emphasis on funding, the program draws on the JBS network to focus on venture creation by teams with a structured combination of coaching and mentoring.

Oxford too provides some great examples, including The Saïd Business School Venture Fund. This is a student-led organisation which provides investments to Oxford-related companies. The Saïd Fund was started in 2006 with donations from Sir Phillip Green and David Bonderman. The Fund is currently in the process of expansion with a view to making investments in excess of £1million. Saïd Fund investments are made in the same manner as made by institutional investors, and also invests alongside venture capital and impact investment funds in club deals and syndicates. Student members of the committee are responsible for all parts of the investment process and work collaboratively on investment decisions and portfolio management. By working with investment professionals, student members of the committee have a unique opportunity to interact with leaders in their fields and refine their investment knowledge and acumen. What a great way to leverage MBA talent and networks at every level and bring through the next generation of leaders in venture capital.

 A similar model to the Saïd Fund has been set up by Cass Business School. The Cass Entrepreneurship Fund is a £10 million venture capital fund, providing growth equity to start-up and early stage companies. The Cass Entrepreneurship Fund finances a number of high-growth young businesses across the Cass Business School community, as well as providing general support and incubation facilities. The Fund was established in 2010 with the support of Peter Cullum CBE, one of Cass' most successful entrepreneurs and the Founder of Towergate Insurance. In contrast to the Saïd Fund, it is not student-run as such but it does look to leverage the Cass talent network similarly.

In the same vein, Sussex Place Ventures invests in earlier stage technology businesses using the London Business School alumni network. Sussex Place Ventures draws on the knowledge, expertise and experience it sees in the London Business School alumni network to help find, validate and invest in technology businesses looking to grow. Its stated goal is straightforward: to create business wealth for entrepreneurs, superior risk-adjusted returns for investors and benefits for the London Business School, which shares in the fruits of the investors’ success.

There are other various other great examples of alumni-focused venturing across the UK in addition to those set out above, like the University of Herts enterprise fund and the seed investment clubs which are being fostered within the alumni communities of forward thinking Oxbridge colleges (e.g. Downing Enterprise).

In this way, university investment activity in the UK, in many cases led by the business schools, has increasingly adopted an approach that goes beyond pure tech transfer and commercialisation of research. It is a means for institutions to engage with their alumni and provide them with investment opportunities/ sources of funding at the same time.

This approach is not without challenges, including that these venture funds increasingly find themselves competing with angel and institutional investors whose outlooks have been buoyed by the SEIS and EIS tax reliefs. However, to put the trend in international context, in 2012, the Shanghai-based China Europe International Business School (CEIBS) launched CEIBS-CHENGWEI Venture Capital, a venture capital fund of US$100 million which will only invest in early or growth stage businesses founded or managed by CEIBS alumni. In the face of this kind of heavy hitting approach elsewhere, we will surely see more from this relatively new investor class in future.

This is a highly positive development, given the retrenchment in the mainstream institutional VC sector in recent years, and the need for Universities to find new ways to extract value from their networks. I hope to see the trend develop.

In the Taylor Vinters team, we work on a diverse range of venture capital, early stage investment, technology transfer and University spin-out transactions. We worked on 25% of all University spin-outs reported in the most recent PraxisUnico Spinouts UK survey. In doing so, we encounter the various different spin-out approaches adopted by the institutions who are most frequently carrying out venture activity.

A version of this post was first published by me in Business Weekly - on 15th August 2013.

Thursday, 8 August 2013

Luis Suarez, Liverpool and the dangers of soft obligations in contracts

It was reported today in the Daily Telegraph that Liverpool striker Luis Suarez has been ordered to train alone for several weeks after being accused by manager Brendan Rogers of showing "a total lack of respect" to his club with his public demand to join Arsenal.

Clearly, this represents a breakdown in relationships. It is also the culmination of the saga of Suarez's posturing for a transfer. It's an unfortunate situation for the club and the player.

While football transfers can be the type of deals that really put the ego in negotiations at the best of times, the situation seems to have been fuelled in part by the wording of the Suarez contract, an excerpt of which was quoted by Gordon Taylor, the PFA chief executive who is seeking to mediate between the player and the club on this matter, reported as follows:

"There is a clause in there that if Liverpool do not qualify for the Champions League and then they do receive a minimum offer of £40 million, then the parties will 'agree in good faith to discuss and negotiate in good faith' and see what transpires".

When the contract was originally negotiated, this provision will no doubt have seemed like a good alternative to a difficult discussion. In effect though, it counts for little and had the effect of kicking the issue of the circumstances in which the player can talk to other clubs into the long grass. The trouble is that now, with the parties up to their knees in the long grass, they seem to be finding that as any 12 year old on the rec would tell you, this is not a good place to be...

I am often asked to include these type of soft obligations (to consult, or negotiate, or hold future discussions, or use reasonable endeavours to do something) in contracts. Usually I would counsel strongly against them. Aside from the fact that they are often used as a means of avoiding difficult discussions up front, they can give rise to significant problems of interpretation where the wording used is not specific enough to be meaningful.

In this example, there are some obvious problems, including:
  • Under English law, it is a longstanding principle that so-called "agreements to agree" are generally unenforceable. So saying an obligation is subject to future agreement can effectively make that obligation meaningless;
  • There is no certain meaning to "good faith" in these circumstances. The only way to get certainty on this in the absence of agreement would be to go to court and have the judge decide how this obligation should be interpreted; and
  • Having an obligation to "discuss and negotiate" again brings an unclear meaning. This could be a very short discussion and negotiation indeed, and explains why Liverpool seem to have given short shrift to offers below their own valuation.
This is a classic example of where it would have been better for all concerned to have thrashed out a more certain position, and a more specific mechanic as to what should happen in the event of a >£40m offer, at the time of signing. The media wrangling and bad blood that has been evident in recent weeks could and, with the benefit of hindsight, should have been avoided with a more transparent and specific approach to papering the player's terms. All too often, negotiations focus on the contract deliverables - an orderly approach to what happens if the deal does not work out should never be sidelined in the excitement of signing a trophy contract.