1.  INTRODUCTION

  This memorandum has been prepared by the NatWest, Innovation and Growth Unit, drawing mainly on extensive experience in the technology-based business sector over a number of years (the Innovation and Growth Unit was established in 1989). Limited consultation has been undertaken with other Units within the Bank.

2.  SUMMARY

  The Committee are conducting an inquiry into Innovation and Technology Transfer in the fields of engineering and physical sciences. Specific terms of reference have been agreed and this submission covers those areas where we consider ourselves able to offer comment.

—  it is essential to create a supportive environment, both economic, fiscal and social where innovation and new product development are actively encouraged;

—  academia needs to be encouraged to consider the commercial applications of research and supported in their efforts to exploit the opportunities. This will require a cultural change in academia towards the USA model of commercial exploitation from academic institutions;

—  the Government has an important role to play at all levels—maintaining stable economic conditions, encouraging new innovations through fiscal incentives (eg R&D write off against future profits, encouragement of informal investment), direct support to innovative enterprises via targeted Grants and Awards and the continued encouragement of "support organisations" to provide coherent "one-stop" support services that are easily understood by SMEs;

—  the understanding of the innovation process in its various forms by all relevant parties (Government, Financiers, Academia and Support Organisations) is essential in order to provide a range of solutions to the range of circumstances;

—  the identification, understanding and protection of Intellectual Property Rights is vital to the creation of wealth in the technology-based business sector. The early involvement of experts in this area by businesses and the development of accepted methodologies for the valuation of IPR should be encouraged;

—  the funding programmes via the Engineering and Physical Sciences Research Council (EPSRC) could be linked to the Foresight Programme to focus research work;

—  selectivity in research is essential. Resources will always be scarce and their distribution will require careful management to ensure that the best projects and best scientists and engineers are supported. It is essential that the capabilities of our world-class centres maintain their international standards. The crucial question is the level and degree of selectivity that is appropriate;

—  to enhance the chance of success in these start-up businesses, the wider aspects of business management need to be addressed. Technology alone will not produce world leading businesses. The role of "business mentors" could be considered—ie the establishment of a register of experienced businessmen who would be willing to act as mentors.

3.  ENCLOSURES[29]

—  "Innovation Business"—Issue 18;

—  "Innovation Business"—Issue 19;

—  CBI/NatWest Innovation Trends Survey 1997.

4.  SCOPE OF THE INQUIRY

  "to inquire into the manner in which companies in the fields of engineering and physical sciences decide on developing new products and processes and the factors influencing their decisions, with particular reference to:

4.1  "THE INDUSTRIAL APPLICATION OF GOVERNMENT-FUNDED RESEARCH"

  It is widely recognised that the ability of the UK commercial base, especially manufacturing industry, to innovate in the fields of new product, process and service development, is vital to the economic future of the UK. The process of innovation is complex and requires interaction between diverse networks to achieve successful results. Government funded research is only one of these networks.

  In our opinion, industrial/commercial exploitation should not be the sole focus of Government funded research. Indeed, it would be inappropriate for publicly funded research in the Science Base to be driven by the short term requirements of industry. However, it is clear that there exists tremendous potential for UK industry to benefit, in terms of performance and competitiveness, from utilisation in the commercial world of technological advances made in the Science Base.

  The level of collaborative activity between academia and industry has increased, but there remains significant scope for this activity to be extended further, particularly amongst the SME base. Increased activity in the areas of joint-ventures, "spin-outs" funded by Corporate venturing arrangements and commercial research projects would lead to improved product development and innovations. The recently announced University Challenge Fund is welcomed.

4.2  "the respective roles of Government Laboratories and independent research and technology organisations"

  From our experience with SMEs, both are cost-effective and essential elements of the Science and Technology Base. Both sets of organisations provide valuable services in the innovation process with their ability to communicate with both academia and industry. They have demonstrated particular usefulness to physical science based businesses.

  The range of organisations in this sector, particularly the independent Research and Technology Organisations, has meant that specific areas of expertise have developed and this offers significant advantages to SMEs.

  The services offered by the range of organisations and the benefits of SMEs should be promoted through the network of support/advisory organisations eg Business Links.

4.3  "the operation of Government schemes designed to promote collaboration in and industrial application of research"

  The encouragement of collaborative programmes between academia and industry is welcomed, but, from our experience it is difficult to draw general conclusions with regard to the effectiveness of these schemes.

  The range of ESPRC schemes eg Faraday Partnerships, together with other schemes eg LINK, NEST, CARAD, ROPA, JREI, all contribute to increasing the awareness of collaboration as means of achieving success in innovation.

  However, it is essential that the outcome of these schemes are monitored and measured to ensure cost-effectiveness.

  From the perspective of extending utilisation of these collaborative schemes to a wider SME audience, it would appear sensible to consider reducing the number of schemes available, simplifying eligibility criteria and encourage support organisations to more actively promote the schemes to the SME community as a means of stimulating innovation and technology transfer.

4.4  "intellectual property rights and patenting"

  The key issues are identification, appropriate protection and valuation of IPR. It is our experience that many organisations do not have a clear strategy in any of these key areas. A variety of different structures have been established from "do nothing" to very clear and effective strategies.

  With the increasing importance of IPR this is a vital issue for UK companies and Higher Education Institutions. Valuable assets can be lost or sold/licensed too cheaply. Poorly constructed IPR protection strategies can be open to challenge and difficult to defend.

  For effective collaborations, considerable time should be invested in clearly understanding IPR issues. A regular dialogue between industry and University Liaison Officers would promote an improved understanding of respective needs and co-operative working practices.

  The issues surrounding Intellectual Property Rights are very complex and our experience suggests that expert advice and guidance is always the appropriate route to follow. Successful commercial exploitation of technology is inextricably bound with a valid, clearly thought-out and implemented IPR identification, protection and valuation strategy.

4.5  "the provision of finance to support enterprises involved in the application of research and innovation"

  Previous Reports (House of Commons Science & Technology Committee 1994, Bank of England Report 1996) confirm that there is sufficient funding available for innovative SMEs, but that there are failures on both sides (entrepreneurs and financiers) in matching up the most appropriate funding for the business at its particular stage of growth. The main problems are:

—  certain types of funding are misunderstood with regard to purpose and misapplied, eg overdrafts, which is primarily a tool for working capital, is frequently utilised to fund longer term capital projects or R&D activities. Within the NatWest lending portfolio the proportion of medium and long term loans is increasing, but there remains a short term mentality amongst SMEs;

—  the level of management and financial expertise within SMEs is generally low. Our experience of innovative, mainly technology based businesses is that it may be even lower, founded as they often are by highly skilled technical personnel with limited management experience. This lack of experience and expertise in early stage SMEs is major factor in their high failure rates. This could be tackled by increased education and training of owners/managers or by increased management input from outside the enterprise.

  In financing terms, the most important failure is in the provision of small-scale equity in the start up and early stages of growth.

—  Members of the British Venture Capital Association invested £2.8 billion in 1,060 British companies in 1996 (£2.1 billion in 1995), but, of this sum only £38 million was invested in start ups and a further £93 million in early stage firms. The larger Venture Capital houses have moved away from "venture" towards development capital provision in the form of MBOs/MBIs, where returns are potentially greater, and the risk perceived as being far less;

—  The reasons for this reluctance to invest in early stage technology based businesses can be traced to the "boom" of the mid to late 1980's when many technology based firms received investment and subsequently failed. This is acknowledged as being largely due to poor post investment support, and a misunderstanding of their needs, financial and management. In addition, the heavy costs of financial and non-financial due diligence combined with legal costs makes small deals uneconomic;

—  There are a number of Venture Capital houses which specialise in funding early stage technology firms (eg MTI Managers, Prelude Technology, Top Technology). Their approach is to place great emphasis on post investment support at all levels of the business;

—  There is also evidence to suggest that many Venture Capital providers are unable to properly assess the technology risk. This also applies to many traditional debt providers;

—  There is a case to be made for the development of a defined and structured methodology for assessment of technology risk and financial risk for "bottom-end" investment (say £50,000 to £250,000), which could be delivered rapidly and at a cost effective price.

  There are also other areas of support that could be introduced to ensure that maximum advantage is taken of innovative ideas:

—  Training—innovators or entrepreneurs with commercially exploitable ideas need to be identified at an early stage and provided with practical and professional assistance in basic management techniques, financial and marketing functions. Improved early stage training is required, eg an "Innovation Handbook" could be developed. This initial training needs to be reinforced by the use of mentors on an on-going basis, to enable the business to cope with rapid market and industry change;

—  Mentors—innovative, high growth orientated firms are more likely to succeed when led by multi-skilled management teams. Expert guidance at an early stage and on-going is vital. This expertise must be provided at a cost that the entrepreneur is able—and willing—to pay. This could either be cash or an equity stake. This could be achieved by:

—  a structured, nation-wide mentoring service;


—  the use of corporate mentors as well as individuals.

The network needs to be professional and to rapidly establish credibility.

—  Corporate Venturing—Business Angels are increasingly being perceived as a major source of investment and management skills. At present the role of Corporate Angels is relatively unresearched, but, from our experience can provide a vital role in the commercial exploitation of innovative ideas:

—  Centres of Excellence—the development of more well-recognised and well-publicised Centres of Excellence in individual disciplines would assist in the promotion of greater understanding between financiers and the technology community.

  There has traditionally been a reluctance by institutions to finance technology based SMEs. NatWest recognised this in the late 1980's and set up the Technology Unit, now Innovation and Growth Unit. This Unit has had considerable success in identifying and supporting technology based SMEs. The other main clearing banks are only now establishing their own versions following the sharply increased focus on this sector over the past 12-18 months. NatWest's is the clear market leader in this sector reflecting our experience and reputation.

  The reluctance by other banks to meet a clear market requirement is a result of a number of factors:

—  unfamiliarity with the technology risk;

—  fear of the perceived risk;

—  misunderstanding of the financial and commercial requirements; and

—  dynamics of innovative SMEs.

  These factors all form part of what the Innovation and Growth Unit refer to as the Empathy Gap—a breakdown in actual and commercial understanding, and diversity in expectation of the two parties.

  This gap can be bridged, and at NatWest we achieve this by:

—  Technology Business Managers located throughout the network delivering rapid and practical support (these Managers have attended an intensive awareness course with regard to key issues affecting these types of business);

—  a cost effective appraisal service that assesses technological risk and true potential of businesses;

—  a dedicated technology and market information service for managers to assist them make well informed decisions;

—  local and national networking to provide customers access to professional guidance/support;

—  the ability to "scale up" the relationship—ie a flexible response to customers' changing needs throughout their start up and expansion phases;

—  packaged funding which is truly appropriate to the needs of rapidly growing firms;

—  a bank culture that is sympathetic to technology based and innovative enterprises based on true understanding, whilst retaining the ability to appraise risk effectively.

  At the same time, companies themselves must try to understand more about the financiers' requirements:

—  improving their financial and management skills and demonstrating their ability to plan, monitor and control the business;

—  developing greater awareness of the range of finance available, and accepting that some propositions are not suitable for bank finance alone;

—  considering long term loans or equity investment in preference to overdraft, even if it means losing 100 per cent control;

—  improving long term planning, with more emphasis on marketing as the key to innovation success;

—  greater appreciation of the benefits of strategic planning;

—  working with their Technology Business Manager from an early stage in the business's development.

4.6  "the role of the Foresight Programme in fostering networks and identifying priorities"

  The aim of Foresight is to secure sustained competitive advantage by:

—  establishing visions of the future, and identifying priorities for action to assist the UK meet it's future needs;

—  develop a culture of forward-thinking about market and technology opportunities and threats;

—  creating enduring networks linking business, the science base, and government as a basis for generating action on the priorities identified.

  The Foresight Programme's results are increasingly being used by businesses to assist them to make better investment decisions and reduce risk. Companies can identify new opportunities for innovation and threats to existing activities; become aware of the contribution science, engineering and technology can make to business success; identify sources of knowledge in the science base to improve competitiveness and develop the flexible management structures and creative; long-term strategies that will meet their future needs.

  Foresight is fostering investment in new partnerships between business, the science base and government through the LINK programmes. It is estimated that around £400 million has been committed to initiatives reflecting Foresight priorities.

  At the present time proposals are being sought for the next round of work under the UK Foresight Programme. The next round will commence in April 1999 and is aimed at creating a much broader basis of participation, including SMEs, Trade Associations, Professional Institutions, RTO's and other intermediaries.

  The objectives of the next round are supported and welcomed. Extended participation in the process and use of the results can only be beneficial in fostering networks and lead to an increase in commercial exploitation of new technology.

4.7  "the role of the Engineering and Physical Sciences Research Council (ESPRC) in fostering technology transfer"

  The ESPRC operates a number of schemes and Awards designed to initiate and improve technology transfer. Our direct experience of the success of these schemes is limited.

  However, we are of the opinion that measurement of the outputs is essential to ensure cost effectiveness and that the emphasis of future awards should be closely allied with the identified priorities of the Foresight Programme.

4.8  "progress made towards implementing those recommendations of the Science and Technology Committee in the previous Parliament in their report on The Routes Through Which the Science Base is Translated into Innovative and Competitive Technology[30] relevant to the fields of engineering and physical sciences"

  The broad range of recommendations of the previous report has provided a platform for policy development and this has been further stimulated by the heightened debate on and recognition of the innovative, technology based business sector as one of the main drivers of competitive advantage and growth in the UK. This sector and its successful commercial exploitation of innovative ideas is vital to the future international standing of the UK.

  Our opinion is that the many strands of support and collaboration networks need to have a stronger cohesion and provide the SME with simpler access to guidance, advice, funding and potential collaborative partners.

  In order to achieve this process we believe that the DTI, in liaison with the Foresight Programme and the various research Councils are in the best position to provide leadership and achieve the sharper focus that is required.

12 May 1998

30   First Report, Session 1993-94 (HC 74). Back