Filling the early start-up funding gap

After an innocuous start, $60 million investment fund Uniseed is paying dividends for its stakeholders: three of Australia's biggest universities and a trillion-dollar super fund.

Uniseed's mandate is to "nurture" research projects carried out by the fund's owners, University of Melbourne, University of Queensland and University of New South Wales. These universities commit three quarters of the fund's $60 million investment capital, with the remainder coming from Western Australia super fund, Westscheme.

The fund's CEO Dr Peter Devine said the main objective was to develop research to a point where it could be sold to the market.

"The big problem for the unis and publicly-funded research organisations, is that people are inventing things all the time but they're just not really ready for the traditional finance markets, they're just too early for other people to invest.

"Putting up the money, it was to help fill the gap between uni inventions and traditional finance markets ... if you don't have a Uniseed, that IP [intellectual property] just sits there and goes nowhere, and there's no value generated because it's just not advanced enough."

Uniseed was established in 2000 by the Melbourne and Queensland universities, but Devine said it only had limited success because it had a small funding pool, about $250,000 over the life of a company.

"I guess what they found in that first phase, it probably wasn't the best model, in that they found it wasn't enough money, and they had to keep playing in subsequent rounds to maintain their equity position and protect that to get a better return at exits."

In 2005 Westscheme and University of New South Wales joined the fund, and in November 2006 Devine took over as CEO. The increased number of stakeholders improved Uniseed investment decisions, he said.

"That's important for the unis to have that level of scrutiny, it's very hard if you're holding the money and managing the IP to make a decision on the investment, because you tend to be a bit conflicted."

This boosted the fund's capabilities which now funds between two to three university projects a year, committing up to $2 million over the life of the company.

Uniseed produces "very healthy profits" for its stakeholders, Devine said, an amount commensurate with its millions of dollars of investment, which pays for infrastructure and staff to develop the research into a commercially viable operation.

This commercial activity has additional benefits to the university, which can attract additional investors or government grants, he said.

"That research funding primes a whole lot of things, it employs people in the uni, it leads to publications it actually leads to further patents and IP. So it stimulates activity in the uni, and helps move those inventions or discoveries out of the unis, into the more traditional venture markets," he said. "As a total amount of money the unis have got back collectively more money than they've put into Uniseed, in terms of research funding."

There is an option for Westscheme to inject additional capital into a company as it matures and becomes a better investment prospect.

"[There's] investing at a later stage when it's de-risked. They've done that in five or six companies which are all coincidentally our best companies, they stand to make money out of Uniseed's investment but a significant amount of money out of their own direct investment into those companies."

"Therefore they get a direct exposure, they own the shares if you like in their own name, but we manage that for them... Their model isn't just about making money out of Uniseed, but probably making the majority of their money out of the direct follow-on investments."

While the fund is profitable, only 10 to 20 per cent of its early stage investments are successful, Devine said. The pay-off from these makes up for the failures, which are the remaining 80 and 90 per cent.

"The key for us is we do very early stage investments and the key for us is trying to move the companies somewhere and minimise our exposure,

"We want to put money into these things and see if we can get them somewhere, but kill them early if they don't work out.

"We've had a couple of exits, and in the next three years we have a few more coming through, some good ones... It takes a long time in this early stage space, it takes at least 10 years to get to a point where you are making money."

One of the reasons for a company's failure is that a technology doesn't work as predicted by the research, he said. For example, in the biotech space a drug might work on an animal but doesn't have the same effect on the human body.

Another reason for failure is changing market conditions, he said, which happened when Uniseed investment Combonix's human genome sequencing technology was ready to hit the market.

"But sometimes markets change, and the human genome project was completed fairly quickly, but the technology wasn't as great. So that can happen, but most of the time it's been technical failure."