How brilliant idea evolves to dazzling product

Dec 4 2008 by Chris Knox, The Journal

For five years Newcastle venture capital firm NorthStar Equity Investors has helped countless science and technology businesses start or grow. Christopher Knox reports.

THE region’s science and technology sector has been the envy of the country for years now, with institutions such as Newcastle’s Centre for Life and The Centre of Excellence for Life Sciences (Cels) helping to foster a culture of innovation.

However, it is the initial funding start-ups receive which can be the difference between success and failure and can prove essential for inventors looking to turn their blueprints into fully functioning products.

By the end of the year NorthStar Equity Investors (NSEI) will have invested £33m in the regional economy through its two funds, the £10m Proof of Concept (POC) Fund and the £23m Co Investment Fund (CoIF).

Where NSEI differs from most standalone investors is that it also provides technological and commercial expertise, with a team having the knowledge to turn ideas into viable businesses.

The firm also works alongside other investors in the North East and beyond to ensure promising entrepreneurs find the financial backers that best suit their business model.

Dr Richard Exley, who has headed the POC fund since its inception in 2003, said: “However good the technology is, it needs a market and that needs to be quantified.

“Once we believe that the technology can be sold, we start building an investment case and a plan of how to implement the idea.

“At this point we also start to look at the skills needed to bring the technology to fruition and begin to build a team.

“It’s important to remember that investors invest in people first and foremost. No matter how brilliant the technology and exciting the market, no one will back it if they don’t believe in the management.”

The firm, which has also created £47m through deals with other companies and angel investors looking for a slice of the action, recently announced a £2.4m extension to the POC fund, which will be available to entrepreneurs until the end of next year.

The POC fund was created to help plug the investment gap facing businesses in their earliest stages, when the risks, and chances of failure, are most high.

Financed by One North East and the European Regional Development Fund (ERDF), it has already helped to create 200 jobs in the region and committed more than £10m to 170 hi tech companies across a wide range of sectors, including healthcare, IT, biotechnology and the environment. Many POC companies have gone on to achieve further funding. In fact, nearly a third of NSEI’s CoIF portfolio are businesses that have grown from initial POC funding.

Dr Exley said: “When it began, our challenge as an investment team at NSEI was to find good opportunities across the regions and, needless to say, we’ve been constantly impressed with the range of ideas from entrepreneurs, existing companies and the region’s universities.

“Sourcing new high quality POC deals is a huge part of NSEI’s role and is without doubt our key focus over the next 18 months now that it has been extended.

“Managing our investments, however, is just as important as making new ones. Having worked with 170 businesses in the region, the majority of which are start-ups, our role is to help them continue their growth.

“It is also encouraging that One North East have been able to provide the extra funding, despite what is happening in the economy, and it will no doubt prove a lifeline for many businesses looking to start up amid difficult trading conditions.”

The CoIF Fund has also made its mark on the region.

Specialising in high growth technology, it invests between £100,000 and £1.5m as well as multi-million-pound deals alongside networks of investors.

CoIF, which is funded by the ERDF, has so far invested £20m in 33 of the region’s science and technology businesses and has also attracted funding far beyond the boundaries of the North East.

Head of the CoIF fund Gerry White said: “Even in the current climate, the North East is generating many opportunities and the region has huge potential to be a huge centre for investment and growth.

“Investors from outside the region have certainly recognised this potential and we are working with an increasing number of national and international venture capitalists on some really exciting investments.”

E-THERAPEUTICS

ONE of NSEI’s biggest success stories has been Newcastle drug research company e-Therapeutics, which floated on the Alternative Investment Market (AIM) last year.

NSEI has been involved with the company since its launch in 2004 and invested £90,000 from its POC fund to help it start and embark on the initial stage of development for a wide range of drugs, including tablets for asthma and Alzheimer’s disease.

Four years later, the drugs company went on to raise a seven-figure sum to boost research, including £250,000 from NSEI’s CoIF Fund. It has made breakthroughs in the treatment of asthma, depression, cancer, cholesterol, diabetes and pain control, and has also made advances in killing resistant strains of the MRSA superbug.

The firm, which has an annual turnover of more than £1m and has offices China and India, believes it will be in a position to take many of its drugs to market by 2010.

It cites recent deals which show the business that can be achieved in the sector, including a $1.1bn contract won by GlaxoSmithKline and Synta Pharmaceuticals to develop and sell a treatment for melanoma, a form of skin cancer.

CEO Professor Malcolm Young said: “Our aim is for the majority of drugs which address seemingly ‘incurable diseases’ to have been tested by us. Our worldwide expansion is very much part of this aim.

“We are working within a multi-billion-pound industry
and believe that we have discovered drugs that are more robust than those currently
on the market. So, we are very excited.

“In terms of the investment that we have received, we wouldn’t be here if it wasn’t for NSEI, who have been vital to our development and have helped us to make major strides in what we have been able to achieve.”

BLYTH company Applied Superconductors Ltd (ASL) – which creates equipment to cope with power surges in electricity networks – has received £1.5m of funding over two years from NSEI, Gateshead’s NEL Fund Managers and Austrian fund New Energy.

The technology ASL has developed helps network operators deal with surges caused by short circuits in electricity distribution networks by regulating current flow – improving safety and stability and protecting against catastrophic failure of electricity substations.

Superconducting fault current limiters (SCFLs) have worldwide applications for connecting the growing number of alternative energy systems to distribution networks and can also be used in heavily loaded industrial sites, especially ships with electric propulsion, and in areas such as Eastern Europe where old
networks have to cope with growing loads.

NSEI has been involved with the company since 2005, with an investment by the POC fund, which helped it go on to raise £910,000 in September last year from the three funds, and a further investment of £590,000 this year after its achievement of a key milestone in the technology’s development.

ASL was set the challenge by the investors of ensuring its technology passed the type testing phase of development, which it achieved last September and has now been placed in a working network.

The additional funding was transferred to the company this month and will be used to reinforce the position of the technology through further projects.

Chief executive Herbert Piereder said: “We are embarking on an exciting and historic period as our SFCLs are the first of their kind in the world to be placed in a commercial network.

“Thanks to the funding, support and guidance we have received from the fund partners, our technology has been sufficiently fine-tuned and is now ready for commercial manufacture.”

CASPIAN LEARNING

SUNDERLAND group Caspian Learning was the first company to benefit from the POC fund in 2004 when it received seed funding of £60,000.

It is now recognised as being at the forefront of training technology, having developed a series of 3D simulations and games for clients including Swedish car group Volvo, learndirect and the Ministry of Defence.

Earlier this year it received a further £1.5m from a funding round led by NSE and its CoIF, which it
has already used to develop its
core technology Thinking Worlds, as well as establish a presence in the US.

As part of the round, the firm, which employs 25 people, also received £300,000 from Enterprise Ventures in Preston and £400,000 from Hotspur Capital, a £3m fund set up this year by prominent North East business people to support firms working in the region. Caspian,
which also intends to target the Middle East market, is working on a wide range of applications, including one that allows users to create their own simulations.

Chief executive Graeme Duncan said: “Within an education environment, for example, a student may be answering a question about how blood gets around the body whilst exploring a 3D set of lungs.

“From a corporate perspective, Volvo uses our technology to deliver product and sales training to its entire dealer franchise across the UK through virtual 3D car showrooms.”

“Our initial POC funding was instrumental in helping us to build the foundations of the business and enabled us to set up and firmly establish our Sunderland roots.

“We want to further expand within our core markets and capitalise on opportunities within the education and training sectors, and the new funding we recently received from NorthStar means we can explore and exploit these to their full potential.”