Bridging the valley of death: grants versus loans

Funding formula: Innovate UK conference will hear of plans to convert some innovation grants into loans

A lack of appropriate and timely funding for innovative businesses is a barrier to productivity and growth.  But what is appropriate and what is timely?

These are key questions as the United Kingdom government changes its thinking on how better to encourage industry to take on the high risks involved in innovation.

The INNOVATE2016 conference in Manchester this week will hear about the Government’s plan to convert some of the existing company innovation grants into loans.

The move sent tremors through UK industry when it was announced by the then Chancellor of the Exchequer, George Osborne, as part of his 2015 Autumn Statement.

Innovate UK, the agency that manages innovation support, has this year received £561 million to award as government match-funding for innovation in key sectors of the economy, such as high value manufacturing and the life sciences.  The plan is that, by 2020, £165m of this amount will be delivered in the form of repayable loans.

Life sciences provide a good example of why such innovation support is important, as companies involved must traverse a prodigious “valley of death” to take their new products to market.  The technical complexity of these products and their highly regulated route to market make the early stages of this journey too risky for conventional forms of investment.  Innovate UK bridges the gap, effectively sharing the development risk with industry.

In Manchester, delegates will be told that Innovate UK has conducted a range of scoping and testing exercises –  involving the British Business Bank –  that would see a future funding landscape as a continuum of financial support, covering grants and loans, and extending into forms of equity investment.

A spokesman for Innovate UK told it recognised that different businesses needed different forms of financial support to innovate and grow depending on how close they are to launching their products.

“Grant funding will be focused on finding and proving new innovative ideas, which often involve early stage businesses,” he said yesterday.

“New financial products will operate at slightly later stages of innovation activity nearer to market.”

Industry unease centres on a view that the move could be the first step along a path previously trod by student loans, where loans replaced grants. Innovate UK are keen to emphasise that their grant funding activities were here to stay.

It is also recognised that the introduction of loans and, in particular, equity products provided an opportunity, “where appropriate, to generate a direct return for the taxpayer”, the Innovate UK spokesman said.

The BioIndustry Association (BIA), which represents the biotechnology sector, continues to meet with politicians and government officials to discuss how the new innovation finance products should be developed to support their sector. The biotechnology sector – as part of the health and life sciences industries – contribute to a £60.7bn turnover, with almost 222,000 people employed in 5,633 companies, according to the Department of Health Strength and Opportunity 2015 report.

The association has developed some “over-arching principles”, proposing that any loans should be interest free and need to be paid back after other debts and investors to not repel other forms of financing. Payback then should begin post-revenue generation or at company sale.

The BIA policy and projects manager Martin Turner said that there is an appreciation of the specific challenges faced by biotech companies.

“This is reflected in the recent announcement by the Chancellor that £100m of grants are to be made available to UK biotech companies through Innovate UK’s Biomedical Catalyst scheme, which the BIA campaigned strongly for,” Dr Turner said.

In the absence of further announcements from government, the BIA expects pilots of the new funding products to be launched by the end of the year. The organisation intends to work with members to assess these products and feedback opinions to the government about how they could be improved.

By John Egan