Clever software can take you a long way. Couple algorithms with data and you can model climate change, accelerate the production of game-changing drugs, design new materials or predict customer demand over the next decade. However, all this depends on the availability of computer systems that will handle the demands of increasingly powerful and resource-hungry software. This is where a sector dubbed The Future of Compute is coming into play, and according to a new report, VCs in the U.K. are allocating more funds to university spinouts specialising in fields such as quantum, photonic and neuromorphic computing.
According to the report – published by venture firm AlbionVC and market intelligence company Beauhurst – equity investment in this field amounted to just £3 million in 2015. Fast forward to 2024, and that figure had risen to £284 million. Small in comparison with the sums being poured into, say, fintech or climate science, but still significant, given that much of the cash is being directed towards academics seeking to commercialise their research.
So what’s behind the reported increase in investment in a corner of the deeptech universe that is – to say the least – esoteric ?
Well, there’s a certain amount of history here. Back in 2022, then Chancellor of the Exchequer, Rishi Sunak ordered a review of The Future of Compute, stressing the importance of high performance computer and cloud technology for U.K. prosperity in the years ahead. Since then there has been a drive towards commercialisation of university research.
Compute Opportunities
And according to AlbionVC partner David Grimm, equity investors have been looking more favorably on a sector that they might once have shied away from.
“Software ate investment for a while,” says AlbionVC partner, David Grimm. “It was so attractive to investors that persuading people to put money into harder, more complex tech was difficult. However, software deals are harder to get into now and more expensive and there are other opportunities that can be exploited.”
Grimm says interest in The Future of Compute segment is rising because the technologies that are spilling out of labs dovetail neatly with the needs of hot sectors within the innovation economy.
Today you have software – such as large language models – that demands exponentially larger compute capacity. Suddenly there is a need to invest in Compute and hardware,” adds Grimm.
Meanwhile, universities are keen to send their cutting edge research out into the world. “Universities are very aware of the impact that can be generated from research. Having a spin out is a great way of getting a global impact,” says Dr Anne Lane, Head of UCL Business, University College London’s technology commercialisation division.
The challenge, of course, lies in successfully navigating a path that leads from lab-generated IP to world-beating product and (from the VCs perspective) a returns-generating exit. This in turn means guiding academic founders through a world of unfamiliar commercial disciplines.
Academic/VC Engagement
Grimm stresses the importance of early engagement between academics and VCs. “We are going earlier and deeper and talking to researchers before they have spun out a company,” he says. Often academics know how to build a spinout, they don’t understand the financing journey and they don’t know how they will be judged at each stage.”
The idea, he says – citing the example of funding – is to provide the kind of guidance that will help founders avoid mistakes. “It’s so easy to take the wrong amount of funding. Usually too little, so the business fails, but sometimes too much, making it difficult for future investors.”
Dr Lane, who works closely with Albion, says the universities also play an important role. “Things often take a long time. You need patient capital in there. That’s where universities can help. Proof of concept funding is key. A small amount of money to make something investor ready.” From there, universities can work with partners to build an ecosystem that will support spinouts throughout their journey. For its partUCLB invests through its technology fund.
Businesses offering promising technologies are finding capital is available. The report cites the examples of Oxford Quantum Circuits, which has raised £79 million in just two years and Oriele Networks, which secured funding of £27.5 million within 18 months from its establishment.
And VCs don’t neceessarily have to wait for a decade to see returns, even if the technology is cutting edge. “It’s not always true that Deeptech takes a long time. We helped spinout called Odin Vision in 2019 which sold to Olympus in 2022. So you can seek returns relatively quickly,” says Grimm.
The Funding Gap
However, there is a funding gap. As things stand, it’s hard to find VCs who will wait ten or fifteen years for a return and that will affect the funding opportunities for some spinouts. However, there are other options, such as sales to Private Equity businesses that might be prepared for the long haul. There are also efforts being made by governments to unlock pension fund investment through the Mansion House Agreement, but that is a work in progress. There is also a sovereignty question. Grimm says rounds of $20 million or more are often dependent on U.S. investors, something that has implications for the ability of the U.K. to hold onto its deeptech success stories.
That said, Compute spinouts are being created in greater numbers. The report identifies the Oxford, Cambridge, London golden triangle as the U.K.’s Compute Powerhouse. Oxford has so far produced eight spinouts, and the London Ecosystem and Cambridge six apiece. More will surely follow.
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