Stay with me on this one.
Last week Silicon Valley Bank (SVB) officially collapsed and threatened to take a number of technology firms with it.
The reasons for its collapse aren’t that important to this particular story but in short as interest rates went up, SVB’s customers needed cash as money became more expensive, and in turn a mass of withdrawals caused a run on the bank.
Billions and billions
At a frankly extraordinary pace and at the instigation of the government HSBC acquired SVB UK (the UK branch of SVB) and in doing so assumed its loans of around £5.5bn and its deposits of £6.7bn. Tech investors of all kinds have come out to praise the government and HSBC for their speedy action. While the total number of UK companies invested with SVB UK was relatively small at 3,000 there were genuine concerns that as of Monday this week companies would not have been able to withdraw money from the bank. In short, it would have been a significant blow to the UK’s tech sector.
The story of SVB shows the inherent risk in our interconnected global economy, the difficulty of appraising the true value of banks replete with complex financial instruments and investments, and it demonstrates that the state can act in the innovation space where the case is urgent enough.
There has been debate over the last week as to whether the collapse of SVB is the first domino to fall in a banking fallout similar to 2008. It seems like, for now, a financial crisis has been averted but there are likely consequences for the wider innovation ecosystem.
Depending how you look at it, the news about SVB either makes it the ideal moment or the worst time possible to launch an independent review into university spin-outs. One of the aims of the review is to consider how universities can attract more VC funding and SVB’s collapse will only shine a line on some of the fragilities within this ecosystem. There is increasing investment in university spin-outs and it would be a shame for universities, businesses, and the country if the collapse of SVB led to a more risk averse funding environment
The growth in investment in university spin-outs will bring the role of universities in transferring their academic research to the real economy into sharper relief. With that comes some challenges that are worth reflecting on.
The first, and this seems obvious but it is worth repeating, is that universities aren’t tech firms. They are enormously publicly funded institutions with stakeholders not shareholders. How university research is translated into the real economy isn’t widely understood. To make the leap that universities may burn through lots of public money as they could invent, discover, or develop something useful, is difficult.
Additionally, the role of universities within spin-outs has been much commented on. The usual narrative runs that universities take too big an equity stake in spin-outs and in turn this removes the incentives to scale them or invest them. This could be a factor but the other important element is that capital arrives at a university spin-out often once an idea has been incubated. This means that there is a mediation role for universities between spin-outs and businesses, and an expectation for universities on a return on their investment. Quantifying exactly what that investment is given the complexity of the university support and funding ecosystem is not straightforward.
Aside from individual university consideration the demise of SVB raises profound questions of the approach to supporting the innovation ecosystem. The speed at which the government was able to act to facilitate the HSBC buy out was truly astounding. It is an urgency that both stands in contrast to addressing the structural weaknesses in the innovation economy, and a continuation of the government’s supply side reforms when it comes to innovation.
The rescue of SVB was born of economic necessity and in tandem with policies like Freeports, R&D tax credits, and the mooted new investment zones, speaks to a set of public priorities of keeping money flowing through state intervention. SVB is a stark example of this but elsewhere the one driving theme of UK innovation is the theory that if businesses are incentivised to invest in R&D through tax cuts, relaxing planning, or removing regulatory hurdles, then the overall innovation economy will grow.
This theory has merit where investment is carefully targeted but it has limits. Reducing tax will not support the development of a more skilled R&D workforce. It will not always encourage new investment and will sometimes displace existing investment. And it will not improve infrastructure like lab space, transport connections, or digital capabilities that are central to the R&D economy.
Reliance on business and VC investment is also not without risk. The advantage of government funding, for all that it can be slow, bureaucratic, and maybe even boring, is that it is safe. The Nurse review is at best sceptical about the value of QR funding. While universities should be encouraged to put public funding to work to leverage private investment, this should be done with careful consideration of the trade-offs between the stability and certainty of the public sector, against the opportunity private sector investment can bring.