Edie G-Lush

‘We take the risks that private finance can’t’

Even being soaked by driving rain isn’t enough to dampen Jonathan Kestenbaum’s passion for innovation.

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Even being soaked by driving rain isn’t enough to dampen Jonathan Kestenbaum’s passion for innovation.

Even being soaked by driving rain isn’t enough to dampen Jonathan Kestenbaum’s passion for innovation. The chief executive of Britain’s largest source of endowment funds (£350 million and counting) arrives in the Notting Hill coffee shop where we are meeting, shakes off his coat, and within seconds is talking with almost religious fervour about how well-targeted public finance can promote technological and social change.

The National Endowment for Science, Technology and the Arts (NESTA), which he runs, is difficult to categorise. It began in 1998 with £200 million from the National Lottery. It has both commercial and non-commercial aims. Its public face promotes debate and research, and supports people who are interested in ‘innovation’ — creative solutions to issues in education, healthcare and climate change. On the private side, it’s an early-stage financier for entrepreneurs in new technology.

Kestenbaum is the first to agree that NESTA is difficult to pigeonhole, but he likes the way the two facets of the organisation co-exist. Before coming to NESTA, he was chief of staff to Sir Ronald Cohen, head of the private equity firm Apax Partners. ‘I learnt from Ronald that you don’t have to choose between being disciplined, focused and rigorous on the one hand and having a very strong sense of mission, purpose and values on the other. These are not mutually exclusive.’

Since taking the helm 18 months ago, Kestenbaum has been moving NESTA into what he describes as ‘Phase Two’. Phase One — under its founder chairman, the film producer Lord Puttnam — was born out of the New Labour euphoria of 1997 and sought to spread the endowment’s funds ‘in the spirit of the time, letting a thousand flowers bloom’. Kestenbaum ditched this scattergun approach, and his Apax experience has clearly helped hone the focus of the endowment’s private financing arm. But he’s anxious to state that just as NESTA doesn’t invest in a public-sector way, neither is it a typical venture capital fund. ‘Public finance — with the best will in the world — often ends up backing the unbackable.’ While NESTA’s investments are ‘unapologetically about financial return’, they also seek to ‘go in much much earlier than seed or venture funds are prepared to do’, not least to demonstrate to private financiers that you can make money doing so.

By getting in early, NESTA can insist from the start on ‘a very strong programme of mentoring’ — which may include assembling the new venture’s management and board. ‘We’re often backing embryonic companies with hardly any governance at all — perhaps one entrepreneurial scientist who’s come up with a really clever technology but has very little conception of how to commercialise it. Often the community of entrepreneurial scientists doesn’t lend itself to an effective management team,’ he laughs. Once milestones have been reached, NESTA helps bring in more traditional forms of private finance.

How have NESTA’s investments done? During its first few years it built a portfolio of 180 companies, of which 50 have been taken forward and eight have been chosen for follow-on investment. Kestenbaum is reticent about specific failures, but says, ‘If we don’t have a proportion of projects that don’t go the way they’re meant to, then we aren’t doing our job. We have a responsibility to take the risks that private finance can’t.’ A glance at his list of investments proves his point. Probe Scientific is developing a monitoring device which samples blood while it is still within the patient’s body. Incentec is developing the first diagnostic test for pre-eclampsia, the pregnancy complication. Starbridge Systems is developing a device to allow diabetics to take insulin through a tiny pump worn on the skin. NESTA’s seedlings are as speculative as they are potentially revolutionary.

Where did Kestenbaum get the urge to be a venture capitalist with a heart? Raised in Tokyo by American parents, he describes himself as having always been interested in ‘environments that have a combination of change, leadership and impact’. He started his working life building an international training programme for teachers, then became a commodities trader in a family business on the London Metal Exchange. Having sold out of that, he returned to the philosophical, not-for-profit side, becoming chief executive of the office of the Chief Rabbi, Professor Jonathan Sacks.

‘I started working for Jonathan in 1991 when he had just taken office. He — and I — were very young. He came into office with huge expectations being placed on him. I learnt then the importance of managing expectations. I also learnt the sense of fulfilment that came from working on a wider national agenda.’ It may also be where he developed the ability to talk with messianic enthusiasm about subjects that not everyone would find so involving.

And what is his goal for NESTA? When he started there, he took a close look at the Rockefeller Endowment, which experimented with a variety of models for the financing of public health, using small hospitals as a testing ground. ‘They did that independently while making sure they were working in some degree of proximity with bodies such as the World Health Organisation that could subsequently pick those models up, replicate them and get them to scale. A very important and subtle feature of NESTA is that — while we have to protect its independence so we can be very experimental — we also have to build relationships with governments and other public bodies so they can take the ideas that we have experimented with, and scale them up.’

Kestenbaum also hopes NESTA will help build interest and belief in technological innovation in Britain. ‘If you look at the hotbeds of innovation across the world — Tel Aviv, Scandinavia, parts of the US — they have two things in common. The first is the use of very cleverly deployed public finance to foster innovative technologies and ideas. The second is the degree to which technology and social innovation are part of the national consciousness. We don’t have that in the UK. There are pockets of it but not enough yet. You can have all the money in the world, but if you don’t have a national galvanising culture to carry through your ideas, you don’t get anywhere.’