How to spin out from university

Your quick and comprehensive guide to life beyond the lab

At present, conditions seem ideal for the growth of thriving university spin-outs. Britain’s universities are under pressure to produce commercial results; under the terms of the new research excellence framework, academics have to demonstrate their research has an impact outside their own institution, so tertiary education hubs have a vested interest in fostering money-making companies.

Several higher education hubs are already seeing great success as commercial hot-houses – indeed academics at Leeds University have established 18 successful spin-outs in the last three years, and Manchester University has launched 100 spin-outs in the last decade.

Many universities are now making a concerted effort to promote academic start-ups – for example, Scotland’s Heriot-Watt University has recently put up £25,000 for an ‘X Factor meets Dragons’ Den’-style funding competition, while the University of York has just unveiled specialist premises for IT spin-outs.

The complexion of the spin-out marketplace has changed in recent years. Biotech and life sciences spin-offs have tended to perform well, while drug development companies – which would appear better-placed than anyone to capitalise on university research facilities – have tended to struggle.

The problems

It’s also important to understand the challenges a prospective spin-out faces. Chief among these is the difficulty of accessing funding. As Dr Arnab Basu, chief executive of burgeoning spin-out Kromek, says, “the UK capital market has never been very good for spin-outs; the perception of risks is high, and there are still real challenges for encouraging early-stage technology.” This problem has been accentuated during the recession, with both venture firms and private investors looking to keep existing companies afloat, rather than pump money into news ones.

Some spin-outs can source finance from an investment programme specific to their university. In 1999, the government created the University Challenge Seed Fund – a central pot of money which enabled Britain’s leading universities to set up their own dedicated fund. Although several universities, notably Oxford, are still investing serious money through the seed fund initiative, a number of funds have run dry. You may well find that your university runs no seed fund of any kind.

Where to turn

So, if the seed funding is no longer readily available, where can a spin-out turn for early-stage funding? Well, you’ll probably get some good advice from your uni’s technology transfer office, or TTO. More than 100 universities across Britain run their own TTO, and these bodies are dedicated to commercialising in-house research projects.

The TTO may be able to put you in touch with angel investors and independent venture capitalists (VCs), and provide advice on all kinds of issues – from tailoring your product to suit the market to writing professional business correspondence – and they may waive their fee in return for an equity stake in your business.

However, TTOs will not have = the sort of money you need to start a business. You may be better advised to contact one of the big investment companies set up to handle university spin-outs.

There are three such companies in the UK: Fusion IP, Imperial Innovations and the IP Group. All three have public funding, and together they cover most of the elite universities represented by the Russell Group. Because these companies are built specifically on university spin-outs, they can provide the hundreds of thousands, even millions, you need – and they have a network of angel investors and VCs who can provide even more.

How to present

Whether you’re presenting to one of the ‘big three’ spin-out investment firms, your TTO, or even an independent investor, it’s really important you get your pitch right. The people you’re pitching to need to understand that you’re not just a team of boffins with no business sense; your team and your product have real potential. As David Baynes, CEO of Fusion IP, says: “When it comes to taking on spin-outs, we’re not in the business of companies which might make £100,000 one day – we want firms which can make millions.”

The first thing you’ll need to resolve is your chain of command – it’s vital that you pitch with a clear management structure, headed by someone with proven commercial experience. As Dr Basu says: “Some researchers are exceptional businesspeople, but most of the time someone who’s strong in one area will be weaker in the other. You need a commercial person who understands the commercial aspects, and can work with the technological team.”

If you feel your team lacks someone with the required commercial savvy or managerial nous, your TTO, or investment company, may be able to provide one for you. However it’s good to have a basic structure nailed down even before these intermediaries come in – if you don’t have one in place, they might not take you seriously.

It’s also important to do some serious research before you begin pitching. Dr Basu says that “University start-ups have far too much emphasis on technology, and not enough on commercialisation and customer focus.” To avoid this imbalance, you should look on the internet to gauge the shape of the market, invest in some professional market research, talk to potential customers and identify competitors.

And, perhaps most importantly, you need to have your IP locked down. Dr Basu says that IP is “the only thing an investor can put value on in the early stages,” while David Baynes stresses that “we want to see [a spin-out has] done some diligence on their IP – we want to be confident there aren’t rival firms doing the same thing.”

To secure your IP, make sure you get specialist advice in the early stage, and follow best practice at all times – this means maintaining your development records, dating everything, and clearly assigning ownership of the IP.

It’s also essential that you look into patents, trademarks, and other forms of protection for your IP. Protection for design and concepts is sometimes free, and even expensive patents can be attainable; a number of universities will provide financial assistance for a patent application, provided the idea is commercially viable. For a more detailed look at IP protection, go to the Intellectual Property Office.

Finally, it’s crucial you present your company to sponsors, backers and investors with a tight business plan, containing realistic projections. Businesspeople are trained to cut through the hype, so you’ll need to show that you’ve got a sustainable strategy in place, taking into account all eventualities.  

Going to market

Even if you’ve done the most meticulous research, bolted down your IP, targeted your customers and generated piles of investor cash, there may still be trouble ahead. More than half of all spin-outs fail in their first year, and it’s crucial you’re equipped to get through this early period.

Perhaps the most important thing to appreciate is that, once you’re on the market, you’re no longer a team of university researchers – you’re a serious business. Dr Basu says there is “no halfway house” between business and academia, and adds:

“Getting away from the university labs is like cutting the umbilical cord, and you need to be able to make that jump. Think of R&D as a two-part process; the R needs to be done in the university, the D needs to be done in a commercial environment.”

A proven way of sealing your independence is to move out of university premises, and rent your own space. Your TTO, or investment company, may be able to provide specialist premises outside the university’s confines, and the UK’s network of science parks offer dedicated accommodation for burgeoning companies based on pioneering research.

But before you cut your ties with your alma mater, you need to be sure all parties are clear who owns what, and whether the university is entitled to any profits, or a share in the business. Each university will have its own spin-out model, and the amount you owe to the university will depends on what that model stipulates. Make sure you’ve checked all the fine print before you move off campus.

It won’t be easy to move from the fusty confines of your university into the hard-nosed real of business, but with a great product, and by following the guidance above with consistent diligence, you’ll have a fighting chance of success.

 

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