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How can more university spinouts achieve success?

19 Nov 2020

If someone told you that for every £1 you invested, I’d give you £3.60 back again, I suspect you’d be biting my arm off.  

Well, that’s exactly what the UK government should be doing. The data behind UK university spinouts (businesses set up to exploit Intellectual Property (‘IP’) that originated within universities) shows that for every £1 invested into research, £3.60 in economic benefit is created.

UK universities have spun more than 3,000 businesses over the last two decades, including some of the UK’s biggest success stories such as ARM Holdings and Oxford Nanopore Technologies. In spite of these successes, there are still so many missed opportunities where fantastic IP is stuck in the lab or in companies which just aren’t receiving the funding they deserve.  

Every year, Octopus Ventures carries out research to see which UK universities have been most successful in creating spinouts. Top of the tree, for the second year running, was Queen’s University in Belfast. It created more spinouts from its research than any other university in the UK (relative to funding received) and, most importantly, continued to see successful exits (the last one being of its cyber security and data analytics spinout, Titan IC, which was acquired by Mellanox, an Israeli-American supplier of networking technologies).

Having interacted with hundreds of spinouts over the last 20 years, our key recommendations to the entrepreneurs running these businesses are as follows:  

1.  Understand your customers

It’s really important to ground academic research in commercial reality as soon as possible. The best way to do this is to get out there and talk to potential customers – we recommend having at least 100 detailed conversations with potential customers to gauge product market fit.

2.  De-risk the technology

This applies as much to de-risking the proposition via proof of concept and prototyping as it does to ensuring the spinout is not too dependent on a single individual. It’s important to bring in ‘outsiders’ relatively early on, both to add some new experience as well as to avoid key person risk.

3.  Get your incentives right

It’s important to think through what skills (and management expertise) will be required throughout the life of the spinout and ensure the ownership structure and incentives reflect this. And remember, it’s quite normal for teams to change over time as businesses moves from proof of concept through to scale up.  

4.  Use milestone-based valuations and fundraising

Spinouts should be very disciplined in how they raise and spend money. Our experience suggests that the most successful spinouts set clear milestones for their business, then fund raise in accordance with these milestones.

5.  Get creative on fundraising

Any spinout should try to leverage all sources of funding possible, whether that be alumni networks, crowdfunding, angel networks, charitable foundations, family offices or corporate venture funds.

6.  Build scale through alliances

Not only in terms of university alliances such as SETsquared, MICRA and the Northern Powerhouse, but also through collaborations with incubators such as Unit DX, angel networks, venture capital funds and corporate partnerships.

The value in building for good

One final point that’s interesting is the lens through which universities are starting to view their spinouts. As Brian McCaul, the CEO of QUBIS (the arm of Queen’s University, Belfast, focused on commercialising research) and Director of Innovation at Queen’s University in Belfast, said:

“When I first showed up at QUBIS there were two camps with almost opposing views, one being we are here to make money, the other being we are here for good. There is a sweet spot in that we do both. We create good by creating quality jobs and companies that address some of the deficits in our economy. Along the line, we are also getting technology out to society and having an impact.”

This, in my view, is further evidence of the change that is happening in the wider investment industry. In the past, investors have been faced with a choice – do good or make money. I don’t think that’s true anymore. In fact, I believe that society is changing and that the best investment returns will come from investing in businesses that care deeply about solving the environmental and societal problems that surround us. Here’s to UK universities leading the way. 

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