25: Spinning Out 2

Why spin out? There are a number of possible motivations ranging from money – supplementing income, for self and/or department – to the more altruistic – offering people or organisations outside the university something valuable to them. Possibly both. This means that you have something to offer of value and that someone else recognises this. There is a complicated interaction to be worked through at the outset – connecting some research or expertise to an external need or potential demand. In the simplest case, there is a valuable invention that has an obvious use and can be patented, developed and marketed; it is just as likely, maybe even more so, that there is a need to venture out into the market place to see what might be of interest.

Most universities now have an organisation – usually one or more companies – that can support staff with ideas that can generate spin-outs. Their motivations are probably similar to the individuals: make some money – in that case for the university – and do some public good by helping turn good research into something useful and valuable beyond academia. On the money-making side, caution would be in order and it would be interesting to do some research on university accounts to see what had been achieved. I was once on a Government tour around the United States to explore what was then thought to be a better performance in spinning out by American universities. I always remember one of those responsible for this operation within MIT saying ‘…if you want to make money [out of this], you’d be better off taking out a MacDonald’s franchise!’

In my experience, university holding and development companies are pretty conservative in deciding what to back, and I suspect with good reason: they are probably besieged with ‘good’ ideas that have had no market testing and indeed have no obvious market. Having said that, if you have a good idea, there are lots of reasons for trying to develop it through the university. The business development arm – let’s call it the ‘BDA’ – will have lots of relevant experience among its staff. They will ask questions about markets, they will advise on how to write a business plan. But is that how to start? My guess is that It is rarely possible to begin by launching a spin-out company. It may be so in the case of the invention where someone is prepared to invest for its patenting costs and development. It is more likely that the starting point is in a consulting role. This then can provide the material – the case studies – that might convince the BDA that you are on to something good. This certainly worked for Martin Clarke and myself – see Spinning out-1. The University of Leeds BDA – ULIS – so no reason to back us at the outset. We were not hard science, we were not patentable – all our ‘methods’ had been published – but they were prepared to act as book keeper while we acted as small beer consultants. It was only when we won a couple of large contracts that they saw the real possibilities.

Let’s suppose there is an ‘offer’ that might be the basis of a spin-out: a brilliant idea that can be patented or a record with consultancy that looks worth supporting. How do we make progress? A starting point is to write a business plan: the idea, the market, and above all how the finances will work. In this last respect, does it need capital investment to get off the ground? For the patentable idea route, the answer is almost certainly, ‘Yes’; if a consultancy record has been built up, there may be a possibility of managing the cash flow from contracts to avoid the need for initial investment – usually on the additional assumption that the time input of the founders, for a time, may well be free! There are then some thorny questions of ownership which need to be resolved at the outset to avoid difficulties later. First, what is the university’s share of the equity? Most universities have rules, usually one side or other of 50-50. The second stage is the share of the founders. (One test may relate to how much free time as distinct from fee or salaried time is invested in the early period.) And the third stage is the share of any equity partners investing capital. The middle stage can be tricky! There is sometimes an attempt to determine all of these in terms of who owns or originates the intellectual property – the IP. This is potentially very difficult territory. Research councils have given up any hold on IP from projects they have supported – which is probably the best way from their point of view in providing incentives for it to be exploited. Universities usually claim some share of IP from having provided the resources to develop the ideas. Incentives are critical here. If the university claims too great a share, and the idea is good enough, some people will resign from the university and take the whole operation away and the university will receive nothing. There are some well known examples of this. Also bear in mind that there may be possibilities of direct Government support – through Innovate UK or the appropriate Catapult.

Once these organisational things have been dealt with, the real business, literally, starts. There are some big early decisions to make. Is the product a bespoke high-value offering to a small number of customers; or is it a volume product where the income is derived from selling in large numbers? Does the company do its own development or can a product be licensed to a customer so the spin-out income derives from the customers sales?

But having digested all this – how difficult it is! – remember that it can be very exciting and rewarding. Remember that you might be changing mind sets – from ‘research on to research for’ – cf. Research on vs research for’. So make a start, and above all talk to potential customers, find out what they want and tailor your offer. See if some of them will fund pilot projects. Above all, start doing focused work!!

Alan Wilson

October 2015

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