Friday, 15 April 2011

University Spin Outs

In the post-mortem of the recent financial crisis, a key conclusion was that the U.K. economy needs to reduce an over reliance on the financial sector. Crucial to this is a transition to a knowledge-based economy. Being home to some of the world’s leading research institutions, the country has a cornucopia of R&D expertise at its disposal. Harnessing this innovation to form wealth-generating companies is a vital tool in enabling that transition.

Venture capital (VC) funding data for the five years from 2000-2005, show that university spin-outs received between £0.35 million and £1.3 million in early stage VC funding each year. This is approximately 50% of the £0.8 million to £2.4 million invested in other early stage technology investments. Subsequently from a VC perspective, an interesting question to ask is what makes a R&D project suitable to form a spin out? Top of many VCs list, unsurprisingly, is that the concept needs to be truly innovative, particularly in being able to satisfy a customer’s need. Similarly the underlying intellectual property (IP) must be protected.

However, creating a successful university spin-out company from a research laboratory project has some challenges. With an almost unlimited R&D budget, and not suffering from the same time constraints as their corporate counter parts, lack of innovation is not what stops a university spin out from flourishing. It tends to be the more practical aspects which hinder a company’s evolution. For example, the essential task of finding the right team to enable growth, protecting IP, validating the technology in the face of market demand and raising capital. These are all areas in which academics inherently lack proficiency. Fundamental in providing this expertise are University technology transfer offices (TTO) and incubators. It is no surprise to see that the introduction of university challenge funds (UCFs) in 1999 resulted in a direct increase in the formation of TTOs and consequently university spin outs. In 2004 the Library House Spin-out Monitor* identified that there were 435 spin out companies formed from the UK’s 36 leading research universities. Using TTOs and incubators to provide a sustainable ecosystem to facilitate the growth of university spinouts not only benefits the economy through local development and job creation, but also channels millions of pounds back into the university, thereby completing the circle.

A couple of examples showcase the breadth of innovation possible from university spin outs. One is Novacem, a spin out from Imperial College London. Novacem have created carbon negative cement, a revolutionary construction technology. Novacem highlight the perhaps unexpected ability of university spin outs to disrupt seemingly static and established industries. On the other end of the scale is Owlstone Nanotech, who combine chemical sensing technology and micro & nano fabrication to create an all round, versatile chemical detection system. Their technology is pioneering in its size and cost effectiveness, which they claim is ‘one hundred times smaller and one thousand times cheaper than existing technologies’.

Further developing and fostering exciting research through the formation of university spin outs will ensure the UK technology sector retains a competitive edge and keep the economy in rude health.

Alberto Carlini & Naunidh Virk
Analysts

*2004 Library House Spin Out Monitor

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