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What Investors Look For In University Spinouts
Britain’s higher-education sector is world-leading, so it is to be expected that the IP being developed in university labs is of great interest to investors. In the period from 2011–2018, IP-based University spinouts (USOs) secured approximately £8.86 billion in external investments to support their development. Since 2008, the amount of external investment raised has increased substantially
Britain’s higher-education sector is world-leading, so it is to be expected that the IP being developed in university labs is of great interest to investors.
In the period from 2011–2018, IP-based University spinouts (USOs) secured approximately £8.86 billion in external investments to support their development. Since 2008, the amount of external investment raised has increased substantially in real terms from approximately £991 million in 2008 to £1.5 billion in 2018.
This growth is due in part to the prominence of large investment bodies like IP Group, which aim to help spinout life science technology and also to the work of University Tech Transfer Offices (TTOs). It is the TTOs role to help facilitate business-university interaction and work to bridge the chasm that exists between invention and commercialisation. As such it is vital that there is a shared understanding between Investors, like IP Group, and TTOs when it comes to ensuring the necessary preconditions are in place within a USO in order to secure investment.
A recent review conducted by ‘The British Private Equity & Venture Capital Association’ (BVCA), asked forty-two VCs that had invested in high technology ventures (including technology spinouts) to rank the factors that had influenced them to invest. From a list of forty-two different factors, the ten most important to VCs are shown in the table below.
RANKING OF FACTORS REQUIRED FOR SUCCESSFUL SPINOUT INVESTMENT
The table also shows the responses of TTOs and USOs on the same question. It is encouraging that these results indicate that all groups have a broadly similar appreciation of the factors investors are looking for when reviewing a proposal. In this article, we will explore some of these factors in more detail and examine what spinout founders can do to try and secure investment.
DEMONSTRATED MARKET TRACTION
One of the most important questions in the mind of an investor when assessing a USO is: “Does this innovation or new technology satisfy a customer need?” This invariably leads to follow up questions surrounding the potential benefits to a customer and further discussions around price, however, it is this first question where an investment decision can hinge.
If we are in any doubt as to the importance of this question one need first look at the divergence between corporate and university spinouts. Typically, a corporate spinout is founded with the explicit aim of satisfying a known customer need. This can arise in a variety of ways. In some large industrial companies, an innovation area on which a group has been working, may no longer be perceived to be central to the organisation’s strategic direction and the decision might be taken to spin it out.
In others, where the underlying purpose of the company is contract research, teams can be working on technology solutions for clients when the opportunity is spotted to leverage that experience to meet a new customer requirement. In both cases, the spinout starts life with clear advantages over a university spinout. The technology has already been proven, the market assessed, and a clear customer need has been established. Indeed, customers themselves may very well have been closely involved with specifying and testing the solution. In the case of university spinouts, this intimate connection between the research laboratory and the commercial environment is often absent. This is why the work of the TTO in assessing the commercial value of the innovation or technology is so crucial.
Corporate engagement is often the missing component in connecting academic laboratories with real-world problems. It is widely acknowledged that more extensive collaboration would help steer innovation efforts towards the most relevant commercial opportunities, reducing the challenges faced by many research teams who having developed a new innovation or technology and then set about searching for a potential market.
PASSIONATE FOUNDERS
Having a passion for their start-up is pretty easy to come by for business founders. They believe in the product or service they want to provide. They are confident that it is an improvement over existing products or is a new way to address an old problem. But how deep is their passion? Are they willing to be told “No” over and over and over again and keep going?
This is a key area for VCs as they are looking for clear evidence that the founders have the commitment and energy to take the company through its early stages. However, they also understand that one of the areas of value that they bring to a young company is help in recruiting key managers and developing the management team. From the TTO and spinout perspective, they are aware of the lack of experience of a typical academic founding team in building a company. Ideally, they would like to be able to attract an experienced entrepreneur and managers as part of the team that pitches to investors as they correctly believe that this will improve their chances of securing investment.
In this respect it is vital that founders not only have the passion but the humility to recognise where their limitations lie and ensure that the right expertise.
EXIT STRATEGY
Investors have three primary financial questions about projects: How much do I need to invest? How much will I get back? and When will I get it? This is why a clearly articulated exit strategy is essential in bringing further reassurance to potential investors. As Scott Munro of VC firm iNovia Capital writes: “While some companies are aimed at an ultimate IPO, the fact remains that less than 1% of start-ups grow into public companies,” Munro explains that: “The other 99% need to consider other ways to return value to the people and organisations who invested money into the company.
For most large companies who represent potential acquirers, “they will not engage in an acquisition discussion without having an internal business leader sponsor.” These kinds of connections take effort and time — often more than six months, according to Munro — so he advises that founders do this well in advance of seeking a buyer. Partnerships aren’t only good for exits; they can also help your company move into growth fundraising and provide start-ups with more negotiating leverage by having more than one acquisition possibility, as Munro explains: “in the case of almost all large exits, the company being acquired was not for sale.
The transaction was initiated by a preliminary relationship that developed over time in which ultimately the buyer determined that the target was strategic enough that it shifted from a partnership relationship to an interest in acquisition. When this trigger event occurs, it is advantageous if other existing partnerships can be leveraged to create a competitive M&A environment,” Munro points out. Developing relationships with potential acquirers should be a goal of every start-up. “This way,” Munro says, “the chance of the very desirable situation of a competitive bidding war for the target company is made more likely, leading to greatly increased exit valuation.”
Ultimately, an end goal affects everything from how you run your business, to the partnerships you pursue, to how you choose to fund your company. By thinking and planning ahead, you’re much more likely to be prepared when you do exit, whether that’s in 18 months or 10 years down the road.
CONCLUSION
It is clear that there is a degree of consensus between all parties on the main areas that need to be addressed prior to investment. The ten factors that were drawn out from the BVCA review can largely be categorised into three main areas: the innovation and its market, the team and the investment case. By retaining focus on these elements’, the founders and innovators of USOs will have taken a significant step to bridging the chasm between invention and commercialisation.
CRSI is proud to work in in partnership with universities throughout the UK, and has helped to accelerate the growth of over 50 spinout companies.
To find out more about our work in this space, contact Samantha Clarke - samantha.clarke@crsi.team or visit our University Partnerships page.
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