Nothing but good news

There have been five investment rounds in university spinouts worth more than $500m in the past 18 months – three of these occurred this year and two of them in the first quarter. It partially explains the $8.73bn raised in January, February and March – significantly more than the $7.23bn raised over the last five months of 2020.

Databricks, a US-based data analytics software producer based on research at University of California, Berkeley, accounted for a whopping $1bn of the 2021 total thus far. The company’s series G round in early February pushed its valuation from an already respectable $6.2bn to $28bn and the cash came from investors including corporate venture capital units Amazon Web Services, CapitalG and Salesforce Ventures – on behalf of internet and e-commerce group Amazon, technology conglomerate Alphabet and cloud computing firm Salesforce – as well as software producer Microsoft. Despite Databricks’ large round, the top 10 deals accounted only for $3.1bn of all funding, proving that there was a lot of money invested in others too.

Sila Nanotechnologies, a US-based battery materials producer, is a similarly interesting beast. Co-founded by Georgia Institute of Technology faculty and former engineers of electric carmaker Tesla, the company secured $590m in a series F round at a $3.3bn post-money valuation in late January. The line-up of backers consisted of institutional investors led by Coatue Management, but Sila’s cap table already included advanced battery producer Amperex and Next47, a corporate venturing subsidiary of industrial equipment and appliance maker Siemens, carmaker Daimler and, intriguingly, In-Q-Tel, the venture firm investing on behalf of the US intelligence community.

Hinge Health, a US-based digital therapeutics company, does not have a direct university link but its co-founders – chief executive Daniel Perez and president Gabriel Mecklenburg – obtained a PhD in medical sciences from University of Oxford and MPhil in bioengineering from Imperial College London respectively, and that strong academic background was reason enough for commercialisation firm IP Group to throw its weight behind the business. It did not feature, however, in Hinge Health’s $300m series D round co-led by Coatue and Tiger Global in early January. Notably, Perez previously founded and became chief executive of Oxbridge Biotech Roundtable, an organisation looking to connect academia with industry, during his PhD research in 2011, with Mecklenburg joining later that same year as chief operating officer.

For their impressive sizes, these three companies only represent the tip of a very large iceberg in the first quarter, which saw 112 deals – making it the most active month since June 2018, when 115 investments occurred. Across the first three months of the year, activity surged to 281 deals – more than three out of the four preceding quarters, and only marginally less than the 283 in Q2 2020.

While they are not all entirely unprecedented numbers, they are all noteworthy and representative of a wider bull market. And while they are welcome – as well as indicative of how well university spinouts are doing despite the ongoing pandemic – there is also a question as to whether this growth is sustainable long-term.

Top 10 deals by size in Q1 2021

Deals from January 2020 to March 2021

The question of sustainability is answered to a certain extent when looking at exits in the first quarter. With a combined $3.48bn in disclosed proceeds, the three months are also on par with preceding periods and – ignoring the outlier that was MyoKardia’s $13.1bn acquisition by Bristol Myers Squibb in October 2020 – actually the largest sum making its way back to investors. The top 10 largest deal accounted for a majority of the proceeds, at nearly $3.28bn.

It is also interesting to note that out of the top 10 exits – from 21 overall – only three were Spac deals and seven were traditional initial public offerings. The largest exit was celebrated by Lilium, a Germany-headquartered aircraft developer spun out of Technical University of Munich, that undertook a reverse merger with Nasdaq-listed Quell Acquisition Corp in late March – netting it a total of $780m that included the $330m raised by Quell in its IPO and $450m in Pipe financing from backers including internet company Tencent, data analytics service provider Palantir and construction firm Ferrovial. The merger gave the combined business a pro-forma valuation of $3.3bn.

IonQ, a US-based quantum computing technology developer exploiting University of Maryland and Duke University research, also agreed to list through a reverse takeover in early March. The company collected $625m in financing – including $275m secured in an IPO by dMY Technology Group and $350m in Pipe financing from investors including carmaker Hyundai Motor Company, its Kia subsidiary and GV, a corporate venturing arm of conglomerate Alphabet. The newly combined firm scored a $2bn pro-forma valuation.

Sana Biotechnology’s initial public offering was newsworthy for another reason: the US-based stem cell medicines developer exploiting Harvard University research priced its shares above the range at $25 and pocketed $588m in upsized offering that was worth nearly four times as much as the originally targeted $150m in proceeds. Shares peaked at $43.50 within a week, though they have since dropped back down and have been hovering between roughly $23 and $33 for the past six weeks, closing at $25.40 on April 22.

The Spac frenzy seems far from over still, so it will be interesting to see if more spinouts will choose this route as we move further into 2021. But with IPOs remaining popular with spinouts – and spinouts, with their foundational research well proven, have not much to fear from disclosures in prospectuses – it looks as though investors will continue to see good returns on their investment either way.

Top 10 exits by size in Q1 2021

Exits from January 2020 to March 2021