Scaling up innovation

It is hard to deny the potential of the university spin-out sector. It is the breeding ground of innovation, where today’s brightest academic minds create the disruptive technologies of tomorrow. So why is the collective performance of its ventures often so underwhelming?

While it is true that market trends are finally heading in the right direction – the 2015 Spin-outs UK Annual Report shows that failure rates are continuing to decline – successful exits, though increasing, remain relatively low and still take an average of eight years to achieve. Again, this figure is coming down but it is some way from ideal.

When examining spin-outs created 10 years ago, the report found that around 20% had achieved a successful exit – via initial public offering or trade sale – whereas 40% had failed. The remaining 40% were either still active or dormant. Such results are difficult to describe as anything more than average, but what exactly is preventing the university spin-out sector from flourishing into a much greater contributor to both the economy and technological landscape?

It seems that a major barrier is in the spin-out’s ability to scale. Most university ventures have serious growth ambitions but such aspirations must be matched with a robust business plan if significant investment is to be secured at an early stage. The spin-out needs to demonstrate it has the roadmap to establish a strong position in its chosen market.

Unsurprisingly, such business plans are often built around the company’s intellectual property (IP) – it is, after all, the raison d’être for most ventures. But are university spin-outs placing too much emphasis on this and failing to focus on other vital elements of strategy? Intramezzo’s recently published Talent Capital report asked the venture capital (VC) and corporate venturing community to name the most important factor in their investment decisions. Among 100-plus respondents, strength of IP ranked only fifth, suggesting that investors are looking for much more when it comes to augmenting their portfolio. In fact, the findings of the report clearly demonstrate that it is talent, not just technology, that is required to turn an investor’s head – 90% of VCs ranked the quality and strength of the leadership team as a top-three factor in the decision to invest.

Richard Hill, who is responsible for direct investments at Stonehage and Fleming Family & Partners, said: “The leadership team is the single most important factor for us. We want to see that members can work individually and as a team and that they can demonstrate past success. If you are investing in an early-stage company, you do not have much to go on other than the team and its product or service.”

This finding was endorsed by the fact that 85% of respondents said they were unlikely or highly unlikely to invest in a company if they felt the existing leadership team lacked the skills or experience to realise the company’s growth plans. This does not necessarily mean the team must be complete. As the lynchpin of the leadership team, the CEO is usually the focus of investors’ attention and many of the study’s respondents felt any gaps in the top team could be addressed after investment – as long as the right CEO was on board.

While it is not always easy for spin-out founders to acknowledge, the academic entrepreneur is rarely the best person to lead a venture through scale-up and growth. As a business grows, different leadership challenges emerge, and handing over the reins can be key to securing its success. Paul Morris of UK Trade & Investment says: “As a venture evolves, the board may recognise that a new CEO is needed to take the company to the next stage. Where the incumbent is the technical founder, he or she may be more effective in the role of chief technology officer.”

Of course, it is one thing to claim that the university spin-out sector must focus on leadership talent, but it is quite another to attract candidates of the requisite stature. Generally speaking, the best people out there are not naturally drawn to early-stage ventures that lack the presence and budget to compete with established companies offering big salaries and considerably less risk. This poses a real challenge but one that is not insurmountable.

An earlier piece of research by Intramezzo looked at the motivations of business leaders, and a recurring finding was that, for many, the opportunity to take on a seminal role a formative stage can be highly compelling. In fact, the study showed that the desire to build something new had been the most influential factor in the respondents’ career choices to date. Furthermore, the survey revealed that 83% of business leaders would consider a reduced remuneration package if there was an opportunity to participate in equity. This is interesting, as it demonstrates that, by offering share options and exciting exit potential, even the smallest and youngest of companies can attract a world-class individual.

Securing an investable leadership team demands a strategy with as much of a focus on talent as on IP. Possibly more. Spin-out founders need to look closely at their offering and identify the necessary changes to the existing management if an exceptional business is to be built. Moreover, it must be recognised that this is a vital factor both in the eyes of the investors and in the ultimate success of the enterprise.

With university venturing trends continuing to inspire tentative positivity, the market is prime for the spin-out sector to finally realise its potential. The results are coming – and it will be people, not products, that deliver them.

Taken from GUV’s forthcoming magazine, out Monday.