What are the differences between a spin-out and a licence in university technology transfer? How do you decide which to do? Tom Hockaday discusses the pros and cons.
A frequently asked question by visitors to Isis is: How do you decide whether to license a technology to an existing company or set up a new spin-out company to develop the technology, and what is the difference? There are many issues to consider in identifying the best route to market for an early-stage technology, and many points of view to take into account.
There is a conventional and widely held view that the licence route is generally easier than a spin-out. The table below (see GUV mag) summarises some of the commonly held perceptions. The second table, (see GUV October magazine), identifies ways in which it may not always be like this.
Speed: Using this aspect as an example to illustrate the variation, the conventional thinking is as follows. Licences do not take very long to negotiate and conclude, and once the deal is signed there is very little work involved on the researcher and technology transfer office (TTO) side until the money starts coming in from product sales. Whereas with a spin-out it takes ages to pull the team together, generating much heat and light, and then years for the technology to come to market.
Things can play out differently. We have examples of licences taking a long time to conclude, and then requiring re-negotiation, litigation, support from researchers, and taking years for any royalties to flow. We have examples of new companies thriving with experience management, needing little input from researchers and generating decent share-holder return and exit opportunities in a few years.
What makes you think you have the choice? We are often asked how we decide whether to license a technology to an existing company or set up a new spin-out. A first reaction can be: “What makes you think you have the choice?” This is a serious point for at least two reasons.
The first is that transferring technology from a university out into industry is fundamentally difficult. Finding anyone who is willing to invest their money in your idea is hard. And this applies whether a company is investing in developing the technology under a licence or financial investors are investing in a new spin-out. Tech transfer is helpfully described as the art of the possible, rather than a target-rich environment where the TTO is selecting which of many offers to take up. Getting other people to invest their resources in your idea is hard – why should they?
Who is involved? The people in the TTO will be working with the researchers who invented the technology. In some universities the TTO decides what to do with the technology and sets about executing its plan. In others researchers are expected to tell the TTO what they want to happen. Usually, it is a joint decision. It is generally counterproductive for the TTO to try to achieve something the researchers do not want to happen.
However, this is only half the story, so far only considering the supply side or push side, from the university out to industry. What about the demand or pull side? Successful technology transfer requires people in business deciding to take an idea on. The vital role of the TTO is trying to understand the possible routes to market and finding companies and investors willing to take on the challenge of developing a new technology.
What role does the researcher want to play? License or spin out has important implications for the researchers involved, and these are discussed below. The biggest difference is whether or not the researchers are shareholders in a new company, but even this can be blurred. A researcher may choose not to be a founder shareholder in the spin-out. A researcher may be incentivised by an existing company licensee with share options or shares under a consultancy agreement alongside the licence.
Researchers have very different views about how their technology is used. Some take the view that allowing anyone else to take their idea forward is an honour for which that person should be eternally grateful. Others are pleased to see any uptake of their research outputs.
In any case it is extremely important to have full commitment of the researchers in both cases – license or spin-out – and definitely in the case of the spin-out. The spin-out could be in jeopardy if the researcher loses his interest too soon when choosing to spin out.
What are your objectives? There is also variation in the objectives of those involved – the researchers, the university, the TTO, the investors, the company, the management.
Researchers may be motivated to see their ideas out there, being used and making as much money as possible. The university may be most interested in generating stories to tell about how well it is connected to industry and benefiting society, and is also playing the long game for business partners to make donations many years ahead. The TTO may not be well-enough resourced to wait for the researchers to die, and may need financial return to stay open.
At
Isis we have no preference for either creating a new spin-out or licensing to an existing company. The key thing for the TTO is to identify the route to market with the optimum chance of success.
Our focus is on identifying the most appropriate route for commercialisation of the technology arising from the research at the university, rather than pursuing a preference for the route of either licensing to existing companies or creating new spin-out companies. Both routes are challenging, and when Isis spin-out companies this still involves a commercial licence deal with the spin-out company. Isis also plays an instrumental role in establishing other possible applications of the technology, hence widening the overall scope and the target market.
In recent years the numbers of licensing deals concluded by Isis and new spin-outs have both risen – although spin-out formation ceased from mid-2003 to mid-2004 due to the unintended consequence of government changes to tax legislation. We continue to build strong relationships with investor communities outside the UK, such as Japan, Middle East, US and China, and have successfully secured investments from them for a number of our spin-outs.
The introduction of key funding initiatives from the UK government over the past seven to eight years – such as the University Challenge Seed Fund, the Biotechnology Exploitation Platforms, and the Higher Education Innovation Fund – has enabled resource to be put into technology transfer in the UK. This has therefore allowed many more research institutions to commercialise the results of their research, with the consequent increase in technology transfer in the UK and therefore an increase in the number of spin-out companies formed during this period. At the same time the business and investment communities showed a greater interest in commercialising university technologies.
The University Challenge Fund initiative was a collaboration involving the UK government, the Wellcome Trust and the Gatsby Charitable Foundation and has increased substantially universities’ capability to invest in spin-out companies and led to greater interaction with seed and venture capitalists, both of which have increased the number of UK university spin-outs, as well as stimulating more licensing activity.
Some of the challenge funds are consortia of universities and are managed by external fund managers that invested only in a company vehicle which perhaps also contributed to an increase in the number of spin-outs formed during this period.
